Here’s why I am bullish on Lido Finance (LDO) — Investment Analysis
A short memo on why I believe LDO is a must-have token for a long term-strategy
General
LDO is the governance token of Lido Finance, the premier solution for liquid staking. Lido Finance allows users to stake their tokens and issues IOUs in exchange, which can be used in DeFi application. So you can earn additional yields without missing out the opportunity cost of not staking.
Lido has other benefits compared to traditional staking. For example on Ethereum if you are looking to stake on the Beacon chain for ETH2 you need to own at least 32ETH, with Lido there’s no such limit and you can stake any amount.
Essentially with Lido liquid staking, you are earning the staking reward, securing the network and can use your token all at the same time. Not two, but three birds with a rock.
I am bullish on Lido Finance for the following reasons:
GENERAL
LDO is a multi chain protocol, it is currently available on Ethereum, Terra, Solana, Kusama. More blockchain will be added in the future. The combined TVL of assets staked via Lido is north of 20B$, most of the funds are coming from Ethereum (10.5B) and Terra (9.5B), relatively less from Solana (450M) and others.
REVENUES
LDO is charging a 10% fees on all revenues coming from staking. The overall staking reward of all the different chains results in an overall rate of circa 5–6% per annum, of which Lido takes 10%, (50–60bps per year). At current price levels it implies an ARR of 20B * 5% * 10% = 100M USD of Annualized Revenue Rate. If and when ETH switches to Proof of Stake we can expect this blended rate to increase to as much as 10%. Currently most of expenses are paid in LDO which means majority of the revenues (ETH, SOL, LUNA …) end up in the Treasury.
Interesting enough, all revenues are accrued in the underlying tokens which means stETH fees are in stETH, stSOL fees are in SOL and so forth. The Lido Treasury thus is naturally long crypto and LDO tokens benefits of additional market beta in an upside market and stable returns in all market conditions.
ONE PROVIDER TO RULE THEM ALL
Furthermore, one might argue that Lido finance is in a monopolistic position as it is the first liquid staking platform by TVL on any chains where it’s available and shows no sign of stopping. Its growth rate is currently higher that all the other competitors and it’s % stake out of the total staking deposits too.
On ETH Lido solidified its leadership recently becoming available as collateral on Aave, giving users the possibility of depositing interest-generating ETH and borrow against them.
On LUNA Lido is the only entrance door for bridging and creating bETH, the second most used collateral on Anchor Protocol (the first being bLUNA).
INCENTIVES
In the last months Lido started a heavy campaign of incentivisation to bring in more users, using their token as a reward. They are currently issuing 250'000 LDO per month (1'100'000USD at current price of 4.40$) among 5+ chains and 40+ protocols. LDO are being issued to both stable pairs (such as stETH-ETH) and non-stable pairs (such as stSOL-USDC).
Lido has also started a significant bribing campaign to bring more liquidity on the above mentioned pairs. The process of bribing works in the following way:
- On a weekly basis users of Curve and Convex Finance are called to vote on how to distribute the CRV or CVX incentives.
- The more CRV or CVX you own, the more you can tilt the issuance of those token over your preferred pool.
- Lido Finance allocate LDO rewards to users who vote for the Lido pools (for example stETH-ETH).
The campaign so far seems successful as stETH-ETH pool has seen both an increase in votes and new users.
VENTURE FUNDING
Recently Lido has received fresh capital from a handful of top notch market participants, including a16z, Alameda, Paradigm and a group of successful crypto entrepreneurs. In this deal, the Treasury sold LDO for $70M, and we were particularly impressed about the way the deal was carried forward as everything was done under the sunlight on the public Governance forum. On-chain analysis shows us that other players are accumulating large quantities of LDO both via farming and by outright purchase, for example 3AC and Wintermute.
CONCLUSION
Owning LDO is an investment that allows exposure to several factors and key-areas:
- Exposure to multi-chain universe
- Exposure to staking (and ETH upgrading to POS)
- Exposure in a key infrastructure player
- Participation in another DAO
