GM, this is your Daily Bolt briefing.
In this edition, we’ll be giving you a brief history lesson on liquid staking as well as outlining some important considerations to make about staking and restaking on Ethereum and beyond.
Arbitrum is considered by many to be the chain currently garnering the most attention in DeFi. That’s why we’ve included notes on two popular projects built on Arbitrum, Level Finance, and Pendle.
Over and out ⬇️
2/ Bell Curve - The End Game for Liquid Staking
Preview: Mike and Myles discuss the history of POS and liquid staking, how LSTs are a network effects game, and issues around LSTs. Click here to listen to the full episode (43 mins).
Read our Note (7 mins) and save 36 mins.
Here are some key takeaways:
Mike says that the concept of liquid staking did not originate in the Ethereum ecosystem, but was first proposed by Felix Lutsch from the Cosmos ecosystem.
Mike talks about the early design of Ethereum and its transition from a proof-of-work chain to a proof-of-stake chain. Ethereum was designed to prevent the concentration of staking pools, aiming to avoid a situation where a small number of large entities control a significant amount of Ethereum staked. To encourage this, Ethereum decided not to have an in-protocol delegation mechanism, unlike Cosmos, and instituted a minimum of 32 ETH needed for staking.
Myles says that Ethereum was trying to design a system that couldn't be captured by a few large actors, aiming for a large number of geographically spread individual solo stakers. Cosmos, on the other hand, was trying to balance the high yield from staking with the desire to participate in DeFi activities, leading to the idea of liquid staking.
Myles says that despite Ethereum's design decision to encourage self-staking, dominant liquid staking protocols like Lido have effectively overruled this decision, enabling delegated proof-of-staking. This became popular due to concerns about large entities capturing the validator set of Ethereum by making it easier to delegate stake.
He adds that the rise of Lido has led to concerns about the security and governance of Ethereum.
Myles says that there is a competitive landscape for liquid staking, and mentions other competitors like Coinbase, Frax, and Rocket Pool that have different designs and have been successful at gaining market share.
Myles adds that innovations in security and yield differentiation could potentially give a competitive edge to the protocols that implement them.
He says that there is a potential for a blow-up in the next bull run when people are hunting for yield and the potential for a superfluid restaking operation.
He says there is a potential for liquid staking to take off in other ecosystems, and the innovations being made in these ecosystems other than Ethereum.
1/ Level Finance Twitter space - Level, the future of DeFi on Arbitrum
Preview: Dr.LVL hosts Anton and Nick to discuss Level Finance, its use cases, and more! Click here to listen to the full episode (33 mins).
Read our Note (5 mins) and save 28 mins.
Here are some key takeaways:
Level Finance is an Omnichain Perpetual DEX, enabling fully permissionless, on-chain, and non-custodial trading with up to 50x leverage.
Dr. LVL provides an update about Phase 2 of Level Finance's Arbitrum launch and the incentives going live on it. He also mentions that Level Finance has an upcoming NFT drop.
He says that a proposal about regulating the LVL supply has been passed and is well-received.
Anton talks about their plan to support more assets, especially different liquid staking tokens. Pendle is also looking forward to Arbitrum Orbit and exploring how to tokenize yield or earning opportunities.
Dr. LVL says that Level Finance is launching a running feature on Arbitrum and Pendle would integrate with them on the LVL and LGO staking. Level Finance distributes 20% of the total protocol revenue to LVL and LGO stakers. If users have LVL or LGO tokens, they can deposit them and start earning yield in the form of BTC, ETH, or USDT without any lockups, vesting, or bonding.
The yield is determined based on the previous day's protocol revenue and usually ranges from 40-70%. For example, if the protocol revenue for the previous day was $200K, they distribute $20K each (10%) to LVL and LGO stakers. Once integrated, LVL and LGO holders can hedge and trade the yield earned from staking, and users remain, owners of their tokens, while only stripping off the yield component.
Anton says the Pendle protocol allows anyone to create markets, even though they lack a user interface (UI) at present. However, they intend to release a simplified UI to facilitate market creation. Once Level Finance's markets are accessible, users can utilize Pendle to establish yield trading markets, enhancing the user experience.
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