A&T Talk: Shield Detailed Explanation of LSD Ecosystem and Innovation Opportunities in the Application Layer

Author: A&T Capital

Guest introduction for this issue:

• @Shield_dao: Blue Wharf, Core Contributor of Shield

• @ANT_Capital

Q1: The ecological composition of the LSD track

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@Shield_dao: The Ethereum merge is definitely a key event. Before this, few people paid attention to LSD until the Ethereum merge on September 15, coinciding with the TOKEN 2049 in Singapore. During the conference, many began to realize the new LSD opportunities brought by the Ethereum Shanghai upgrade. Most teams started planning and building related applications from mid to late October to early November.

Image source: Staking Rewards, edited by Shield

The LSD ecosystem can be roughly divided into the following five layers:

The bottom layer is the Ethereum protocol layer. It is divided into the consensus layer and the execution layer.

The second layer is the validator nodes. It includes clients for the execution layer, clients for the consensus layer, and distributed clients (DVT). A typical distributed client is the currently popular SSV. Previously, the client model was to install one client on one machine to act as a validator. The problem with this model is that if the client server goes down, there will be a series of penalties, including slashing. The distributed client technology allows different computers to come together to form a validator node, making Ethereum's node services more distributed and stable.

The third layer is the Staking infrastructure. This includes Solo Staking and Validator-as-a-Service (VaaS). Solo Staking is when a staker has sufficient Ethereum (usually over 10,000) to support the complete setup of all staking services, covering all expenses from client to DVT to server purchase to team building, mining for themselves. VaaS can be divided into two categories: service providers targeting only institutions and those targeting both institutions and individuals.

The fourth layer is the staking protocol layer. The more familiar ones are Rocket Pool and Lido, but the competition in this track is very fierce; there should be at least 20 DeFi protocols in the race.

The top layer consists of some centralized exchanges or wallets, divided into custodial and non-custodial types. Custodial types may face regulatory issues related to issuing securities if they do not have the appropriate licenses; non-custodial types involve directly staking money into the corresponding nodes.

Q2: New opportunities in the LSD track

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@Shield_dao: The various layers under the Staking Protocol have developed for a long time, and the competitive landscape has basically stabilized, making new opportunities relatively hard to emerge; however, we predict that after the Shanghai upgrade, there will be intense competition in the staking protocol layer. The Shanghai upgrade will weaken Lido's liquidity barriers, thus creating new challengers; comparatively, the application layer above will experience explosive growth after the Shanghai upgrade. Shield hopes to be the first to reach this layer to create applications, focusing on two things: one is to find the optimal Ethereum mining path for users, which is the flagship product and the core opportunity. The second is to help users find the optimal path to further increase their returns.

Q3: Predictions for future staking mechanisms after the Shanghai upgrade

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@Shield_dao: In the traditional world, banks sell three types of products: First, fixed income products, with fixed interest; Second, capital-protected financial products (fixed income +), where floating returns exceed the upper limit of traditional fixed income products; Third, equity funds.

Traditional capital-protected financial products first use deposits to buy very safe assets (such as government bonds) to generate the first layer of returns. On top of this return, they then use the interest to invest in a high-leverage income-generating product, such as options, secondary market equity funds, bonds, etc. But there is an important prerequisite: the ability to find a safe source of returns for the first layer.

In the crypto industry, there has always been a lack of a large-scale, safe, and stable income-generating underlying asset. After the Ethereum upgrade, the returns from POS mining have become the true government bonds of the entire industry, the first truly risk-free super category of underlying assets, capable of accommodating at least 100 billion USD. After the Shanghai upgrade, the staking rate is likely to double, reaching over 60 billion USD. The emergence of "government bonds" in the crypto industry after the Shanghai upgrade means that almost all financial derivatives based on government bonds in the traditional world can be replicated in the crypto industry.

However, as of now, most leveraged methods in traditional finance have not yet birthed stable product forms on-chain. Relatively speaking, there are currently two types of leveraged methods on-chain: Options trading and loop lending. The former can achieve complete transparency on-chain; the latter can achieve relatively high annualized returns, but the protocol has risks that are difficult to control, such as facing a run when deleveraging. For various reasons, we currently believe it is very difficult to protocolize loop lending in a safe and controllable manner.

Q4: Shield's Plan A (Conservative) and Plan B (Moderate) financial product strategies

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@Shield_dao: Shield's Plan A chooses a relatively consensus-based conservative strategy: first using Lido for the first layer of POS mining, and then going to Curve liquidity mining. The combined returns, according to calculations, can be about 30% higher than Ethereum's official mining. The entire protocol's risk is completely controllable, stable, and can accommodate large amounts of capital.

Shield's Plan B is the second financial protocol strategy we offer, which combines the optimal mining path with options trading. It adds the stable returns of the first layer with the Wedding Cake strategy for secondary income generation. We have investors who have done options trading at Deutsche Bank and Goldman Sachs for 14 years recommending the Wedding Cake strategy to adapt to the current market conditions. This product is a capital-protected floating income product. In terms of strategy selection, we believe the current chosen options have a higher win rate than other strategies, but this is not absolute. The above are some of our current thoughts on the application layer.

Q5: Shield's plans after the Shanghai upgrade

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@Shield_dao: We will have two major actions. First, our Staking Vault will launch on the mainnet before the Shanghai upgrade. In addition to helping everyone find the optimal mining returns at this moment, we will also provide token incentives (early mining opportunities) to all users participating in staking. The specific plan is currently being drafted in the community discussion forum and will be presented to everyone as soon as possible.

Second, after the Shanghai upgrade is completed, we will conduct comprehensive research and design based on the market situation of LSD, helping everyone continuously discover the optimal mining paths based on new market dynamics.