Author: @Web3Mario
Summary: We know there is a saying, 'Buy the rumor, sell the news.' In the lead-up to the October elections, my publication (The New Value Cycle of DOGE: Political Traffic Potential and Musk's 'Department of Government Efficiency' (D.O.G.E) Political Career) received a good response and expected results, and I also enjoyed considerable investment returns. I believe that during this window period before Trump officially takes office, there will be many similar trading opportunities. Therefore, I have decided to start a series of articles (Buy the Rumor series) to explore and analyze the hot topics currently being hyped in the market, extracting some trading opportunities.
Last week, a noteworthy phenomenon occurred: with Trump's strong return, the market has begun to hype expectations of SEC Chairman Gary Gensler's potential resignation. You can find relevant analysis articles about potential successors in most mainstream media. In this article, we will analyze which cryptocurrency will benefit the most directly from the improving regulatory environment. To conclude, I believe the ETH Staking sector will be the one that benefits the most, and Lido, as a leading project, may be able to escape its current price predicament.
A review of the regulatory difficulties faced by Lido: the Samuels v. Lido DAO lawsuit.
First, let's provide some basic information. We know that Lido is a leading project in the ETH Staking space, providing non-custodial technical services to help users participate in Ethereum PoS and earn yields while lowering the technical threshold and the capital threshold of 32 ETH for Ethereum Native Staking. The project has raised a total of $170 million through three funding rounds. After its launch in 2022, Lido maintained a market share of around 30% due to its first-mover advantage. According to recent data from Dune, Lido currently holds a 27% market share and has not shown significant decline, indicating strong business demand for Lido.
The reason for Lido's current price slump can be traced back to the end of 2023, when its governance token LDO reached its historical peak, with a market cap of $4 billion. At this time, a lawsuit changed the entire price trend: the Samuels v. Lido DAO case, case number 3:23-cv-06492. On December 17, 2023, an individual named Andrew Samuels filed a lawsuit against Lido DAO in the U.S. District Court for the Northern District of California, accusing the defendant Lido DAO and its partnering venture capital firms of selling LDO tokens to the public in an unregistered manner, violating the provisions of the Securities Act of 1933. Additionally, Lido DAO created a highly profitable business model by pooling users' Ethereum assets for staking without registering its LDO tokens with the SEC. Plaintiff Andrew Samuels and other investors suffered financial losses as they believed in the potential of this business model, thus seeking legal compensation.
This case not only involves Lido DAO but also includes accusations against its main investors, such as AH Capital Management LLC, Dragonfly Digital Management LLC, Lido DAO, Paradigm Operations LP, Robot Ventures LP, etc. According to information displayed about the entire case progress, these institutions received subpoenas from the court sequentially in January 2024, when the price of LDO was at its peak. After that, the legal processes between the parties have been limited to the lawyers of the investment institutions and Andrew Samuels, so the related influence has not spread.
Until the first motion hearing on March 28, 2024, the judgment results were confirmed on April 10, 2024, and after modifying some related terms, the case was factually accepted.
Subsequently, on May 28, 2024, Andrew Samuels' legal team unilaterally announced a motion requesting a default judgment against Lido DAO. This action was taken because Lido DAO believes it is not operating as a corporation and thus did not respond to the lawsuit. If ultimately declared in default, Lido would face some unfavorable judgments, such as not defending itself. Based on previous similar cases like Ooki DAO, the outcome is generally unfavorable for the absent party. The motion was approved by the court on June 27, requiring Lido DAO to respond within 14 days. Subsequently, on July 2, 2024, Lido DAO had to propose a community proposal to hire Dolphin CL, LLC, located in Nevada, as its defense attorney, and apply for related funding of 200,000 DAI. Thus, this case became widely known within the community. After several rebuttals from both sides, the case seemed to enter a cooling-off period after September.
Meanwhile, another case has also had a substantial impact on Lido: the SEC's case against Consensys Software Inc., case number 24-civ-04578, noted that this date is the day after the judgment was issued in the Lido case, informing Lido DAO as an operating organization that it was fully aware of the lawsuit. In this lawsuit, the SEC alleges that Consensys Software Inc. was engaged in the unregistered issuance and sale of securities through its service called MetaMask Staking, and operated as an unregistered broker through MetaMask Staking and another service called MetaMask Swaps.
According to the SEC's complaint, since January 2023, Consensys has provided and sold thousands of unregistered securities on behalf of liquidity staking plan providers Lido and Rocket Pool, which created and issued liquidity staking tokens (called stETH and rETH) in exchange for staked assets. While staking tokens are typically locked and cannot be traded or used during the staking period, liquidity staking tokens, as the name implies, can be freely bought and sold. Investors in these staking plans provide funds to Lido and Rocket Pool in exchange for liquidity tokens. The SEC's complaint accuses Consensys of engaging in the unregistered issuance and sale of securities by participating in the distribution of staking plans and acting as an unregistered broker in these transactions.
In this lawsuit, the stETH certificates issued by Lido for participating users are explicitly described by the SEC as a type of security. Thus, Lido has officially entered a low tide period under regulatory pressure. In the previous descriptions, the reason for organizing the timeline of the case progress is to hope to resonate with its price trend. In other words, the core factor that suppresses the price of LDO is the lawsuit impact brought about by the increasing regulatory pressure, triggering risk-averse sentiments among institutional or retail investors, because if the ruling is unfavorable, it means that Lido DAO will face significant fines, which will undoubtedly have a great impact on the price of LDO.
Is stETH a security, and why is Lido's subsequent development the most worth watching?
From the analysis above, we can identify that the current reason for the low price of LDO is not due to business underperformance, but rather the uncertainty caused by regulatory pressure. We know that the core of the two aforementioned cases is to determine whether stETH is a security. Generally, whether an asset can be recognized as a security requires passing the so-called 'Howey test.' To briefly introduce, the Howey test is a standard used in U.S. law to determine whether a transaction or instrument constitutes a security. It originates from the 1946 U.S. Supreme Court ruling in the SEC v. W.J. Howey Co. case. This test is crucial in defining securities, especially in the cryptocurrency and blockchain fields, and is often used to assess whether tokens or other digital assets are subject to U.S. securities laws.
The Howey test is primarily based on the following four criteria:
Investment of funds: Does it involve the investment of money or other valuable assets?
Joint Enterprise: Does the investment enter into a joint enterprise or project?
Expected Profits: Do investors have a reasonable expectation of profits derived from the efforts of others?
Efforts of Others: Whether the source of profit primarily relies on the project developers or third-party management and operation.
If a transaction or instrument meets all of the above conditions, it may be identified as a security and subject to regulation by the U.S. Securities and Exchange Commission (SEC). In the current regulatory environment, which is not favorable to cryptocurrencies, stETH is considered a security. However, the cryptocurrency community holds the opposite view; for instance, Coinbase believes that ETH Staking does not meet the four elements of the Howey test and should not be regarded as a securities transaction.
No Financial Investment: During the staking process, users retain full ownership of their assets and do not entrust their funds to third parties, thus there is no investment behavior.
No Joint Venture: The staking process is completed through a decentralized network and smart contracts, and the service provider is not a company jointly operated with users.
No Reasonable Profit Expectation: Staking rewards are the earnings of blockchain validators, similar to salary compensation, rather than the expected returns from investments.
Non-Dependence on Others' Efforts: The institutions providing staking services only operate public software and computing resources to perform validation, which is technical support rather than management behavior, and rewards are not based on their management efforts.
Thus, we can see that there is indeed discussion space regarding whether the staking-related certificate assets of ETH will be recognized as securities, heavily influenced by the overall subjective judgment of the SEC. Finally, to summarize why I say Lido's subsequent development is the most worth watching:
The core factor of price suppression is regulatory pressure, with high subjective factors involved in the regulatory pressure, and the current price is technically at a low point.
ETH has been defined as a commodity, so the related viewpoints have more room for discussion compared to other areas, such as SOL.
The ETH ETF has been approved, and the top resources mobilized for promoting the sales of the ETF will undoubtedly provide assistance. To elaborate a bit, as there is already information circulating about this, the general consensus is that the current inflow of funds into the ETH ETF is consistently poor compared to BTC. The reason lies in differentiation; for most traditional funds, BTC is easier to understand as the standard of the entire cryptocurrency space, while the appeal of the ETH ETF is not as strong. If ETH ETFs can provide indirect staking yields to buyers, it will significantly enhance their attractiveness.
The legal costs associated with resolving relevant lawsuits are relatively low. We know that in the Samuels v. Lido DAO case, the plaintiff is not the SEC but an individual, so the legal costs resulting from dismissing the judgment are smaller compared to a direct lawsuit by the SEC, and the impact is also relatively minimal.
In summary, I believe that during this window period, with the increasing possibility of changes in the regulatory environment, Lido's subsequent development is worth paying attention to.
