Metis LSD Ecosystem Exploration: The First Meeting of Layer 2 and LSD

TL;DR

• As the first Layer 2 to focus on developing the LSD arena, Metis has broken through the limitations that other Layer 2 networks cannot reach. Its unique decentralized sequencer pool has created staking demands, making LSD the most convenient and high-yield channel for community participation in decentralized construction.
• As a crucial component of Ethereum’s Proof-of-Stake (POS) mechanism network, LSD has played a strong positive role in lowering the network pledge threshold, improving network security and maintaining currency prices, stimulating asset liquidity and other derivative Defi ecology.
• To vigorously develop the liquidity staking track, Metis has initiated various ecosystem incentive programs such as MetisLSB, offering LSD protocol a 20% annual mining yield, far exceeding Ethereum’s meager 4.25% and other networks.
• Emerging protocols like ENKI and Artemis have proposed community initiatives, with their token economics and upcoming ecosystem activities serving as crucial criteria for early airdrops, warranting attention.

1. Metis LSD

1.1 Why LSD?

1) Lowering the High Threshold of Traditional Staking

LSD, short for Liquid Staking Derivatives, emerged as a concept with the shift from Proof-of-Work (POW) to Proof-of-Stake (POS) mechanisms on the Ethereum network after the Paris upgrade. In a POS-based network, nodes are required to stake a certain amount of tokens to participate in the network, earning block rewards and staking incentives. However, for regular users, engaging in public staking can be challenging.

Typically, public chains demand a significant amount of funds, such as Ethereum’s requirement of 32 $ETH to run a node, leading to a high entry barrier. Extended staking periods can be impractical for retail investors due to capital lock-in, resulting in inefficiencies. Additionally, staking involves technical and hardware requirements, making it less user-friendly.

With the Shanghai (Shapella) upgrade on Ethereum, the introduction of staking withdrawals marked the beginning of LSDfi. LSD not only provides an alternative token revenue stream for regular users but also unlocks liquidity for staked assets. This innovation has given rise to various protocols like LSDfi, Restaking, and more, contributing to the rapid growth and widespread participation in the DeFi ecosystem.

Metis, as a Layer 2 solution, innovatively incorporates the POS mechanism into its sequencer pool, creating a demand for staking $METIS. By decentralizing the consensus security traditionally maintained by node staking and venturing into the development of LSD, Metis takes a crucial step towards achieving decentralization.

Metis positions itself as a truly decentralized Layer 2 network on Ethereum, with a primary focus on decentralized sequencers. By redirecting gray income, such as MEV, back to the community, Metis aims to become a transparent and user-friendly network. The article delves into Metis’s decentralized technology, emphasizing its decentralized sequencer pool as a pivotal component.

Metis introduces multiple sequencers into the sequencer pool, granting each staked sequencer the right to view and process transaction pool contents. This prevents a single sequencer from maliciously manipulating the system. To participate in the network, nodes must stake the native token $METIS, with sequencer nodes requiring a minimum staking of 20,000 $METIS (approximately $2.4 million). However, once engaged in transaction block production, sequencers receive gas income and additional $METIS staking incentives. Blocks are broadcasted randomly based on the node’s staking share.

Furthermore, becoming a Metis sequencer not only enables participants to enjoy network and staking rewards but also aligns with the EDF plan initiated by the Metis team. This plan allocates 3 million out of 4.6 million $METIS for achieving decentralization of sequencers. The commitment to decentralized sequencers is evident from Metis’s dedication. However, regular users face a daunting staking threshold of up to $2.4 million, prompting hesitation.

LSD provides a channel for users to engage in staking with a minimal investment, significantly lowering the entry barrier.

2) Enhancing Network Security and Maintaining Token Value

Why should staking be community-oriented? For Proof-of-Stake (POS) mechanism-based public chains, network security heavily relies on the decentralization of node staking.

If staked assets are concentrated in the hands of a few nodes, they wield sufficient power to manipulate the network, posing centralization risks. Conversely, with a diverse set of staking participants, the influence of individual nodes diminishes, raising the cost of potential malicious actions, as attacking the network would require control over more nodes.

While there was a short-term withdrawal of a significant amount of staked $ETH after the Ethereum Shanghai upgrade, the total staked amount of ETH has shown considerable long-term growth. Users moved withdrawn funds into LSD protocols, enabling staking while enjoying asset liquidity and flexibility. This, in turn, contributed to the rise in Ethereum’s staking rate, maintaining network consensus and thereby enhancing security and stability.

The introduction of LSD allows Ethereum’s network staking to involve more individual users, making the Ethereum network more secure as more tokens participate in staking. Simultaneously, staking reduces the market liquidity of $ETH, controlling the supply to maintain or uplift token value.

3) Improving Capital Efficiency & Promoting the DeFi Ecosystem

LSD, as a crucial component of Ethereum, currently boasts a Total Value Locked (TVL) of $37.96 billion, constituting 35% of Ethereum’s total TVL. Leading protocols like Lido and Rocketpool provide high-standard, multifunctional liquidity staking, driving the development of other LSDfi, Re-Staking, DVT, and other niche paths.

The well-established liquidity staking ecosystem makes $ETH assets more divisible in trading, stimulating new possibilities in the DeFi ecosystem. For instance, users can further utilize tokens obtained through staking in lending, market-making, farming, and other scenarios, significantly improving the efficiency of initially locked capital.

LSD attracts more users and capital into the DeFi ecosystem by providing liquidity and innovative financial products, thereby stimulating economic growth across the entire ecosystem.

In conclusion, the development of LSD is crucial for POS mechanism-based networks. It represents an essential step in maintaining network consensus and facilitating the circulation of ecosystem capital. Metis, in turn, provides rich and comprehensive incentive plans to encourage liquidity staking in this ecosystem.

1.2 Ecosystem Incentive Program

1.2.1 MetisLSB

On February 8th, Metis launched the LSB (Liquid Staking Blitz) program, focusing on propelling Metis to become the first Rollup with a decentralized sequencer, sharing sequencer revenue with the community.

The initiative involves extracting 3 million $METIS from the 4.6 million MetisEDF, the ecosystem development fund, to expedite the deployment and development of the LSD protocol. Selected protocols will have the right to pair with Sequencer nodes and receive a 20% Mining Reward Rate (MRR) incentive for the first year.

As previously mentioned, becoming a Metis sequencer allows participants to receive gas income from processing transactions and additional $METIS staking incentives when engaged in transaction block production. The LSD protocol, when obtaining tokens from the community, also has the right, as an individual entity, to pair with sequencer nodes and receive a 20% mining reward rate.

Compared to other POS mechanism-based networks, Ethereum offers a staking incentive rate of only 4.25%, Solana at 7.25%, and Celestia at 14.8%. In the Ethereum ecosystem, aside from the recent API3, Metis has the highest reward rate, exceeding 10%.

Metis LSB integrates sequencer mining and the ecological fund to provide revenue incentives for LSD products, amplifying the benefits of liquidity staking. This strategy not only attracts more users to participate in decentralized implementations but also facilitates the expansion of network assets by activating circulation.

1.2.2 MetisEDF &Journey

On December 6, Metis introduced a $5 million incentive plan, #MetisJourney, for the DeFi space to encourage and attract more related DApps deployments.

On December 18, Metis launched the #MetisEDF (Ecosystem Development Fund), allocating the 4.6 million $METIS (valued at $5.5 billion) from the ecological fund to the implementation of decentralized sequencers, DApps grants, DApp building mining incentives, liquidity incentives, and other ecosystem development activities.

It specifically allocated 3 million $METIS from EDF for sequencer mining to ensure network functionality and decentralization. The remaining 1.6 million $METIS is allocated to attract more LSD protocol deployments, including lending, stablecoins, CDPs, and other ecosystem developments.

On February 16th, it was confirmed that 250,000 $METIS would be extracted from EDF as the Grant Pool for 2024, with 23,000 already claimed.

Source: https://www.metis.io/grants

As of now, Metis has already provided billions of dollars as incentive plans, offering new momentum that combines new assets, products, and platforms, providing robust support for the decentralized development and asset liquidity of the network.

The community proposal voting for the LSD protocol is currently open. In conjunction with the LSB program, we can anticipate participation in these elected protocols, allowing users to enjoy high mining rewards. So, which specific protocols are involved?

2. Alpha Protocol

2.1 ENKI

2.1.1 Introduction

ENKI is the first LSD project deployed on Metis, aiming to simplify participation in the Metis Sequencer Node Staking process. It allows users to earn rewards without dealing with the technical complexities of running a Sequencer node. ENKI can be seen as a bridge connecting regular users to the Metis Sequencer Node, enabling them to earn multiple rewards.

Here is its workflow:

• Step 1: Convert to $eMETIS - Users convert their held $METIS into $eMETIS on Enki (through Minter).
• Step 2: Stake $eMETIS - Stake $eMETIS to obtain $seMETIS as proof of active participation in the earning process.
• Step 3: Accumulate Earnings - Over time, the held $seMETIS accumulates earnings, reflecting the performance of the Metis Sequencer Node ecosystem.
• Step 4: Receive Rewards - Rewards are distributed every 7 days, where 70% of $eMETIS earnings are immediately converted into $seMETIS, and the remaining 30% enters the vesting stage. Users need to stake $ENKI to unlock this portion of earnings within a year.
• Step 5: Claim Rewards - Users can convert $seMETIS back to $eMETIS within ENKI, then convert $eMETIS into $METIS on secondary markets such as Netswap.

This process enables users with a smaller amount of $METIS to participate in staking, eliminating the need for technical knowledge and extensive initial setups, providing more users with the opportunity to engage in staking and earn rewards.

2.1.2 Tokenomics

1) Token Distribution

The native token of the ENKI protocol is $ENKI, with an expected total supply of 10 million. $ENKI token holders can participate in staking and provide potential governance rights and other benefits within the ecosystem.

The initial distribution for $ENKI is as follows:

• Market and early contributors: 10%, i.e., 1 million $ENKI.
• Liquidity support: 10%, i.e., 1 million $ENKI, added in batches based on market demand and protocol revenue.
• Mining rewards and market campaign: 80%, i.e., 8 million $ENKI, gradually released through various forms.

The ENKI team itself does not hold any token allocation shares, does not conduct fundraising, and all token releases in each stage follow a Fair Launch approach.

2) Dual-token Model

• $eMETIS: A token similar to a stablecoin, pegged 1:1 to the value of $METIS. It is converted through the Minter in ENKI, facilitating user participation in the ENKI system and serving as a ticket to enter the Metis Sequencer Node Staking world.
• $esMETIS: Represents the staked $eMETIS, providing proof of effective staking and earning additional staking rewards. It also has liquidity and can interact with other DeFi ecosystems.

3) Value Capture

• Governance Rights: Holders play a crucial role in the decentralized governance model. Most $ENKI tokens are allocated as mining incentives, allowing holders to vote on incentive content, fee structures, protocol upgrades, and the overall development of the ecosystem.
• Unlocking Rights: As mentioned earlier, 30% of the mining incentives in the ENKI protocol require users to lock $ENKI to unlock them within 365 days.

The $ENKI token is essential for the staking process, as staking $ENKI is a requirement for $esMETIS holders to earn a portion of $eMETIS rewards. This locking mechanism, combined with the $ENKI token, encourages users to continuously participate and invest in the ecosystem, effectively tying incentives to the long-term development of ENKI.

2.1.3 Latest Development

1) Community Testing Season 2

Currently deployed on the Metis Sepolia Testnet, ENKI is participating in the second phase of the Metis decentralized sequencer community testing.

On January 16th, Metis officially launched Community Testing on the Sepolia testnet, allowing users to explore various DApps to test the POS Sequencer pool. Users receive corresponding Testing Points rewards. Each DApp has a different points pool, and each operation has different point ratios. Participants can obtain testing net $METIS at zero cost through network faucets and earn points.

In Season 1, participating ecosystem projects included Hummus Exchange, League.Tech, Tethys Finance, Midas Games, and Netswap. In the current Season 2, only ENKI is included.

Source：https://decentralize.metis.io/#szn2

By receiving the test token $METIS, you can mint & stake on the ENKI website to earn points. You can also claim the $ENKI test token for staking and receive rewards.

2) Fantasy Genesis Plan

Source: Medium

On February 8th, the official launch of the ENKI Fantasy Genesis Plan was announced, involving the phased release of 10% (1 million) $ENKI tokens as incentives.

The entire activity will be divided into two phases:

Phase 1 - Early market activities and test network (Pre-launch)

• Community participation and Trivia tasks: Allocation of 25,000 $ENKI (0.25% of the total).
• Participation in testnet activities: Allocation of 25,000 $ENKI (0.25% of the total).
• Testnet Bug Bounty and marketing collaborations: Allocation of 100,000 $ENKI (1% of the total).
• Ecosystem partner airdrop: Allocation of 100,000 $ENKI (1% of the total), aiming to reward loyal users in the Metis ecosystem partner community.

All users participating in the above activities will be eligible, after the first phase, to mint an early supporter NFT on the Metis mainnet. This NFT will serve as proof for subsequent airdrop claims.

Phase 2 - After deployment to the Metis mainnet (Post-launch)

• Metis staking airdrop: Allocation of 200,000 $ENKI (2% of the total), targeting users staking Metis in the ENKI protocol, distributed based on staking ratios.
• Invite staking activity: Allocation of 400,000 $ENKI (4% of the total).

Users holding $eMetis or $seMetis are eligible to participate in this activity. They will be able to mint a special inviter NFT and receive a unique invitation code. Users staking with this invitation code will add airdrop points to the inviter’s NFT, provided each invitee contributes at least 0.1 $METIS to the staking pool to help increase points for the inviter.

The point calculation rules are as follows: Points = 100 total number of invitees + 200 total staked amount by invitees. After the activity ends, airdrop tokens will be distributed based on the proportion of airdrop points. The inviter NFT will serve as proof for claiming airdrops.

• ENKI Liquidity Incentive: 150,000 $ENKI allocated (1.5% of the total).

ENKI is a critical step for Metis in achieving decentralized sequencers, lowering the staking threshold to reach ordinary users and benefit individual investors, enabling the entire community to participate in network construction and enjoy rewards.

2.2 Artemis

2.2.1 Introduction

Artemis Finance is a liquidity staking protocol designed for the Metis decentralized sequencer pool. Users can stake their $METIS tokens on Artemis and receive liquidity tokens ($artMETIS), accruing automatic returns while using $artMETIS for on-chain interactions within the Metis network.

2.2.2 Tokenomics

1) Allocation Mechanism

The native token of the Artemis protocol is $ART, the total supply is 100 million, and the initial distribution plan is as follows:

• Airdrop (10%, 10 million): Early participants in activities such as $METIS stakers, liquidity providers, and ecosystem partners.
• Treasury (52%, 52 million): Treasury funds primarily used for initial liquidity provision, incentivizing $artMETIS usage, marketing proposals, etc.
• NGDAO/Advisors (18%, 18 million): Locked into the DAO, with the team holding no allocation.
• IDO (20%, 20 million): Conducted through a Fair Launch.
  

2) Value Capture

Artemis allocates 10% of the tokens to early participants, such as $METIS stakers, enabling multiple returns for $METIS staking, acting similarly to a golden shovel, enjoying incentives from other projects in the ecosystem, further stimulating staking motivation. Additionally, another portion of the allocation is used to expand the use cases for $artMETIS, enhancing the practicality and application scenarios of the asset.

The specific benefits for $ART holders have not been disclosed.

2.2.3 Latest Development

Artemis plans to release a series of activities, collaborating with DeFi projects, liquidity providers, and yield optimization platforms to increase liquidity and expand the use cases of $artMETIS:

• Launching $artMETIS/$METIS pools on DEXs, providing liquidity mining incentives.
• Listing $artMETIS on Pendle and enabling yield trading.
• Designating $artMETIS as eligible collateral for lending protocols.

It aims at attracting more participants to $METIS staking, while allowing users to simultaneously utilize $artMETIS across diverse DeFi ecosystems and earn rewards. Similar to ENKI, Artemis provides an opportunity for $METIS holders to simplify participation in decentralized sequencers and earn profits.

3. Conclusion

Anticipating the positive cycle brought by Metis’s robust development of the LSD protocol: LSD protocol lowers staking thresholds and allows ordinary users to enjoy multiple returns, incentivizing more users to participate in staking. The increased staking of $METIS promotes the realization of network decentralization, sharing traditional Layer 2 MEV income with the community, reducing user costs, and maintaining user returns. This unique network feature attracts more users to participate in the network.

As $METIS, being a consumable token for network usage, experiences increased network usage, it generates more demand, driving the token’s value higher. LSD, as the fastest and most lucrative investment method for token holders, attracts more users. The rich user traffic sparks various derivative paths such as LSDfi and re-staking, allowing assets to generate returns while enjoying liquidity. This contributes to more diversified possibilities within the entire DeFi ecosystem.

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