Interpretation of Vector Reserve: After liquidity staking and re-staking, Liquidity Position Derivative (LPD) is quietly rising

New concepts in the crypto market are always evolving rapidly.

While everyone is still playing with the related concepts of liquid staking and liquid re-staking, such as LSD, LSDFi, LST and LRT, a new concept has quietly emerged -

LPD, Liquidity Position Derivatives.

Every time a new concept emerges, the first related project to do this concept will often see good gains, such as Restake Finance in the re-staking sector, and Lybra Finance in the previous LSDFi.

This time, the project playing with this concept is called Vector Reserve and has launched a new ETH-based derivative vETH, which represents the certificate for users to act as LP (liquidity provider) in DeFi.

Meanwhile, the project’s token VEC is currently being sold. Taking this opportunity, let’s discuss:

What exactly is LPD? Can the projects, represented by Vector Reserve, lead the new narrative around ETH after re-staking?

LPD, you have to go to the matryoshka doll when you are in the pool.

So what exactly is this new concept of LPD? Things have to start with liquidity staking and liquidity re-staking.

We were already mentioned in an article titled “The Liquidity Restaking Token (LRT) Narrative Reignited: Finding High-Potential Project Opportunities Among Endless Liquidity Matryoshka Dolls“

From a speculative perspective, liquidity staking and re-staking can be understood as a form of “liquidity matryoshka” that aims to protect the security of Ethereum and its ecosystem. It involves exchanging asset certificates through repeated pledges, utilizing these certificates to generate additional income, and maximizing capital efficiency.

To briefly recap, it’s:

Stake ETH to generate the liquid staking token LST, and use LST to lend and stake to earn profits;

Take LST to EigenLayer and stake it to generate LRT. You can also make profits by using LRT for lending, mortgage, interest generation, etc.

Have you found any problems with the matryoshka dolls above?

You have probably felt that this kind of nesting doll is a 1-for-1 exchange of a single asset, that is, an original asset is mapped into a next-level asset for pledge, and the next level of income is constantly searched for.

What if the asset itself can be pooled with other assets, and then be staked after expanding the breadth?

Yes, this is the essence of LPD (liquidity position derivatives): you combine ETH, LST, and LRT to form a liquidity pool. Then, you obtain the LP certificate and stake it on EigenLayer to generate a round of income. Doesn’t this add another layer of benefits?

Therefore, the name LPD is self-explanatory. P stands for Position. The position certificates in your pool can generate income, which may be higher than the income from holding a certain LST or ETH asset alone.

Matryoshka dolls never sleep, and the leader of this time is called Vector Reserve. The following will show you the mechanism and benefits of LPD from the actual product interface.

Product implementation of Vector Reserve

Vector Reserve has currently partially implemented the logic of the above-mentioned LPD in its products.

Users can deposit native ETH (or wETH) as well as derivative tokens such as LST into the protocol. The protocol will match the tokens you deposit into a liquidity pool and generate vETH tokens that have the same value as the assets you deposit. These vETH tokens represent your position in the liquidity pool.

Although Vector’s documentation mentions that LRT and LST tokens can be deposited, the only tokens we can see that can be deposited so far are ETH and wETH.

Specifically, the operation steps of the entire product can be divided into the following parts:

1. Deposit Assets: Deposit native ETH or liquid staking tokens (LST) and/or liquid re-staking tokens (LRT) into the Vector Reserve protocol.
2. Create a liquidity position:

1. The Vector Reserve protocol pairs your deposited assets with other tokens to form one or more liquidity pools (LPs) according to its internal rules. This process involves a combination of different types of tokens (such as ETH, LST, LRT) to provide liquidity.

1. Get vETH:Users receive vETH tokens as a representation of their share in these liquidity pools. vETH is a Liquidity Position Derivative (LPD) that represents a portfolio of investments in these pools.

1. Re-stake for additional income:Choose to stake these vETH tokens further, such as to the Eigenlayer platform. In this way, vETH not only represents a share in the liquidity pool, but can also generate additional revenue on platforms such as Eigenlayer.

So, you may ask why you can directly deposit LP tokens into Eigen? This involves another layer of mechanism provided by Vector: Superfluid Staking.

Superfluid Staking allows investors to use LP tokens—the certificates of liquidity providers — as a re-staked tool. This is possible because LP tokens represent investors’ shares in liquidity pools, which are backed by actual assets such as ETH and LST. By staking these LP tokens on platforms like Eigenlayer, investors can not only retain their position in the liquidity pool, but also earn additional staking benefits without sacrificing liquidity.

This method can be said to take the flow of matryoshka dolls to the extreme.

1. Source of income:vETH’s income comes from multiple sources, including but not limited to liquidity pool transaction fees, income generated by specific staking strategies (such as Eigenlayer’s Superfluid Staking), etc.

All in all, the LPD represented by vETH provides investors with a diversified source of income and risk diversification opportunities, combining traditional liquidity staking and re-hypothecation strategies in a higher-level financial product. By pledging asset position certificates, users can not only obtain income from the liquidity pool, but also obtain additional income by re-staking vETH, thereby maximizing the utilization of assets and optimizing income.

VEC Token Role and Current Situation

After understanding the project’s products, let’s take a look at the project’s native token VEC.

The VEC token is the cornerstone of the Vector Reserve ecosystem, designed around continued value growth and economic sustainability. The goal is to create a healthy ecosystem that benefits all participants, continuously accumulating value and expanding influence through smart strategies and innovative incentive mechanisms.

The VEC token plays several key roles in Vector Reserve:

1. Reserve currency:As the reserve currency of the ecosystem, VEC supports and stabilizes the value of vETH.
2. Incentives: VEC encourages and rewards users to provide liquidity to the system, which is an important part of ensuring the smooth operation of the ecosystem.
3. Governance rights: VEC holders have the right to vote on the future development direction of the ecosystem, which reflects Vector Reserve’s commitment to decentralized governance.

The value growth of VEC tokens is achieved through the following mechanisms:

1. Revenue sharing: A portion of the transaction fees and other income generated by vETH will be used to support the value of VEC, providing holders with passive income.
2. Treasury Management: Manage reserve assets and invest in ETH-based staking and re-staking tools through smart treasury strategies to achieve long-term stable growth.

In addition, Vector Reserve will introduce voting-escrow VEC (veVEC) after fully obtaining liquidity. This represents the VEC staked in the VEC/ETH Liquidity Position (LP). These staked tokens are locked and serve a dual purpose: not only do they contribute to the stability and liquidity of the VEC token, but they also hold the power to collect and distribute incentives (often referred to as bribes) in the protocol’s liquidity-guided governance.

Through a well-structured bribery mechanism, external protocols can provide incentives to veVEC holders to influence the distribution of LRT liquidity in a way that benefits them. These incentives are a way for other DeFi protocols to attract the strong liquidity provided by Vector Reserve, thereby enhancing their own liquidity and stability.

In terms of tokenomics, the total amount of VEC is 10,000,000. However, 500,000 tokens have been allocated for the pre-sale, which means that early investors have obtained VEC at a certain price. There is no linear unlocking mechanism for this portion, meaning that the tokens will be in circulation when the Token Generation Event (TGE) occurs.

At the same time, consultants, treasury reserves and the portion used for incentives will also receive different proportions of VEC, but they all have a linear unlocking period of 12-36 months.

The portion reserved for the public is 5%, and there are also 500,000 for public trading in the Liquidity Bootstrapping Pool (LBP). Compared with traditional token issuance methods, LBP aims to launch new tokens and establish initial liquidity for VEC in a more fair and decentralized way.

LBP utilizes an automated market maker (AMM) model that allows the price of a token to dynamically adjust based on trading activity. This means that the price is not fixed but changes in real time based on buying and selling pressure.

If buyer interest is strong enough, the token price may increase; if seller activity is more significant, the price may decrease.

By allowing market dynamics to determine prices, LBP is able to promote a fairer distribution of tokens. Instead of scrambling for a limited supply at a fixed price, investors can purchase tokens when the price drops to a level they deem reasonable.

From the information provided, it appears that this liquidity pool will launch at 24:00 on January 22nd (Beijing time). Interested readers can visit here to participate. However, the estimated value of the token FDV is currently close to $180 million, which I believe is relatively high. Considering the current market volatility and the lack of further mentions, rushing into the liquidity pool may not be the best choice.

A more reasonable approach is to observe the price changes of its tokens during the 4 days that the liquidity pool lasts, and selectively participate at relatively low points.

Finally, as we previously determined, the liquidity Matryoshka doll never sleeps, and there will always be new forms of chasing yields emerging.

It is often easier to focus on the first project in each new form to obtain profits. LPD is nothing more than a way to maximize liquidity staking rewards, and it is likely not as significant as Eigenlayer itself.

But there are indeed a lot of articles that can be done around re-staking and staking. LPD is not the first, but it is certainly not the last.

Look at what’s new, not what’s old. Participating in new projects does not guarantee profits, but at least it won’t be too far from earning potential.

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