LSD and DVT Explanation

What are the skyrocketing LSD and DVT?#

Recently, there have been rumors in the market that the SEC wants to cancel the cryptocurrency collateral services for retail customers in the United States. In addition, Kraken announced the termination of its cryptocurrency collateral services for US users and paid $30 million to settle SEC's charges of offering unregistered securities.

This event has sparked discussions within the industry about the anti-fragility of ETH2.0. If the rumored policy is implemented, centralized platforms such as Coinbase, Kraken, and Binance will all be affected. Due to this expectation, the market prices of tokens related to LSD and DVT concepts have risen against the trend.

Classification of Collateral:#

Native Collateral: 32 ETH + running a node
Collateral as a Service (stSaaS): 32 ETH + outsourcing node operation services (requires payment of service fees and avoiding rug risks)
Joint Collateral: Any amount + 1:1 exchange for collateral certificates
Centralized Exchanges: Exchanges using deposited funds for native collateral

LSD:#

LSD (Liquid Staking Derivatives) is a protocol for liquid staking derivatives. Currently, it mainly includes projects such as Lido, Rocket Pool, Frax, Ankr, and Stafi. Among them, Lido occupies over 73% of the LSD market share and accounts for 29.27% of the total ETH staked.

Lido is a non-custodial Ethereum 2.0 staking service platform. For users, they can participate in Ethereum 2.0 staking on Lido with any amount of ETH without setting up a node. The staked token, stETH, can freely circulate through the AMM mechanism of DeFi and participate in other services in the DeFi market.

Lido takes a 10% cut from the earnings of native staking as protocol revenue, with 5% going to the operators of the staking nodes and the other 5% going into the Lido treasury, which is governed by $LDO. Since the earnings from native staking are less affected by market fluctuations, its income in terms of the native currency is almost unaffected by bear markets. In December, the protocol's revenue was slightly less than GMX, and its total fees exceeded Uniswap. Currently, $LDO is only used for community governance, and its token empowerment is similar to AAVE/Maker, which is average but stronger than Uniswap, which has no protocol revenue.

Currently, the total amount of Ethereum staked is over 16.4 million ETH, with a staking ratio of about 13.6%. Compared to other public chains, the staking ratio of ETH is relatively low. For example, ADA, SOL, BNB, AVAX, etc., have staking ratios generally exceeding 60%. The LSD market still has room for growth.

In my personal opinion, the total amount of Ethereum staked in Shanghai's upgrade may decrease slightly in the short term, and then the staking ratio may continue to rise (from fixed-term to current-term, with the interest calculation method remaining basically unchanged). Moreover, the Ethereum that was originally staked will be reallocated to Lido and Coinbase.

As time goes by, Lido and Coinbase will gain more and more Ethereum validators and staking volume, posing a serious threat to the decentralization of Ethereum. Once they control Ethereum, transactions that want to break this situation will be rejected by large mining pools like Lido or Coinbase. This undoubtedly poses a new challenge to the decentralization of Ethereum, and it is hoped that the community and core developers can solve this problem.

DVT:#

DVT (Distributed Validator Technology) refers to decentralized validation technology. DVT refers to a technology that allows Ethereum proof-of-stake validators to run on multiple nodes simultaneously, creating a trusted network for staking infrastructure to ensure the security and decentralization of the blockchain network. The main projects in the DVT field currently include SSV.Network, Obol Labs, etc.

Operator: An individual or entity running one or more nodes.
Operator node: Refers to the hardware and software that perform the tasks of an Ethereum validator. These tasks can be performed by a node alone or in collaboration with other nodes using DVT tools.

In simple terms, DVT forms a network of node operators, similar to the distributed network of blockchain, and the nodes in the cluster of DVT providers' node operators can have different clients, thereby reducing the risk of single point of failure.

Taking SSV.Network as an example: It is a fully decentralized open-source ETH staking network based on Secret Shared Validator (SSV) technology. SSV achieves decentralized validation by managing its validation network based on the Istanbul BFT consensus mechanism through MPC threshold schemes. The overall operation logic of SSV is as follows:

ETH holders stake ETH to the SSV protocol to become stakers (these ETH holders can be individuals, institutions, or LSD platforms like Lido). Users who originally stake ETH to become validators in the Ethereum network can now stake ETH to the Validator Client and SSV Network aggregates many operators (i.e., nodes) to help these stakers correctly perform their validators' responsibilities under the IBFT consensus mechanism.
The SSV protocol distributes the Validator Keys among non-trusted nodes through DVT using Distributed Key Generation. These nodes, acting as operators, execute the validators' duties under the Istanbul BFT consensus mechanism.
Stakers need to pay SSV tokens to operators as a reward for their execution of validators' actions. In addition, a liquidation mechanism is set up to ensure the rights of operators.

Summary:#

LSD lowers the threshold for staking and increases the liquidity of staked assets, perfectly meeting the needs of institutions and retail investors. Projects like Lido, as representatives, have earned stable income through staking spreads, and the continuous and stable cash flow is the reason why $LDO has performed well in this bear market. With the progress of the Shanghai upgrade, it is expected that more funds will choose to stake in LSD projects, which may pose a threat to the decentralization of the Ethereum network.

The main advantage of DVT technology is that it can form a distributed network of validators, similar to the distributed network of blockchain nodes, relying on the consensus mechanism (IBFT) to jointly execute the responsibilities of validators. It also allows for diversity in Validator Clients, improves fault tolerance, and reduces the risk of single point of failure for validators, thereby earning stable income.

LSD platforms and DVT technology providers can cooperate. For example, Lido can integrate the DVT solution from SSV.Network to achieve decentralization of its node operators, solving the risk of ETH being penalized due to server downtime when the validation keys are held by a single node operator. This is also in line with the Ethereum community's consistent advocacy for anti-fragility.