Author: Jack Inabinet, Bankless; Translated by: Tao Zhu, Golden Finance

The rise of re-staking led crypto investors to sell off Ethereum staking giant Lido Finance in the first half of 2024, causing LDO to fall to multi-year lows against ETH.

LDO investors, who have been buoyed in recent weeks by the protocol’s potential to upend EigenLayer’s dominance, were dealt a heavy blow on Friday when the U.S. Securities and Exchange Commission designated its Liquid Collateral Token as an unregistered crypto security in a lawsuit filed against MetaMask creator Consensys.

LDO may have underperformed ETH significantly year-to-date, but today, we’ll discuss why LDO’s fundamentals have never been stronger.

Re-staking competition

In 2023, Lido was unstoppable, accumulating a third of staked ETH and doubling the amount of ETH under management.

Throughout the year, Lido’s control over the percentage of ETH staked has threatened to breach 33% — the first of three key thresholds at which staking entities can more easily manipulate consensus — sparking a fierce debate among Ethereum users over whether the ecosystem should enforce limits on Lido’s staking to prevent unwanted centralization.

In 2024, these contentious conversations have moved to the margins, while the share of ETH staked on Lido has fallen to a seemingly more acceptable 29% (purple line), its lowest level since April 2022.

While Lido continues to enjoy net ETH inflows, the protocol’s market share decline coincides with the emergence of a breakthrough phenomenon that challenges the dominance of its original staking model: restaking. Although restaking services are neither operational nor profitable to date, projects that provide meta information by promising future airdrops have quickly become the hottest farms this year.

In just a few months, EigenLayer, ether.fi, Renzo, Puffer, and Kelp have all grown from relative obscurity to trusted protocols with billions of dollars in TVL!

Putting aside the controversial nature of re-staking, the appeal of the associated airdrops is undeniable, and Lido’s re-staking competitors have been able to grab market share due to the huge amounts of capital chasing these lucrative airdrops.

The arrival of EigenLayer’s much-anticipated airdrop sparked a second wave of depositor excitement in May, however, the rise of re-staking alternatives aligned with Lido has the potential to reshape the landscape of the industry…

Symbiotic relationship

Symbiotic’s deposit contract just hit mainnet two weeks ago and has already accumulated $300 million in deposits since launch, making it the fastest growing restaking protocol in June and one of the few protocols in the space to experience TVL inflows this month!

The protocol is undoubtedly the most credible EigenLayer competitor in existence, as it received seed funding from well-known crypto venture capital firm Paradigm and cyber·Fund, an investment firm that was an early contributor to Lido DAO.

While Symbiotic is largely a clone of EigenLayer, planning to offer re-staking services for a variety of assets, this re-staking ecosystem is unique through its close ties to Lido.

Coinciding with the launch of Symbiotic is the announcement of Mellow Finance, a re-pledge vault management service also backed by cyber·Fund, and designated as the first member of the “Lido Alliance,” a status that signifies formal partnership and endorsement with Lido.

Unlike the EigenLayer liquidity re-staking model, which encourages users to deposit with independently staked non-Lido re-staking managers, Mellow Finance’s custodial deposit model transforms re-staking operators into pure liquidity staking token delegators.

Compared to popular liquidity re-staking alternatives, Mellow Finance is able to better manage the liquidity risks associated with LRT by quickly converting it to LST (i.e., in the event of a decoupling, it needs to be withdrawn through the Ethereum staking queue to be converted to ETH at par); this design also reinforces the implicit winner-take-all dynamics of staking.

Since token liquidity is a key factor in assessing the attractiveness of LST, and Lido holds a massive 60% share of this staking market segment, re-staking stETH through Mellow has clear advantages from a risk-adjusted perspective.

Although stETH holders can only get one airdrop opportunity under the EigenLayer mechanism, they can obtain Mellow and Symbiotic points by leveraging Mellow.

Meanwhile, many EigenLayer restaking projects have already distributed their first round of tokens, weakening the potency of their future rewards and solidifying Mellow’s position as a top airdrop farm.

Once existing stETH capital migrates to this opportunity, the fundamental bull case for Symbiotic x Mellow re-staking becomes apparent, with EigenLayer’s employed capital most likely to flow out of the underlying LRT into stETH, ultimately triggering the first measurable growth in Lido’s staking market share in two years.

Summarize

The SEC’s attempt to designate Lido’s stETH as a crypto security poses unresolved risks for unregistered collateral services, but this event may have created a local bottom, with little unexpected danger of derailing LDO until a decision is made in pending litigation years from now.

A business does not need to be attractive to be a sound investment, and while restaking has become a focus for cryptocurrency investors, staking providers can equally generate fees from depositor returns, with the added benefit of a reliable revenue stream.

Lido has over $30 billion worth of ETH under management at an annual interest rate of 3%, and the protocol is currently generating $1 billion in annual revenue at an interest rate of 10%, giving the token a price-to-earnings (P/E) ratio of approximately 23. While this is considered “average” for a stock, such a multiple appears to undervalue LDO given the high growth potential of the crypto industry and the aforementioned Lido-specific tailwinds.

Admittedly, Lido’s current 10% management fee for operating a low-cost software business could easily be compressed if competitors attempted to corner the market with lower-cost alternatives, however, extensive stETH integration and market-leading liquidity across DeFi provide Lido with a degree of flexibility to charge additional fees for its services.

Assuming the Symbiotic ecosystem takes off in the coming months, stETH will once again approach the 33% staking concentration threshold, and while this will inevitably reignite the debate over whether Ethereum should impose a hard cap on Lido, decentralized social consensus will make it difficult (if not impossible) to implement such a drastic network change.