Exclusive Interview with StakeStone Founder Charles K: Where is the Turning Point of the Liquidity Market? What is the True Value of TVL?

Interviewee: Charles K, Founder of StakeStone

Interviewer and Author: Karen, Foresight News

Is the TVL boom under the temptation of airdrops a sunset glow or a continuing chapter? What kind of TVL is considered valuable? Where is the turning point of the liquidity market?

To find answers, we had an in-depth conversation with Charles K, the founder of StakeStone, discussing "the feasibility of the valuation solely based on TVL," "the TVL boom under the temptation of airdrops," "what kind of TVL is considered valuable," "the turning point of the liquidity market," and StakeStone's unique advantages and differentiated strategies.

Has the era of valuing projects solely based on TVL and attracting TVL through airdrop expectations come to an end?

In exploring whether the crypto space has bid farewell to "the valuation solely based on TVL" and "the single model of relying on airdrop expectations to attract TVL," we must re-examine the profound changes in the current market. Blast faced considerable controversy after launching its token. From the competitive landscape of L2 solutions, it can be observed that market capitalization and TVL do not always have a direct linear relationship when compared to Optimism and Arbitrum. If we compare with liquidity staking projects like Lido that also attract massive funds, the correlation between market cap and TVL is also quite low.

The current crypto market has entered a more complex and diverse stage. TVL is no longer the only metric for measuring a project's success; the true determinants of a project's value also include its token economic model, application scenarios, market demand, and overall financial health. The era of "valuation solely based on TVL" has quietly come to an end.

Foresight News: What is your view on the correlation between TVL and market capitalization for public chains, layer twos, and liquidity staking protocols?

Charles K: First, from the perspective of value capture, take Lido as an example. Many protocol tokens are limited to governance functions and lack substantial utility, which restricts their intrinsic value enhancement and capture. For protocol tokens to truly realize their potential, they must seek and create additional value capture mechanisms. This may involve complex securities considerations. Non-U.S. projects can achieve value capture, such as Curve implementing token dividends through the ve model, significantly enhancing the positive correlation between tokens and TVL. Even without a dividend strategy, attractive application scenarios must be designed for tokens to stimulate market demand and enhance token value.

Moreover, StakeStone is not merely a staking pool protocol; it can be seen more as a liquidity issuance protocol that adds incentivizing empowerment to tokens based on liquidity use cases beyond governance functions.

Secondly, from the perspective of market dynamics, the fierce competition among staking pool protocols has led to a phenomenon where high TVL often comes with high liabilities. To compete, these liabilities are increased without limits, placing a heavy debt repayment burden on the secondary market. Once TVL exceeds a certain threshold (e.g., $1 billion), it may drag down market capitalization due to increased selling pressure and intensified repayment burdens.

Furthermore, we need to pay attention to the impact of primary market financing on protocol market capitalization. Large financing amounts in the primary market, introducing excessive capital relative to TVL, can attract more funds to boost TVL, but the annualized yield requirements and expected returns from these financings can also become significant burdens on protocol market capitalization. Therefore, it is not the case that higher TVL naturally leads to higher market capitalization; on the contrary, high TVL and high primary financing amounts may hide greater market risks and return pressures, as this TVL is essentially obtained through "high-interest loans."

Foresight News: Has the era of attracting TVL through airdrop expectations come to an end?

Charles K: The peak period of attracting TVL through airdrop expectations has passed, but this does not mean that airdrops as a means of attracting capital have come to an end. Many protocols are increasing their airdrop ratios, but some protocols' "PUA user" behaviors have indeed weakened confidence in airdrops. Nevertheless, the intrinsic value of airdrops should not be overlooked.

Foresight News: What is your view on the behavior of "witches"?

Charles K: Under the rules of the TVL game, unless the amount of funds in a single address reaches a relatively large scale, splitting addresses is not particularly meaningful. Witch behavior can affect the rules regarding "contribution based on deposit amount and time," but compensating small fund holders for gas fees is also a relatively benign consideration. Of course, we do not encourage everyone to test the low guarantee. StakeStone hopes that this TVL game is fair.

What kind of TVL is considered valuable?

When discussing the topic of TVL, we cannot help but ask: what kind of TVL can be regarded as truly valuable? How can this metric accurately reflect the real health of a protocol? Charles K believes that the true value of TVL does not lie in the mere accumulation of numbers, but in whether it has been practically applied and circulated.

Foresight News: What kind of TVL is considered valuable?

Charles K: First, I believe there should be no fake TVL. Only when the assets represented by TVL are genuinely put to use and participate in various protocols or ecological scenarios can their value be demonstrated. Additionally, fairness is an indispensable part of measuring TVL value; any false or unfair TVL cannot accurately reflect the strength and health of a protocol.

Foresight News: What is the current structure and pattern of the liquidity staking market? What specific impacts or opportunities do you think this structure brings to StakeStone?

Charles K: I believe the current liquidity structure is very unhealthy because most liquidity is locked up. I even think that the low gas fees on Ethereum are significantly related to the locked liquidity preventing circulation. This vicious locking of liquidity is very unhealthy. The primary attribute of liquidity assets should be liquidity, not endless locking. Those behaviors that sacrifice market liquidity for short-term gains are shortsighted and irresponsible.

Foresight News: Why is the most valuable metric for liquidity protocols the utilization rate of liquidity assets?

Charles K: Take USDT as an example; it has become one of the earliest liquidity assets in the market and continues to be favored precisely because it offers high liquidity and a wide range of application scenarios. Users can easily convert dollars to USDT and back, and this seamless exit mechanism is key to building trust. Additionally, USDT's extensive applications in payments, mining, trading, and other areas further enhance its liquidity value.

For StakeStone, we believe that the true measure of TVL value is the utilization rate of TVL. Because TVL that cannot be applied does not bring value to the industry and ecosystem; rather, it is more about capturing value. We are committed to creating a liquidity ecosystem that brings value to the ecosystem. Currently, we have closely integrated with over 40 protocols and established connections with over 100 protocols. At the same time, we believe that our collaboration with Native.org will become a new paradigm for solving the problem of multi-chain liquidity fragmentation. At that time, STONE will be the only asset that achieves good exit liquidity for yield-generating liquidity ETH across any chain. The primary duty of liquidity assets is always to have good exit liquidity anywhere.

StakeStone's Unique Advantages and Differentiated Strategies

In the fiercely competitive liquidity space, how does StakeStone stand out? Charles K revealed its unique advantages and differentiated market strategies, believing that StakeStone is more like the yield-generating ETH version of MakerDAO.

Foresight News: What are StakeStone's unique advantages and differentiated strategies?

Charles K: LRTs are staking pool protocols that primarily provide core value through staking services. StakeStone, on the other hand, is positioned as a liquidity asset protocol, aiming from day one to be a liquidity asset issuance protocol, which is a significant difference.

For StakeStone, staking services are a means to help users cover risk-free returns on Ethereum. We collaborate with staking service providers like InfStones and StakeFish, but StakeStone itself is not a staking service provider. I personally believe that even for LRTs, their ability to provide staking services is weaker than that of staking service providers.

As a liquidity asset protocol, several conditions must be met: first, the assets must be transparent so that users are willing to deposit; second, the assets must have real liquidity and allow for deposits or withdrawals at any time.

Overall, StakeStone has significant advantages in asset transparency, liquidity, and composability. Every asset in its asset pool maintains high transparency. At the same time, StakeStone ensures that assets have real liquidity, allowing users to deposit or withdraw at any time. Additionally, composability allows STONE to easily integrate into various DeFi protocols, creating more diverse application options for users.

Foresight News: Besides governance functions, what other utilities will StakeStone's token have?

Charles K: We allow changes to the underlying assets, but the method of changing the underlying assets is completely decentralized and requires the consent of LPs; we cannot change the underlying assets arbitrarily. All STONE holders can participate in this decentralized governance mechanism.

Regarding the underlying assets, StakeStone will seek to allocate more competitive underlying assets while ensuring that risks are controllable or guaranteed to be risk-free. STONE continuously captures and adjusts the yield underlying assets, with the frequency of adjustments related to how often the underlying assets appear. Currently, major underlying assets typically appear once every quarter to half a year. I believe StakeStone is actually more like the yield-generating ETH version of MakerDAO.

Future Outlook and Insights

Previously, LRT projects successfully attracted a large influx of arbitrage funds into the Pendle platform to purchase PT products through carefully designed high-point incentive strategies. This artificially created prosperity is about to face a significant turning point. These incentives prompted some users to choose to sell their rights tokens at a discount in exchange for more YT shares, thereby pushing up the annualized yield of PT.

However, this short-term capital accumulation, while seemingly attractive, is difficult to sustain and poses risks for long-term development. In contrast, StakeStone's robust strategies, such as supporting withdrawals at any time and introducing external market makers to meet exit demands, demonstrate a healthier and more sustainable development model. Looking ahead, StakeStone aims to become a leader in the liquidity asset space.

Foresight News: How does StakeStone aim to reshape the Ethereum and Bitcoin ecosystems through yield-generating ETH and BTC?

Charles K: Currently, StakeStone primarily focuses on Ethereum and Bitcoin, and the underlying assets can be compatible with various consensus mechanisms, including PoS staking and restaking. To reshape the Ethereum and Bitcoin ecosystems, we first need to understand what industry problem StakeStone is solving.

In the last bull market, Arbitrum and Optimism absorbed Ethereum as the main liquidity asset on-chain, but in this cycle, native ETH has high opportunity costs due to PoS, restaking, etc. Even with APRs of 3-4% for PoS, since the returns are settled in ETH, if a public chain ecosystem needs to use its own tokens to cover PoS returns, it would need to pay at least a double-digit percentage in token subsidies. This significant pain point is precisely the original intention behind the development of StakeStone from day one. We are committed to providing the market with a new liquidity ETH/BTC asset that can cover the opportunity costs of Ethereum and Bitcoin.

In addition, through the high stability and good exit liquidity of STONE, it can be integrated into more protocols and scenarios to create more yield opportunities, including exploring various applications of STONE in the ORA ecosystem through collaboration with the Ethereum AI oracle protocol ORA, further broadening the diverse application scenarios of STONE in the ecosystem and creating more value for users.

Foresight News: What market position do you hope StakeStone will achieve in the next few years?

Charles K: We hope to become a leader in the liquidity asset space. During a brief window, EigenLayer once dominated the underlying assets, leading us to support EigenLayer as the underlying asset for STONE to a large extent, causing the market to mistakenly believe that our LRT protocol was involved.

However, as the underlying assets become increasingly rich, STONE, which will not change its notes due to changes in underlying assets, will showcase the unique value of liquidity assets to applications and the market.

Foresight News: What predictions do you have for the future development trends of the liquidity staking sector?

Charles K: Different situations will arise before and after the EigenLayer airdrop release. Before the airdrop, a large amount of liquidity will flow into EigenLayer and restaking protocols, while after the airdrop, liquidity will undergo restructuring. At that time, projects that can apply liquidity notes more broadly and efficiently will stand out in the medium to long-term competition.

Restaking has already become a catalyst for liquidity conversion, significantly driving the leap in on-chain active TVL from $5 billion last year to the current $20 billion. Although the liquidity scale may face downward pressure in the short term as the restaking cycle gradually completes, the growth potential in this field remains significant from a long-term perspective.

It is worth noting that previously, LRTs attracted arbitrage funds to purchase Pendle PT through artificially created high-point incentives, and this phenomenon is about to reach a turning point. As PT matures, the market will undergo a significant adjustment in liquidity structure, which may trigger market volatility.

Specifically, regarding the strategies of projects like ether.fi, they stimulate arbitrage funds in the short term through double or even multiple point incentive mechanisms, but this is difficult to sustain in the long term, as the endpoint for arbitrage funds is to exchange back for ETH to complete the arbitrage.

In specific terms, normally, when STONE is involved in activities in Manta, it cannot be withdrawn immediately after depositing. If users are eager to exit, they may choose to sell on a DEX, which could lead to STONE/ETH decoupling and signs of STONE being discounted, previously dropping to 0.9, meaning buying in could yield a 10% profit. This brought StakeStone a $300 million increase in TVL. However, we cannot incentivize this behavior, as excessive incentives would further expand the arbitrage space and exacerbate the decoupling phenomenon of STONE, which is not conducive to the long-term stable development of the market.

As a neutral tool platform, Pendle itself is a principal and interest separation platform, but because the discount after splitting yield notes does not directly reflect in the price of the notes themselves, it creates opportunities for LRTs to manufacture discounted arbitrage products without worrying about depeg risks.

Foresight News: What are StakeStone's strategic plans in the short to medium term?

Charles K: We can look at it from three dimensions:

First is the horizontal expansion of assets, including entering the Bitcoin space to meet users' growing diverse needs.

Second is the deepening of the consensus layer; in terms of restaking, StakeStone will first introduce Symbiotic while also keeping an eye on and investing in cutting-edge consensus mechanisms like AI.

Third is innovation at the application layer. StakeStone** will not only continue to deepen existing public chain ecosystems but also introduce STONE into projects in AI, gaming, payments, and other fields, creating more diverse and practical application scenarios.**