Article reproduced from: Gary Yang.
In the first week of 2025, the Crypto Market showcased a spectacular scene. Before the final competition in the BTCFi track, people with different perspectives and positions had complex mentalities and emotions. This article does not aim to gossip but to summarize past patterns and analyze future opportunities. LSD has gradually ignited a new round of DeFi demand since Lido, and after two months of extra confidence brought by Trump's election victory, how to face the future development is believed to be the most concerning issue in Q1 2025.
tl;dr
1. The narrative definition of LSD ignited the market, while LYD emphasizes Yield and mitigates the negative impacts of Staking on Liquid.
2. LSD originated from Lido, providing a liquidity balancing mechanism for token issuers and holders, gradually evolving into an industry landscape.
3. LSD captures the BTC ecosystem and BTCFi as a development carrier, achieving a batch of projects in the 2024 TVL and Listing competition.
4. LSD essentially promotes the savings process in the Crypto market, with project competition resembling TradFi banking thinking.
5. LSD has led to two negative issues due to Over Staking, posing risks and making development unsustainable.
6. LYD is oriented towards Yield, introducing sustainable value to the market through the Trade Off game process between Liquid and Yield.
7. LYD addresses the sustainable Real Yield issue, with project teams taking on roles as Crypto funds, asset management, and asset sides.
8. LYD will promote Protocol Asset Management and form the basis for AI Agents' participation in financial management, creating AIFi.
9. LYD will trigger a transition for Crypto from virtual to real, becoming the foundation for actual payments, asset yield, and the development of other financial scenarios.
1. What are LSD and LYD?
The original meaning of LSD (Liquid Staking Derivatives) is to provide returns for Crypto holders through staking to form various derivatives scenarios. LSD is an exceptionally clever narrative concept that cleverly combines Liquid, Staking, and Derivatives into a single term, forming a model that directly addresses the essence of Crypto and DeFi strategies using a very native method, successfully igniting the market and leading a new round of rapid development in DeFi and CeDeFi ecosystems.
LYD (Liquid Yield Derivatives) means seeking balance in the dual state of Crypto liquidity and yield, thus forming various derivatives scenarios. LYD inherits the native concept of LSD, mitigates the negative issues and bubble phenomena caused by Staking on Liquid, and emphasizes the importance of Real Yield for the sustainability of the Crypto Market and Derivatives, opening and promoting the next stage of a secure, scalable, and sustainable healthy market environment.
2. The initiation and original intention of LSD.
LSD started in December 2020 with the launch of stETH by Lido and exploded in 2023-2024. This model is very similar to the role of US Treasuries for the US dollar, essentially utilizing yield expectations to trade off liquidity, seeking a liquidity balance for token issuers and holders.
The original intention of LSD at its inception differs from later stages. The rebase model represented by stETH anchors the staking rewards of the Ethereum POS network. Although it is not the fixed rate guarantee promised by the foundation, it has relatively solid underlying value. This model attracts liquidity to staking through yield expectations, bringing in a large amount of TVL as a KPI marker for industry evaluation, and can generate various interesting innovative derivatives play, thus rapidly exploding and evolving into a rich DeFi and CeDeFi industry landscape.
3. The explosion and competitive landscape of LSD in BTCFi.
Not long after the emergence of LSD, towards the end of the bear market in 2022, it gradually captured and awakened a real demand from BTC holders: BTC holders wanted to appreciate their BTC holdings but struggled with a lack of suitable ecosystems and financial assets.
The emergence of Merlin has opened the BTC ecosystem, BVM, BTC Layer 2, and the BTCFi track, quickly becoming an important track in Crypto for 2024. From a hundred schools of thought battling to several core projects continuously iterating, the competition in BTCFi based on LSD's methodology is gradually becoming clear by Q3 2024, with projects quickly reaching billions of dollars in funding scale by staking user BTC liquidity against yield expectations to achieve TVL.
This cycle includes marketplaces like Pendle formed by model innovation and yield strategies shaped by stablecoins like Ethena. By the end of 2024, in the ongoing competition for TVL and listings, Solv and Babylon may become the final winners.
4. The industry significance and value of LSD.
The demand capture for BTC holders by LSD is real, fundamentally forming savings for Crypto Tokens through the Liquid → Staking process. In other words, the project parties of LSD are essentially thinking like banks, and the competition in BTCFi is fundamentally a competition among project parties for BTC savings.
The emergence and evolution of LSD have brought the following significance and value to the market:
i. Providing a liquidity balancing mechanism for token providers (issuers) and holders (users).
ii. Capturing the common yield demands of token holders to provide yield products and asset marketplaces.
iii. Pooling funds from token holders to form a savings process and Crypto banks.
5. The dilemmas and issues of LSD.
Since it is about savings, the competition is bound to be fierce. To quickly gain TVL, project teams, players, and the market have tried to differentiate ecosystems and gameplay, with the rapid evolution of staking, restaking, and re-restaking asset nesting, making the phenomenon of 'one shovel digging multiple mines' quite common, revealing the core issues of LSD.
The cleverness of the term LSD also ultimately becomes the problem, as it overly emphasizes Staking while neglecting the importance of Real Yield in the face of Derivatives. Ultimately, the operation of this LSD cycle still follows the usual route, that is, innovative narratives, depicting expectations, building consensus, and the cycle of issuing tokens for realization. Without Real Yield and Real Application as the underlying support for assets and ecosystems, even if Trump's election has temporarily boosted confidence for two months, it is still difficult to maintain the sustainable development of the market.
The over-staking caused by LSD has brought about two fundamental negative issues.
i. For users: excessive use of staking has created a lot of information opacity and a cumbersome redemption process, significantly reducing the fairness of users' initial use of liquid value for trade-off yields, thus constituting a motivational and interest opposition between project parties and users, forming bubbles and risk hazards.
ii. For the industry: excessive staking has impacted the liquidity of many ecosystem native currencies, creating damping effects, which while resisting declines in bear markets, also result in short bull markets, hindering the flexible development of ecosystems and the rapid fluctuation of prices.
Interestingly, to solve this situation derived from LSD, many projects have introduced T-Bills as underlying assets. Projects like Ondo and OpenEden are essentially products of the LSD cycle, and they use T-Bills as an underlying 'cushion' and bring in some Big Names for credit endorsement. A few seemingly simple (but not easy) operations have formed a market branch and gained billions of dollars in market value. The emergence of this branch actually highlights the essential problem: the LSD market severely lacks Real Yield.
6. The inevitability of LYD's emergence.
The success of LSD lies in the smooth and coherent process of Liquid → Staking → Derivatives, but what should not be compared to Liquid is Staking, as Staking is a tool used by issuers to weaken the liquidity management of Liquid. What should be compared to Liquid is not a method or tool, but a financial essence: Yield.
Liquid and Yield are a binary seesaw, also a contradictory community. Whether as issuers, holders, or the overall market, all must consider the balance between the two. This applies to government bonds, funds, and Crypto Derivatives equally.
The process of choosing between Liquid and Yield is a trade-off, and this choice should not be limited by rules unilaterally set by any party, but should be a market game mechanism that can be reflected by a Protocol in Web3 and Crypto. The R²Protocol proposed by CICADA in Q4 2024 has done this well.
The problem with LSD lies in the fact that the staking process limits the game mechanism, and for Crypto to truly inject production value into the market for sustainable development, it must release this limitation and allow the market to form free games between Liquid and Yield. Such an ecological mechanism and financial derivatives are LYD.
7. The superficial issues addressed by LYD.
The emergence of LYD will shift the focus of the market, projects, and existing competitive funding parties towards real sustainable yield-bearing assets, gradually bringing various RYA (Real Yield Assets) into the Marketplace, working and competing in the development, selection, and provision of Real Yield, thus forming a stable and healthy development environment.
Projects advocating LYD and Crypto Protocol will take on the roles of Crypto asset management and asset sides in this process, similar to asset management, trust, funds, and family offices in TradFi, corresponding to the Crypto savings and banking-like funding institutions formed by the LSD cycle, providing various real yield solutions, thus creating a more complete financial system.
8. The essential problems addressed by LYD.
The micro-level significance of LYD is to allow Crypto Holders and Crypto Investors to choose the balance between Liquid and Yield themselves. Each institution and individual can make trade-offs between Liquid and Yield based on their situation, information analysis, and risk preferences. This is a common principle that has evolved in TradFi, a practice of returning freedom to the market, and a necessity for the sustainable development of the Crypto Market.
On a macro level, LYD is driving the trend of real yield assets (RYA) and real-world assets (RWA) rapidly entering the Crypto Market, a trend that will soon undergo a qualitative change, pushing the global economic finance into the Protocol and AI era. More Protocol Asset Management and Smart Contract Asset Management will emerge, forming the basis for AI Agents to participate in managing economic finance, creating AIFi.
9. LYD will trigger a turning point in Crypto.
The transition from LSD to LYD could trigger or even become an important turning point for the Crypto Market over the years. This turning point is not a shift from prosperity to decline, but rather a transition from virtual to real.
Many people were saying that this was the last opportunity in the early stages of this bull market. In fact, the so-called last round is not the final round for the entire Crypto market; on the contrary, Crypto is changing the global economic, financial, and payment systems in an unstoppable way. What is referred to as the last round actually signifies the end of the initial phase of Crypto's narrative construction of consensus.
The next stage will be a significant development phase for Crypto in practical applications, including actual payments, asset yield, and various financial scenarios, which will rapidly enter the Crypto Market, forming part of a new generation of the global economic financial system, with LYD playing an important connecting role.
