In the First Week of 2025, The Crypto Market Put on a Spectacular Show. Before the Final Competitive Conclusion of the BTCFi Track, People with Different Perspectives and Positions Have Complex Mindsets and Emotions. This Article Does Not Aim to Spectate but to Summarize Previous Patterns and Analyze Future Opportunities. Since Lido, LSD Has Gradually Ignited a New Round of DeFi Demand; After the Two Months of Extra Confidence Brought by Trump's Election, How to Face Future Market Development is Likely to Be the Most Concerned Issue in Q1 2025.
tl;dr
1. The Narrative of LSD Defines the Market, LYD Emphasizes Yield and Weakens the Negative Impact of Staking on Liquid.
2. LSD Originated from Lido, Providing a Liquidity Balancing Mechanism for Token Issuers and Holders, Gradually Evolving to Form an Industry Landscape
3. LSD Captures the BTC Ecosystem and BTCFi as Development Carriers, Achieving a Batch of Projects in the TVL and Listing Competition in 2024.
4. LSD Essentially Promoted the Fundraising Process in the Crypto Market; The Competition Among Projects is Similar to TradFi Bank Thinking
5. LSD Due to Over-Staking Has Led to Two Negative Issues, Presenting Risk Hazards, and Unsustainable Development.
6. LYD is Focused on Yield, Introducing Sustainable Value to the Market through the Trade-Off Game Between Liquid and Yield
7. LYD Addresses the Sustainable Real Yield Issue, with Project Parties Taking on Roles in Crypto Funds, Asset Management, and Asset Sides.
8. LYD Will Promote Protocol Asset Management, Serving as the Foundation for AI Agents to Participate in Financial Management, Forming AIFi.
9. LYD Will Trigger a Shift from Virtual to Real in Crypto, Becoming the Development Foundation for Actual Payments, Asset Earnings, and Other Financial Scenarios
1. What are LSD and LYD?
LSD (Liquid Staking Derivatives) Originally Means Forming Various Derivative Scenarios Through Staking Crypto Liquidity to Provide Earnings for Crypto Holders. LSD is a Very Ingenious and Excellent Narrative Concept; It Cleverly Combines Liquid, Staking, and Derivatives into One Term, Forming a Model That Directly Hits the Essence of Crypto and DeFi Strategies with a Very Native Approach, Successfully Igniting the Market and Leading a New Round of Rapid Development in DeFi and CeDeFi Ecosystems.
LYD (Liquid Yield Derivatives) Seeks Balance in the Binary State of Crypto Liquidity and Yield Earnings, Forming Various Derivative Scenarios. LYD Inherits the Native Concept of LSD, Weakening the Negative Issues and Bubble Phenomena Caused by Staking on Liquid, Emphasizing the Importance of Real Yield for the Sustainability of the Crypto Market and Derivatives, and Opening Up and Promoting the Next Stage of a Secure, Scalable, & Sustainable Healthy Market Environment.
2. The Initiation and Original Intention of LSD
LSD Started with the Launch of stETH by Lido in December 2020 and Exploded in 2023-2024. This Model is Very Similar to the Role of US Treasury Bonds in Relation to the US Dollar, Essentially Utilizing Yield Expectations to Trade Off Liquidity, Seeking a Liquidity Balance for Token Issuers and Holders.
The Original Intention at the Beginning of LSD's Initiation Was Different from Later Stages. The Rebase Model Represented by stETH Anchored the Staking Rewards of Ethereum's POS Network. Although It Was Not a Guaranteed Fixed Rate Promised by the Foundation, It Had Relatively Solid Underlying Value. This Model Attracted Liquid to Staking Through Yield Expectations, Bringing a Large Amount of TVL as a KPI Indicator for Industry Evaluation, and It Could Derive Various Interesting Innovative Derivative Plays, Thus Rapidly Exploding and Evolving, Forming a Rich DeFi and CeDeFi Industry Landscape.
3. The Explosion and Competitive Landscape of LSD in BTCFi
Shortly After the Emergence of LSD, Towards the End of the 2022 Bear Market, It Gradually Captured and Awakened a Real Demand from BTC Holders: BTC Holders Hope to Appreciate Their BTC Holdings but Struggle Without Suitable Ecosystems and Financial Assets.
The Emergence of Merlin Has Opened the Chapter for the BTC Ecosystem, BVM, BTC Layer 2, and BTCFi, Rapidly Becoming an Important Track for Crypto in 2024. From the Hundred Schools of Thought to the Continuous Iteration of Several Core Projects, The Competitive Landscape of BTCFi Based on LSD Will Gradually Clarify by Q3 2024, with Project Parties Quickly Achieving Billions of Dollars in Funding Scale by Utilizing Yield Expectations to Stake BTC Liquidity.
This Cycle Has Marketplaces Like Pendle Formed Through Innovative Models, and Yield Strategies Like Ethena Shaped by Stablecoins. 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 Capture of BTC Holders' Needs by LSD is Real; Essentially, It Forms Fundraising for Crypto Tokens Through the Process from Liquid to Staking. In Other Words, Project Parties of LSD are Essentially Thinking Like Banks, and the Competition in BTCFi is Essentially a Competition Among Project Parties for BTC Fundraising.
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 Income-Earning Needs of Token Holders and Providing Income-Earning Products and Asset Markets.
iii. Pooling Funds from Token Holders to Form a Fundraising Process and Crypto Bank
5. The Dilemmas and Issues of LSD
Since It is Fundraising, Competition is Inevitable. To Obtain TVL More Quickly, Project Parties, Players, and Markets Have Tried Various Ways to Differentiate Ecosystems and Strategies. The Assets of Staking, Restaking, and Rererestaking Have Rapidly Evolved, and the Phenomenon of 'One Shovel Digging Multiple Pits' is Quite Common, Leading to the Core Issues of LSD Starting to Emerge.
The Ingeniousness of the Term LSD Ultimately Became Its Problem; It Overemphasized Staking While Overlooking the Importance of Real Yield in the Face of Derivatives. Ultimately, the Operation of the LSD Cycle Still Follows the Usual Route of Innovation Narrative, Describing Expectations, Building Consensus, and Circulating Tokens for Monetization. Without Real Yield and Real Application as the Underlying Support for Assets and Ecosystems, Even if Trump's Election Boosted Confidence for Two Months, It Would Be Difficult to Maintain Sustainable Market Development.
The Over-Staking Caused by LSD Has Brought Two Fundamental Negative Issues:
i. For Users: After excessive use of staking, the underlying opacity and cumbersome redemption process created a lot of information asymmetry and time asymmetry, greatly reducing the fairness of users' initial trade-off of liquid value for returns, and thus forming a conflict of motives and interests between project parties and users, leading to bubbles and risk hazards.
ii. For the Industry: Excessive Staking Affects the Liquidity of Many Ecosystem Native Coins, Creating Dampening Effects, While Resisting Declines in Bear Markets, It Also Leads to Short Bull Markets, Hindering Flexible Development of the Ecosystem and Rapid Price Fluctuations.
Interestingly, To Address the Situations Arising from LSD, Many Projects Introduced T-Bills as Underlying Assets. Projects Represented by Ondo and OpenEden Are Essentially Products of the LSD Cycle, Using T-Bills as Underlying 'Cushions' and Enlisting Some Big Names for Credit Endorsement. Several Operations That Seem Simple (But Are Not Easy) Have Created a Market Branch, Achieving Market Capitalization in the Billions. The Emergence of This Branch Actually Reflects the Fundamental Problem: The LSD Market Seriously Lacks Real Yield.
6. The Inevitability of LYD's Emergence
The Success of LSD Lies in the Smooth and Coherent Process from Liquid to Staking to Derivatives, but Staking Should Not be Compared to Liquid, as Staking is Used to Help Issuers Weaken Liquid's Liquidity Management. What Should be Compared to Liquid is Not a Method or Tool, but a Financial Essence: Yield.
Liquid and Yield are Both a Binary Seesaw and a Contradictory Community. Whether as Issuers, Holders, or the Overall Market, We Must Consider the Balance Between the Two. This Applies to Treasury Bonds, Funds, and Crypto Derivatives Alike.
The Process of Choosing Between Liquid and Yield is a Trade-Off; The Choice Should Not Be Restricted by Rules Unilaterally Imposed by One Party, but Should Be a Market Game Mechanism That Can Be Embodied by a Protocol in Web3 and Crypto. The R² Protocol Proposed by CICADA in Q4 2024 Does This Well.
The Problem with LSD Lies in the Staking Process Limiting the Game Mechanism. If Crypto Truly Wants to Pump Value into the Market for Sustainable Development, It Must Release This Limitation, Allowing the Market to Form Free Competition Between Liquid and Yield. Such an Ecological Mechanism and Financial Derivative is LYD.
7. The Surface Problem Addressed by LYD
The Emergence of LYD Will Shift the Focus of the Market, Project Parties, and Fund Providers with Established Competitive Landscapes to Truly Sustainable Income-Earning Assets, Gradually Introducing Various RYA (Real Yield Assets) into the Marketplace and Competing in the Development, Selection, and Provision of Real Yield, Forming a Stable and Healthy Development Environment.
Projects Advocating for LYD and Crypto Protocols Will Play Roles in Crypto Asset Management and Asset Sides in This Process, Similar to Asset Management, Trusts, Funds, and Family Offices in TradFi, Corresponding with the Fundraising and Bank-like Financial Institutions Formed by the LSD Cycle, Providing Various Truly Real Yield Solutions, Composing a More Complete Financial System.
8. The Fundamental Problem Solved by LYD
From a Micro Perspective, LYD Allows Crypto Holders and Crypto Investors to Choose Their Own Balance Between Liquid and Yield. Each Institution and Individual Can Make Trade-Offs Between Liquid and Yield Based on Their Needs, Information Analysis, and Risk Preferences. This is the Common Sense Evolved from TradFi to Date, Returning Freedom to the Market and an Inevitability for the Sustainable Development of the Crypto Market.
From a Macro Perspective, LYD is Promoting the Rapid Entry of Real Yield Assets (RYA) and Real World Assets (RWA) into the Crypto Market. This Trend Will Soon Experience a Quantitative Change Leading to a Qualitative Change, Propelling the Global Economy and Finance into the Protocol and AI Era. More Protocol Asset Management and Smart Contract Asset Management Will Emerge, Which Will Also Become the Foundation for AI Agents to Participate in Economic Management, Forming AIFi.
9. LYD Will Trigger a Turning Point in Crypto
The Relay Transition from LSD to LYD is Likely to Trigger Even Become an Important Turning Point in the Crypto Market Over the Years. This Turning Point is Not a Shift from Prosperity to Decline, but Specifically Should be Viewed as a Transition from Virtual to Real.
Many People Said Early in This Bull Market That This Was the Last Opportunity. In Fact, The So-Called Last Round Is Not the Last Round of the Overall Crypto Market. On the Contrary, Crypto is Changing the Global Economic, Financial, and Payment Systems in an Unstoppable Way. The Last Round Refers to the End of the Initial Dissemination Phase of Crypto, Where Consensus is Constructed through Narratives.
The Next Stage Will Be a Major Development Phase for Crypto in Practical Applications, Including Actual Payments, Asset Earnings, and Various Financial Scenarios. These Will Quickly Enter the Crypto Market, Forming a Part of the New Global Economic Financial System, with LYD Serving as an Important Link.
