Interviewee: Charles K, Founder of StakeStone
Interview and article: Karen, Foresight News
Is the TVL boom under the temptation of airdrops a sunset or a continuing chapter? What kind of TVL is valuable? Where is the turning point of the liquidity market?
In order to find the answer, we had an in-depth conversation with Charles K, the founder of StakeStone, and talked about "project valuation based on TVL alone", "TVL prosperity under the temptation of airdrops", "what kind of TVL is valuable", "turning point of the liquidity market" and StakeStone's unique advantages and differentiated strategies.
Is the era of valuation based solely on TVL and relying on airdrop expectations to attract TVL over?
When discussing whether the Crypto field has bid farewell to the "TVL-only valuation theory" and the "single model of relying on airdrop expectations to attract TVL", we have to re-examine the profound changes in the current market. Blast has been controversial after the coin issuance. From the perspective of the competitive landscape of L2 solutions, if compared with Optimism and Arbitrum, it can be found that market value and TVL do not always have a direct linear relationship. If compared with liquidity staking projects such as Lido, which also attracts a lot of funds, the correlation between market value and TVL is also very low.
The current Crypto market has entered a more complex and diverse stage. TVL is no longer the only yardstick for measuring the success of a project. What really determines the value of a project is its token economic model, application scenarios, market demand, and overall financial health. The era of "TVL-only theory" has quietly ended.
Foresight News: What do you think about the correlation between TVL and market capitalization of public chains, second layers, and liquidity staking protocols?
Charles K: First of all, from the perspective of value capture, taking Lido as an example, many protocol tokens are limited to governance functions and lack substantial utility, which limits the improvement and capture of their intrinsic value. For protocol tokens to truly realize their potential, additional value capture mechanisms must be found and created. This may involve complex securities considerations. Non-US projects will capture value. For example, Curve realizes token dividends through the ve model, which significantly enhances the positive linkage between tokens and TVL. Even if you do not adopt a dividend strategy, you still need to design attractive application scenarios for the tokens to stimulate market demand and increase the value of the tokens.
StakeStone is not a Staking Pool protocol, but more of a liquidity issuance protocol that will add incentives to tokens based on liquidity usage scenarios in addition to governance functions.
Secondly, from the perspective of market dynamics, the recent fierce competition in Staking Pool protocols has led to a phenomenon: high TVL is often accompanied by high debt. In order to compete, such debt is increased without limit, which brings heavy debt repayment pressure to the secondary market. Once TVL exceeds a certain critical point (such as US$1 billion), the market value will be dragged down due to increased selling pressure and increased debt repayment pressure.
Furthermore, we need to pay attention to the impact of primary market financing on the market value of the protocol. Although large primary market financing quotas and the introduction of too much capital with TVL can attract more funds to push up TVL, the annualized rate of return requirements and investors' expected returns brought by these financings will also become an important burden on the market value of the protocol. Therefore, it is not the case that the higher the TVL, the higher the market value will naturally rise; on the contrary, high TVL and high primary financing share may hide greater market risks and return pressures, because these TVLs are essentially obtained through "loan sharking".
Foresight News: Is the era of relying on airdrop expectations to attract TVL over?
Charles K: The peak period of attracting TVL with the expectation of airdrops has passed, but this does not mean that airdrops as a means of attracting capital have come to an end. The proportion of airdrops in many protocols is getting bigger and bigger, but the behavior of "PUA users" in some protocols has indeed weakened everyone's confidence in airdrops. Despite this, the essential value of airdrops cannot be ignored.
Foresight News: What do you think of this behavior of witches?
Charles K: Under the TVL game rules, unless the amount of funds in a single address reaches a relatively large scale, it is not particularly meaningful to split the address. Sybil behavior will affect the game rules of "contribution based on deposit amount and time", but it is also a relatively benign consideration to compensate gas fees for people who deposit small amounts of funds. Of course, we do not encourage everyone to try the minimum living allowance. StakeStone hopes that this TVL game is fair.
What kind of TVL is considered valuable?
When discussing the issue of TVL, we can't help but ask: What kind of TVL can be considered to have real value? And how can this indicator accurately reflect the true health of the protocol? Charles K believes that the true value of TVL does not lie in the accumulation of numbers, but in whether it has been actually applied and circulated.
Foresight News: What kind of TVL is considered valuable?
Charles K: First of all, I think there should be no fake TVL. Only when the assets represented by TVL are actually put into use and participate in various protocols or ecological scenarios can their value be demonstrated. In addition, fairness is also an indispensable part of measuring the value of TVL. Any false or unfair TVL cannot truly reflect the strength and health of the protocol.
Foresight News: What is the current structure and pattern of the liquidity staking market? What specific impacts or opportunities do you think this structure brings to StakeStone?
Charles K: I think the current liquidity structure is very unhealthy because most of the liquidity is locked. I even think that the low gas fee on Ethereum has a lot to do with the fact that the locked liquidity is not allowed to circulate. This vicious lock-in of liquidity is very unhealthy. The primary attribute of liquid assets should be liquidity, rather than being locked up endlessly. Those who sacrifice market liquidity for short-term interests are short-sighted and irresponsible.
Foresight News: Why is the most valuable indicator of a liquidity protocol the utilization rate of liquid assets?
Charles K: Take USDT as an example. The reason why it has become one of the earliest liquid assets in the market and continues to be popular is that it provides high liquidity and a wide range of application scenarios. Users can exchange USD for USDT at any time, and can also easily exchange USDT back to USD. This seamless exit mechanism is the key to building trust. At the same time, the wide application of USDT in payment, mining, trading and other fields has further enhanced its liquidity value.
For StakeStone, we believe that the real measure of TVL value is TVL utilization rate. Because TVL that cannot be applied does not bring value to the industry and the ecosystem, but rather it is more about grabbing value. We are committed to building a liquidity ecosystem that can bring value to the ecosystem. At present, we have been closely integrated with more than 40 protocols and have established docking relationships with more than 100 protocols. At the same time, we believe that cooperation with Native.org will become a new paradigm for solving the problem of multi-chain liquidity segmentation. By then, STONE will be the only interest-bearing liquid ETH asset that has the same good exit liquidity on any chain. The first priority of liquid assets is always to have good exit liquidity everywhere.
StakeStone's unique advantages and differentiated strategies
In the highly competitive liquidity field, how does StakeStone stand out? Charles K reveals its unique advantages and differentiated market strategies, and believes that StakeStone is more like an interest-bearing ETH version of MakerDAO.
Foresight News: What are StakeStone’s unique advantages and differentiation strategies?
Charles K: LRT is a staking pool protocol, and they mainly provide core value staking services. StakeStone is positioned as a liquidity asset protocol, and what it wants to do from the first day is to be a liquidity asset issuance protocol. There is a big difference between the two.
For StakeStone, Staking service is a means or way for us to help users cover the risk-free returns of Ethereum. We cooperate with staking service providers such as InfStones and StakeFish, but StakeStone itself is not a staking service provider. I personally think that even LRs are weaker than staking service providers in their ability to provide staking services.
As a liquid asset protocol, several conditions must be met first. The first is that the assets must be transparent so that users dare to deposit them. The second is that the assets must have real liquidity and can be deposited or withdrawn at any time.
In general, StakeStone has great advantages in asset transparency, liquidity and composability. Every asset in its asset pool is highly transparent. At the same time, StakeStone ensures that assets have real liquidity and users can deposit or withdraw at any time. In addition, composability allows STONE to be easily integrated into various DeFi protocols, creating more diversified application options for users.
Foresight News: What other utilities will StakeStone’s tokens have besides governance functions?
Charles K: We allow the underlying assets to be changed, but the way to change the underlying assets is a completely decentralized way, which requires the consent of LP. We cannot change the underlying assets at will. STONE Holders can participate in this decentralized governance mechanism.
In terms of the underlying assets, StakeStone will try to allocate more competitive underlying assets to the underlying assets while ensuring that the risks are controllable or risk-free. STONE constantly captures and adjusts the underlying assets of income. The specific adjustment frequency is related to the frequency of the appearance of the underlying assets. At present, the frequency of the appearance of major categories of underlying assets is generally once a quarter to half a year. I think StakeStone is actually more like the interest-bearing ETH version of MakerDAO.
Future Outlook and Insights
Previously, the LRT project successfully attracted a large amount of arbitrage funds to the Pendle platform to purchase PT products through a carefully designed high-point incentive strategy. This artificially created prosperity is about to face a major turning point. These incentives prompted some users to choose to sell their equity tokens at a discount in exchange for more YT shares, thereby pushing up the annualized rate of return of PT.
However, although this short-term capital accumulation seems attractive, it is difficult to maintain for a long time, which lays a hidden danger for long-term development. In contrast, StakeStone's prudent strategy, such as supporting withdrawals at any time and introducing external market makers to accept withdrawal needs, shows a healthier and more sustainable development model. Looking to the future, StakeStone is committed to becoming an industry leader in the field of liquid assets.
Foresight News: How does StakeStone reshape the Ethereum and Bitcoin ecosystem by generating interest on ETH and BTC?
Charles K: Currently, StakeStone mainly focuses on Ethereum and Bitcoin, and the underlying assets are compatible with multiple consensuses, including PoS Staking, Restaking, etc. Regarding how to reshape the ecosystem of Ethereum and Bitcoin, let’s first look at what kind of industry problem StakeStone is solving.
In the last bull market, Arbitrum and Optimism absorbed Ethereum as the main liquidity asset on the chain, but in this cycle, Native's ETH has high opportunity costs such as PoS and Restaking. Even for PoS with an APR of 3-4%, because it is ETH-based settlement income, if a public chain ecosystem needs to use its own tokens to cover PoS income, it will need to pay at least 10% of token subsidies. This huge pain point is exactly the original intention of our development of StakeStone from day one. We are committed to providing the market with a new liquid ETH/BTC asset that can cover the opportunity costs of Ethereum and Bitcoin.
In addition, through STONE's high stability and good exit liquidity, it can be integrated with more protocols and scenarios to create more profit opportunities, including cooperation with the Ethereum AI oracle protocol ORA to explore the various applications of STONE in the ORA ecosystem, etc., which will further broaden STONE's diversified application scenarios in the ecosystem and create more value for users.
Foresight News: What market position do you hope StakeStone will achieve in the next few years?
Charles K: We hope to become a leader in the field of liquid assets. In a short window period, EigenLayer once dominated the underlying assets, which led us to support EigenLayer as the underlying asset of STONE to a large extent, causing the market to mistakenly believe that it was our LRT protocol.
However, as the underlying assets become increasingly abundant, STONE, which will not change the bills due to changes in the underlying assets, will show the unique value of its unique liquidity assets to the application parties and the market.
Foresight News: What is your prediction for the future development trend of the liquidity staking track?
Charles K: There will be different situations before and after the EigenLayer airdrop. Before the airdrop, a large amount of liquidity will flow into EigenLayer and the Restaking protocol. After the airdrop, liquidity will be restructured. At this time, those projects that can apply liquidity notes more widely and efficiently will stand out in the medium and long-term competition.
Restaking has been a catalyst for liquidity conversion, significantly driving the dramatic growth of active TVL on the chain, from $5 billion last year to $20 billion currently. Although the liquidity scale may face correction pressure in the short term as the Restaking cycle gradually completes, from a long-term perspective, the growth potential of this field cannot be underestimated.
It is worth noting that LRTs have previously attracted arbitrage funds to buy Pendle PT by artificially creating high points incentives. This phenomenon is about to reach a turning point. As PT expires, the market will experience a major adjustment in liquidity structure, which may trigger market fluctuations.
Specifically speaking of the strategies of projects such as ether.fi, they use double or even multiple points incentive mechanisms, which stimulate arbitrage funds in the short term, but are difficult to maintain in the long term because the end point of arbitrage funds is to exchange them back for ETH to complete the arbitrage.
Specifically, under normal circumstances, STONE is doing activities in Manta. After depositing, it cannot be withdrawn. If users are eager to withdraw, they will choose to sell on DEX, which will cause STONE/ETH to decouple and STONE to show signs of discount. Previously, it fell to 0.9, which means that you can earn 10 points by buying it. This brought StakeStone a $300 million increase in TVL. But we cannot incentivize this, because excessive incentives will further expand the arbitrage space, aggravate the decoupling of STONE, and be detrimental to the long-term stable development of the market.
Pendle, which separates principal and interest, is a neutral tool platform in itself. However, since the discount of the interest-bearing notes after splitting will not be directly reflected in the price of the notes themselves, it creates an opportunity for LRTs to artificially create discounted arbitrage products without worrying about depeg risks.
Foresight News: What are StakeStone’s strategic plans in the short to medium term?
Charles K: It can be viewed from three dimensions:
The first is the horizontal expansion of assets, including entering the Bitcoin field to meet the growing and diversified needs of users.
The second is the deepening of the consensus layer. In terms of Restaking, StakeStone will first introduce Symbiotic, and will also continue to pay attention to and invest in cutting-edge consensus mechanisms such as AI.
The third is innovation in the application layer. StakeStone will not only continue to cultivate the existing public chain ecosystem, but also introduce STONE into projects in the fields of AI, games, and payments to create more diversified and more practical application scenarios.
