LRT Track Analysis and Either.fi Investment Report

Repost the original title: IOSG Weekly Brief | Why did we invest in ether.fi? What will the future development trend of LRT be like? #217

Part.1 Insight ｜ Why did we invest in ether.fi? What is the future development trend of LRT?

The underlying logic of LRT

LRT is a new asset class derived from the multi-sided market surrounding EigenLayer. The purpose of LRT and LST is to “liberate liquidity”, but due to the different composition of LRT’s underlying assets, LRT is more complex than LST, with diversity and dynamically changing nature.

Taking ETH into consideration, if the Ethereum staked under LST is regarded as a currency fund, then LRT as an asset manager can be regarded as the Fund of Fund for AVS. Comparing LST and LRT is a way to quickly understand the underlying logic of LRT.

Source: IOSG Ventures

• 1. Portfolio

LST’s investment portfolio only has Ethereum staking, but LRT’s investment portfolio is diverse, and funds can be invested in different AVSs to provide them with economic security, naturally there are different risk levels. Different LRT protocols have different ways of managing funds and risk preferences. LST is passively managed at the fund management level, and LRT is actively managed. LRT may provide different management strategies, corresponding to different levels of AVS (such as EigenDA compared to newly launched AVS) to adapt to user’s return/risk preferences.

• 1. Yield, Source and Composition

The yield of LST and LRT, and the source and composition of the yield are different:

• The yield of LST is currently stable at around 4.9%, derived from the joint income of the Ethereum consensus layer and execution layer, composed of ETH.
• The yield of LRT is uncertain for the time being, but it basically comes from the fees paid by each AVS, and may be composed of AVS tokens, ETH, USDC or a combination of the three. According to the information we obtained from some AVS exchanges, most AVS will reserve several percentage points of the total token supply as incentives and security budgets. If AVS has already been launched before issuing tokens, it may also pay ETH or USDC, depending on the specific situation. (In this way, Restaking can actually be understood as the process of re-staking ETH to mine third-party project tokens)

Since it is AVS token-based, its token fluctuation risk will be greater than ETH, and APR will fluctuate accordingly. AVS may also have a rotation situation of entry and exit. All these will bring uncertainty factors to the yield of LRT.

• 1. Penalty Risk

Ethereum staking has two kinds of penalties: Inactivity Leaking and Slashing, such as missing block proposals and double voting, the rules are highly certain. If operated by a professional node service provider, Correctness can reach about 98.5%.

However, the LRT protocol needs to believe that the AVS software encoding is error-free, and there are no objections to the penalty rules, to avoid triggering unexpected penalties. Since there are many types of AVS, and most of them are early projects, this in itself is uncertain. In addition, AVS may have rule changes as the business develops, such as iterating more features, etc. In addition, at the risk management level, it is necessary to consider the upgradability of the AVS Slasher contract, whether the penalty conditions are objective and verifiable, etc. Since LRT acts as an agent to manage user assets, LRT needs to comprehensively consider these aspects and choose partners carefully.

Of course, EigenLayer encourages AVS to conduct a full audit, including AVS’s code, slashing conditions, and logic that interacts with EigenLayer. EigenLayer also has a multi-signature veto committee to conduct final review and control of penalty events.

Rapid growth of LRT in the short term

Source: EigenLayer

EigenLayer has adopted a phased opening approach for LST restaking, while there are no restrictions for Native Restaking. The restriction on LST could be seen as a form of scarcity marketing strategy, but more importantly, it promotes the growth of Native Restaking. Because once LST is restricted, users wanting to restake can only turn to third-party LRT protocols that provide Native Restaking, which greatly promotes the development of LRT protocols. Currently, the ETH flowing into EigenLayer through LRT accounts for about 55% of the total TVL in EigenLayer.

In addition, an implicit point is that Native Restaking can provide Ethereum Inclusion Trust, which is also provided and advocated by EigenLayer, as a third trust model beyond Economic Trust and Decentralization Trust. That is, Ethereum validators, besides making a commitment to Ethereum through staking, can also run AVS and make commitments to AVS. Most of these commitments are related to MEV. One use case is “future block space auctions”. For instance, oracles might need to provide feed services at specific times; or L2 needs to publish data to Ethereum every few minutes, etc., they can pay proposers fees to reserve future block space.

LRT’s Competitive Landscape

First of all, in order to make the liberated liquidity useful, the integration of DeFi is the main point of competition between LRT protocols.

As mentioned above, in theory, AVS needs to calculate the economic security they need to reach a certain safety threshold, but currently, most AVS use a part of the total token supply for incentives. Since different AVS have rotations and entries and exits, incentives depend on the price of the AVS token, therefore the uncertainty of LRT assets is far greater than LST (LST has a stable “Risk-free rate” and good expectations for the price of ETH), it is difficult to become a “hard currency” like stETH in the integration and compatibility of mainstream DeFi protocols.

After all, as a staking protocol, liquidity and TVL of LRT will be the first criteria that DeFi protocols pay attention to, followed by brand, community, etc. Liquidity is mainly reflected in the exit time cycle. Generally speaking, it takes seven days to exit from EigenPod, and then it also takes some time to exit from Ethereum staking. Protocols with larger TVL can establish better liquidity, for example, Etherfi’s Liquidity Pool Reserve can provide rapid withdrawal (i.e., eETH -> ETH).

But it is still too early to discuss the integration of mainstream DeFi before the launch of the EigenLayer mainnet, because many things are unknown.

In other aspects, Ether.fi recently posted a meme token tweet $ETHFIWIFHAT on official Twitter to hype the token launch, which is thought-provoking. Swell uses Polygon CDK, EigenDA and AltLayer to build zkEVM L2, and uses its LRT rswETH as a Gas token. Renzo is mainly focused on multi-chain integration on Arbitrum, Linea and Blast. It is believed that each LRT protocol will launch its own differentiated strategies in the future.

However, whether it’s LST or LRT, the degree of homogeneity is relatively high. Although LRT has more room to play compared to LST, even if one LRT launches a new idea to the market, competitors also have the ability to imitate. I believe that the moat still lies in consolidating and enhancing TVL and liquidity. Etherfi currently has the highest TVL and the best liquidity, assuming all airdrop expectations of all LRT protocols are realized, Etherfi will have greater advantages in attracting new funds. (The adoption of institutional users in this cannot be ignored, Etherfi has 30% of the TVL from institutional users)

After the airdrop event ends, the pattern of LRT could completely reshuffle, and the competition between LRT protocols for users and funds will become more intense (for example, after Etherfi’s airdrop is completely distributed, part of the funds might immediately flow to other platforms). Before the EigenLayer fully launches the mainnet, and AVS starts to provide yield, LRT does not have strong stickiness to users.

Sustainability of LRT

The sustainability of LRT can actually be seen as the sustainability of the EigenLayer system, because the income from Ethereum staking will always exist, but this may not be the case for AVS. A question that is often asked is: at the current TVL of 11b, how does EigenLayer provide a yield that matches it (e.g. 5% per year)? I believe that there are the following points:

• Although EigenLayer reached a TVL of 11b before the full launch of the mainnet, even surpassing AAVE, after a series of related protocol airdrops end, there will definitely be a mean reversion correction period for EigenLayer’s TVL. Overall, the yield rate to consider in the short term does not need to be that much.
• Secondly, each AVS token provides different yields, persistence, volatility, and each staker has different risk preferences and pursuit of yield. During this process, there will also be spontaneous dynamic regulation by the market (more ETH staked to a certain AVS will cause the yield rate to drop, prompting stakers to turn to other AVS or other protocols). Therefore, it is impossible to directly calculate the required yield by simply using the percentage of the total TVL.
• From a medium-to-long-term perspective, the power for the sustainable development of the EigenLayer ecosystem still lies in the demand side, that is, there needs to be enough AVS to pay for economic security, and it needs to be sustainable, which is also related to the good or bad situation of AVS’s own business. Currently, in addition to AltLayer and other 12 early AVS partners, a series of AVS have also announced cooperation. I understand that there are dozens of AVS waiting in line for integration. Of course, this is also related to the quality of AVS projects, the performance of Tokens, and the design of incentive mechanisms, and there is currently no way to give definite comments.

Summary

Finally, regarding the future landscape of LRT, I have the following opinions:

1. Despite fierce competition, LRT remains the preferred investment direction in the primary market EigenLayer ecosystem. When investing in AVS in EigenLayer, the investment logic of this middleware should be considered. It’s not different because it uses EigenLayer to start the network, it’s just that the way the product is implemented is different. In the future, there may be dozens to hundreds of AVSs built on EigenLayer, so the concept of AVS is not unusual. The direction of the node service provider has been firmly occupied by some mature companies. But LRT is obviously closer to the user, as the abstract layer between the user and EigenLayer, with both Staking and DeFi attributes, as the distributor of assets in the ecosystem has more say. In the entire EigenLayer ecosystem layout, we also pay attention to developer tools, Anti-slashing key management, risk management, public goods and other fields.

2. At present, the proportion of participating in EigenLayer restaking through LRT and LST is about 55% and 45% respectively. We expect that as EigenLayer gradually develops, the advantage of LRT unlocking liquidity will emerge, and this proportion may reach about 70% to 30% (assuming that some conservative whales and institutions holding stETH still choose to passively hold stETH). Of course, the risk of LRT cannot be ignored. Due to the nesting of asset structure, we also need to pay attention to systemic risks such as depeg under extreme market conditions. In the long run, we hope to see the AVS in the EigenLayer ecosystem grow and provide LRT with a relatively stable underlying structure and return.

Part.2 IOSG | Post-investment project progress

DAO Maker announces expansion to Solana network, 4 upcoming Solana IDO projects

*Market Maker

DAO Maker announced on Twitter that it will expand to the Solana network, will add a $2 million SOL liquidity pool on Raydium, will soon launch 4 Solana IDO projects, and will list YOURAI on Raydium next Tuesday.

Cosmos ecosystem project Saga adds CryptoPunks and BAYC holders as airdrop targets

• Protocol

The Cosmos ecological scalability protocol Saga announced on Twitter that it has added CryptoPunks and BAYC holders as airdrop targets for SAGA tokens.

Arbitrum plans to invest US$400 million to promote blockchain games

*Layer2

The Arbitrum Foundation has announced plans to invest 200 million ARB (approximately 400 million USD) over two years to promote its blockchain gaming projects. The new proposal suggests that the majority of funds (160 million ARB) will be used to incentivize publishers and developers to create new games on Arbitrum, while an additional 40 million ARB will be used to support infrastructure projects, such as creating “tools necessary for games within Arbitrum”. The Arbitrum Foundation will ask its DAO to approve this plan.

Arbitrum: ArbOS “Atlas” is online and blobs are live

*Layer2

ArbOS “Atlas” is online and blobs are in effect, reducing data release costs. Arbitrum One’s additional gas reduction will go live on March 18th.

EigenLayer will continue its multi-stage approach to mainnet launch in the coming weeks

• Restaking

EigenLayer issued an article introducing the mainnet launch, announcing that it will use a multi-stage approach to launch the mainnet starting now and continuing in the next few weeks. Major steps include final testnet migration, suspension of web applications and contracts, gradual operator registration, launch of EigenDA, and completion of mainnet launch, followed by the emergence of the AVS ecosystem.

Coinbase International to List dYdX on Cosmos Network

*Layer1

Coinbase International Exchange will add support for dYdX on the Cosmos network and will provide updates on launching COSMOSDYDX-USDC transfers and trading in the coming weeks.

Swell Network will launch its L2 rollup chain and plans to launch the mainnet in the second half of this year

*Restaking

The liquidity re-staking protocol, Swell Network, is set to launch its Layer 2 rollup chain and plans to launch its mainnet in the second half of this year. This Layer 2 network, developed with AltLayer’s “restaked rollup” framework, differs from traditional Layer 2 designs and is developed using Polygon’s Chain Development Kit (CDK) with support from AltLayer. This network aims to offer Swell users benefits including native re-staking returns, improved scalability, and lower fees. The soon-to-be-released token of Swell will be used for governance.

Derivatives Network Vega Partners with EigenLayer to Create Crypto Points Derivatives Market

*Restaking

The derivatives network Vega has established a derivatives market for crypto points, initially in collaboration with EigenLayer. This market aims to allow users to hedge the value of their points. Points are often used in airdrops, based on event participation, and may eventually convert into tokens. This new market provided by Vega supports permissionless market creation, allowing anyone to open a trading market for any point project.

Polkadot plans to launch Agile Coretime in the next version, and the Polkadot Alpha plan has now been launched

*Restaking

Polkadot announces the launch of the Polkadot Alpha Program ahead of going live on Agile Coretime. The program aims to help more teams bring their blockchain ideas to life and transform them into projects. The Polkadot Alpha Program is open to teams at all stages of development, including parallel chain teams, infrastructure providers, and Dapp teams, and applications for the program are now open. Previously, Parity developer Joyce announced on the Polkadot forum that Agile Coretime is set to launch with the next runtime version (Polkadot 1.2.0), and an OpenGov vote will be held to launch it on Kusama.

Part.3 Investment and Financing Events

AVAX ecosystem chain game Castle of Blackwater launches $3.65 Million funding round

*GameFi

The AVAX ecosystem’s social deduction blockchain game, Castle of Blackwater, announced the launch of a $3.65 million IDO (Initial Dex Offering) funding round. This includes $750,000 for the seed round, $1 million for the strategic round, $600,000 for the private round, and $1.3 million for the public round. The project has reportedly gained support from several Web3 institutions, including Seedify, Avalanche, Beam, Neo Launch, Merit Circle, Faculty Group, Metrics Ventures, and more. The total supply of Castle of Blackwater’s token, COBE, is 100 million, with an initial community allocation of 1 million. The seed round, strategic round, private round, and public round are allocated 10 million, 10 million, 4 million, and 6.5 million respectively. Registration will open at 23:00 Beijing time on March 19 and will close at 00:00 on March 25.

“MadWorld” mobile NFT shooting game studio Carbonated completes $11 million in financing

*GameFi

“MadWorld” mobile NFT shooting game studio Carbonated announced the completion of a $11 million funding round, led by Korean gaming giant Com2uS, with participation from Andreessen Horowitz (a16z), Bitkraft Ventures, Cypher Capital, Blocore, Goal Ventures, and WAGMI Ventures. The studio had previously raised $8.5 million in 2020, in which a16z and Bitkraft also participated. MadWorld is reportedly set to launch to the public sometime in 2024 and is currently being tested on iOS and Android platforms. Its founder, Travis Boatman, is a veteran of the mobile gaming industry, having served as an executive at Zynga and Electronic Arts.

Ethereum L2 network completed US$9 million in financing, with a valuation of US$30 million

*Layer2

Obscuro Labs, the developer of the Layer2 Ethereum L2 network TEN, has completed a $9 million financing round. The funding round was led by R3, with participation from Republic Crypto, KuCoin Labs, Big Brain Holdings, Magnus Capital, and DWF Labs. Obscuro’s co-founder, Gavin Thomas, stated that the funding was carried out in stages, with the latest round bringing Obscuro’s token valuation to $30 million. TEN is an Ethereum L2 network focused on encryption, allowing developers to choose which parts of a smart contract to keep private or public. TEN is currently in testnet mode, with the mainnet expected to launch in October. Reportedly, TEN’s native token is set to launch in June.

Merlin Chain ecosystem lending protocol Avalon Finance Seed round completed US$1.5 million in financing

*Protocol

Merlin Chain’s first lending protocol, Avalon Finance, announced that it has completed a $1.5 million Seed round of financing, with participation from well-known institutions such as SNZ Capital, Summer Capital, Matrixport Venture, Spark Digital Capital and Web3Port Foundation. Avalon Finance is a one-stop DeFi innovative lending protocol based on the BTC ecosystem, dedicated to providing users with diversified financial services, including lending, algorithmic stablecoins, RWA and derivatives trading. As a key component of the BTC ecosystem, Avalon Finance will actively introduce liquidity from the traditional financial world to assist the development of the BTC DeFi ecosystem. This financing will be used to promote technological innovation of the project.

DeMR, the MR infrastructure of Solana ecosystem, has completed angel round financing.

*DePIN

DeMR, the MR infrastructure in the Solana ecosystem, announced the completion of its angel round of financing, with participation from Kucoin Labs, DWF Labs, LD Capital, JDI, Redline Labs, Meteorite Labs, and Paka. DeMR is a decentralized MR infrastructure network (MR-DePIN) built on the Solana blockchain. DeMR stated that it is preparing for the upcoming DMR token airdrop and coin listing.

Berachain becomes unicorn with $69M funding round, valued at $1.5B

*DePIN

Blockchain platform Berachain is raising funds through the sale of digital tokens, with a valuation set to reach $1.5 billion. With a round of funding exceeding $69 million, led jointly by Brevan Howard Digital and Framework Ventures, Berachain is becoming a unicorn. Berachain focuses on decentralized finance (DeFi), with three main tokens, namely BERA, BGT, and Honey stablecoin. The blockchain’s test version was released to the public in January, but the project has not yet fully launched. Previous investors in Berachain include Polychain Capital, Hack VC, Robot Ventures, and others.

Infrastructure company Clique completes $8 million in Series A financing

*Infra

Clique, an infrastructure company that securely connects Web2 and Web3 user data with identity and attestation oracles built using ZKP, TEE, and MPC, has successfully raised $8 million in its Series A funding round, which was led by Polychain Capital. Clique aims to build a heterogeneous computing coordination network and completely change the way on-chain and off-chain applications access computing and data.

Web3 shooter Nyan Heroes developer 9 Lives Interactive completes $3 million in financing

*GameFi

9 Lives Interactive has secured $3 million in funding led by Mechanism Capital with participation from Delphi Digital, Sfermion, 3Commas Capital, Momentum 6, Kosmos Ventures, Devmons GG and CSP DAO to support the global launch of its first game, Nyan Heroes release. Nyan Heroes is a Web3-based hero shooter with unique game mechanics and cat-inspired IP designed to drive mass adoption.

Part.4 Industry Pulse

Manta Network collaborates with ether.fi to launch the first Restaking Paradigm, where staking ETH can mine double EtherFi airdrop points.

*Restaking

Manta Network has partnered with ether.fi to launch the first Restaking Paradigm. Users can stake ETH on https://restaking.manta.network/, either through the Ethereum mainnet or Manta Pacific, to earn double ether.fi airdrop points. Currently, ether.fi has confirmed that it will be listed on Binance. Subsequently, Manta Network will introduce Restaking Paradigm with more Restake re-staking projects.

Mantle Network completes mainnet v2 Tectonic upgrade to optimize gas costs and improve interoperability

*Layer2

The Ethereum Layer2 network, Mantle Network, announced in its official blog that it has completed the mainnet v2 Tectonic upgrade. This upgrade is based on OP Stack Bedrock and enhances Mantle Network’s ability to provide an economically efficient platform by offering the lowest gas costs among Ethereum Layer2 solutions. It has also made progress in interoperability with other EVM chains within the OP Stack ecosystem. The enhanced features of this upgrade include support for EIP-1559, removal of redundant components, predictable block time, block status marking, migration of native tokens in L2, introduction of meta transactions, and fee optimization strategies. The Mantle v2 Tectonic upgrade was carried out after the successful deployment of the test network in January 2024, which included thorough audits by OpenZeppelin, Secure3, and Sigma Prime, as well as a public vulnerability bounty program supported by Secure3.

Ethereum Dencun upgrade has been officially deployed to the Ethereum mainnet

*Layer2

Ethereum’s Dencun upgrade has officially been activated on the main network. Epoch 269568 has been completed. From this point, the Dencun upgrade has been officially deployed to the Ethereum main network. Ethereum Layer 2 rollups will use the “blob” method instead of the “calldata” method to publish transactions. The transaction costs for L2 (such as Base, Optimism, Arbitrum One, zkSync, Starknet, etc.) will be significantly reduced.

Layer 1 platform Nibiru Chain officially launches mainnet

*Layer1

Layer 1 platform Nibiru Chain has officially launched its public mainnet. Nibiru Chain provides a secure and efficient environment for building high-performance decentralized applications, characterized by a powerful smart contract ecosystem, offering high throughput and security, aiming to become the preferred platform for builders in the areas of gaming, real-world assets (RWAs), non-fungible tokens (NFTs), decentralized finance (DeFi), etc. At launch, Nibiru Chain offers a wide range of features for its community and potential builders.

Solana ecosystem DeFi protocol Drift Protocol plans to launch a “pre-IPO market” for new tokens

*Layer2

Solana ecosystem perpetual futures trading platform Drift Protocol plans to expand to the “pre-IPO market”, offering a service that allows traders to bet on token prices before the token begins formal trading. The first token to be launched will be Wormhole’s upcoming W. Although spot and futures exchanges can obtain price data from a variety of sources, Drift’s pre-IPO market can only refer to itself, making it easy to manipulate. If not controlled, it may force a cascading liquidation of the entire protocol. According to a blog post, Drift is setting up liquidation barriers that will prevent prices from getting out of control. It will also require traders to repay any debts they have accumulated on other trading products, some of which allow risky leveraged positions.

Security company: Polyhedra Network suffered a wallet access vulnerability on the BNB chain, losing $1.4 million

*DeFi

As monitored by Cyvers Alerts, Web3 full-stack interoperability infrastructure Polyhedra Network suffered a wallet access vulnerability on the BNB chain. The attacker extracted $1.4 million, including THE tokens worth $700,000, and then converted all tokens to BNB. The attacker’s funds came from Tornado.cash.

Dubai International Financial Center DIFC enacts new digital asset laws

*Legal

Dubai International Financial Center (DIFC) announced the enactment of new digital asset laws, aimed at keeping DIFC in line with technological developments and providing legal clarity for digital asset investors and users. The law came into effect on March 8 and aims to fully regulate the legal characteristics of digital assets as property law, and stipulates how to control, transfer, and handle digital assets. DIFC is a tax-free special economic zone in Dubai with an independent legal system and courts based on English common law. The law was enacted after a review of regulatory approaches in various regions around the world and public consultation last year.

Coinbase sues U.S. SEC for refusing to establish cryptocurrency rules

*Legal

U.S. cryptocurrency exchange Coinbase has filed a lawsuit against the U.S. Securities and Exchange Commission (SEC). In a brief submitted to the Third Circuit Court of Appeals on Monday, Coinbase claimed that the SEC violated the Administrative Procedure Act by not participating in rule-making or providing a detailed reason for denying Coinbase’s rule-making petition. The law dictates how federal agencies create and issue rules. Coinbase believes that the SEC lacks the statutory power to extend existing securities regulations to digital assets. The SEC’s position on jurisdiction over digital assets needs to be tested through rule-making. Coinbase had requested the SEC to establish clear rules for digital assets, but the SEC rejected the petition in December.

About IOSG Ventures

IOSG Ventures began investing in the crypto industry in 2017 and is an early investor in the main verticals of Web 3.0. As an industry research and community-driven native crypto fund, we are committed to the development and innovation of the industry in the long term, along with excellent early-stage projects and protocols. Our investment portfolio includes a range of creative and high-potential projects, such as ZKRU (Scroll, StarkWare, Arbitrum, zkSync, Taiko), Security Auditing (Runtime Verification, Hexens), MEV (Flashbots, Blocknative), DeFi/NFT-Fi (1inch, MetaMask), FOG (Big Time, Illuvium), and industry-leading projects like Arweave, Cosmos, Celestia, EigenLayer, Scroll, zkSync, Nil Foundation and Mina.

Statement:

1. This article is reproduced from [IOSG Ventures], original title “IOSG Weekly Brief | Why do we invest in ether.fi? What is the future development trend of LRT? #217”, the copyright belongs to the original author [Jiawei Zhu, IOSG Ventures], if you have any objection to the reprint, please contact Gate Learn Team, the team will handle it as soon as possible according to relevant procedures.

2. Disclaimer: The views and opinions expressed in this article represent only the author’s personal views and do not constitute any investment advice.

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