In the first week of 2025, the Crypto Market staged a wonderful scene. Before the final competition of the BTCFi track, people with different perspectives and positions have complicated mentality and mood. This article is not here to eat melons, but to summarize the previous pattern and analyze the market opportunities. LSD has gradually detonated a new round of DeFi demand since Lido. After two months of extra confidence brought by Trump's victory, how to face the market and move forward in the future is believed to be the most concerned issue in Q1 2025.
1. What are LSD and LYD
The original intention of LSD (Liquid Staking Derivatives) is to form various derivative scenarios by staking Crypto liquidity to provide benefits for Cypto holders. LSD is a very exquisite and excellent narrative concept. It cleverly combines Liquid, Staking, and Derivatives into one word, forming a model, and directly hits the essence of Crypto and DeFi in a very native way. It has successfully detonated the market and led a new round of rapid development of DeFi and CeDeFi ecology. LYD (Liquid Yield Derivatives) means to seek a balance between the binary state of Crypto liquidity and interest-bearing income and form various derivative scenarios. LYD inherits the native concept of LSD, weakens the negative problems and bubble phenomenon brought by Staking to Liquid, emphasizes the importance of Real Yield to the sustainability of Crypto Market and Derivatives, and opens and promotes the next stage of Secure, Scalable, & Sustainable benign market environment.
2. The launch and original intention of LSD
LSD started with stETH launched by Lido in December 2020, and exploded in 2023-2024. This model is very similar to the role of US bonds in the US dollar. In essence, it uses the expectation of return to trade off liquidity and seeks a liquidity balance between token issuers and holders.
The original intention of LSD in the early stage of its launch was different from that in the later stage. The rebase model represented by stETH anchored the rewards of staking on the Ethereum POS network. Although it is not the fixed rate promised by the foundation, it has a relatively solid underlying value. This model attracts liquid to stake through the expectation of return, which can bring a large amount of TVL as a KPI mark for industry judgment, and can derive various interesting innovative derivatives. Therefore, it has rapidly exploded and evolved, forming a rich DeFi and CeDeFi industry pattern.
3. The outbreak of LSD on BTCFi and the competitive landscape
Soon after the emergence of LSD, at the end of the bear market in 2022, it gradually captured and awakened a real demand of BTC holders: BTC holders hope to increase the value of their BTC but suffer from the lack of suitable ecology and financial assets.
The emergence of Merlin kicked off the BTC ecology, BVM and BTC Layer 2, and the prelude to BTCFi, which quickly became an important track for Crypto in 2024. From the Hundred Regiments War to the continuous iteration of several core projects, the end of the competition of BTCFi based on LSD gradually became clear in Q3 2024. The project party quickly reached a fund scale of several billion US dollars by staking user BTC liquidity through expected returns to obtain TVL.
In this cycle, there are Marketplaces formed by model innovation like Pendle, and there are also income strategies formed by stablecoins like Ethena. By the end of 2024, in the constant competition between TVL and listing, Solv and Babylon may become the final winners.
4. The industry significance and value of LSD
LSD’s capture of the needs of BTC holders is real. In essence, it forms the deposit of Crypto Tokens through the process of Liquid->Staking. In other words, the LSD project party is essentially similar to the thinking of banks, and the competition of BTCFi is essentially the competition of project parties for BTC deposits.
From its emergence to its evolution, LSD has brought the following significance and value to the market:
Provide a liquidity balance mechanism for token providers (issuers) and holders (users)
Capture the common interest-bearing needs of token holders and provide interest-bearing products and asset markets
Gather funds from token holders to form a deposit-raising process and Crypto banks
5. Dilemma and problems of LSD
Since it is a deposit-raising process, the competition is bound to be fierce. In order to obtain TVL more quickly, project owners, players and the market tried their best to differentiate the ecosystem and gameplay. The asset nesting of staking, restaking and rererestaking evolved rapidly, and the phenomenon of multiple mining with one shovel was very common. The core problem of LSD began to be exposed.
The ingenuity of the invention of the word LSD eventually became the problem. It overemphasized the matter of staking and ignored the importance of Real Yield in front of Derivatives. In the final analysis, the operation of LSD in this cycle still follows the usual route in the past, that is, a cycle of innovative narrative, depicting expectations, building consensus, and issuing coins for cash. Without Real Yield and Real Application as the underlying support of assets and ecology, even if Trump's victory replenished the confidence expectations for two months, it would be difficult to maintain the sustainable development of the market.
Over staking caused by LSD brings two essential negative problems:
For users: After excessive use of staking, the underlying opacity and cumbersome redemption process have created a lot of information opacity and time asymmetry, greatly reducing the fairness of users' initial use of liquid value to trade off returns, and thus forming a conflict of motivation and interests between project parties and users, forming bubbles and potential risks;
For the industry: Excessive staking affects the liquidity of a large number of ecosystem currencies, forming a damping. While resisting the decline in the bear market, it also causes the bull market to be short-lived, hindering the flexible development of the ecosystem and the rapid fluctuation of prices.
Interestingly, in order to solve this situation derived from LSD, many projects introduced T-Bill as the underlying asset. Projects represented by Ondo and OpenEden are actually the product of the LSD cycle. They use T-Bill as the underlying protective cushion and find some Big Names to endorse their credit. A few seemingly simple (but not easy) operations have formed a market branch and gained a market value of billions of dollars. The emergence of this branch actually illustrates the essential problem. The LSD market is seriously lacking in Real Yield.
6. The inevitability of the emergence of LYD
The success of LSD lies in the smooth and native process of Liquid->Staking->Derivatives, but Staking should not be compared with Liquid, because Staking is a liquidity management tool used to help issuers weaken Liquid. What should be compared with Liquid should not be a method or a tool, but a financial essence: Yield.
Liquid and Yield are both a binary seesaw and a contradictory community. Whether as an issuer, a holder, or the overall market, we must think about the balance between the two, including national bonds, funds, and Crypto Derivatives.
The selection process between Liquid and Yield is a trade off. The right to choose this trade off should not be restricted by the rules unilaterally given by one party, but should be a market game mechanism, which can be reflected by a protocol in Web3 and Crypto. The R²Protocol proposed by CICADA in 2024Q4 does this well.
The problem with LSD is that the staking process limits the game mechanism. If Crypto wants to truly pump production value into the market to form sustainable development, it must release this limitation and allow the market to form a free game between Liquid and Yield. Such an ecological mechanism and financial derivative is LYD.
7. Surface problems solved by LYD
The emergence of LYD will allow the market, project parties, and funding parties that have already formed a competitive landscape to shift their focus to real and sustainable interest-bearing assets, gradually introduce various types of RYA (Real Yield Asset) into the Marketplace, work and compete in the development, selection and provision of Real Yield, and form a stable and healthy development environment.
The projects and Crypto Protocol that advocate LYD will assume the role of Crypto asset management and asset end in this process, similar to the asset management, trust, fund and family office in TradFi, corresponding to the Crypto deposit collection and bank-like funding institutions formed by the LSD cycle, providing them with various interest-bearing solutions with real yield, forming a more complete financial system.
8. The essential problem solved by LYD
The microscopic significance of LYD is to let Crypto Holders and Crypto Investors choose the balance between Liquid and Yield. Each institution and individual can trade off the choice of Liquid and Yield according to their own needs, information analysis and risk preferences. This is the common sense of TradFi iteration so far, it is the practice of returning freedom to the market, and it is also the inevitable sustainable development of Crypto Market.
The significance of LYD from a macro perspective is that it is promoting the trend of real-income assets RYA and real-world assets RWA to quickly enter the Crypto Market. This trend will soon undergo a quantitative change to a qualitative change, pushing the global economy and finance into the Protocol and AI era. More Protocol Asset Management and Smart Contract Asset Management will appear, which will also become the basis for AI Agents to participate in the management of economic finance and form AIFi.
9. LYD will trigger a turning point in Crypto
This relay transition from LSD to LYD is likely to trigger or even become an important turning point in the Crypto Market over the years. This turning point is not a transition from prosperity to decline, but more precisely, a transition from virtual to real.
Many people said in the early stage of this bull market that this is the last round of opportunities. In fact, the so-called last round is not the last round of the Crypto market. On the contrary, Crypto is changing the global economic, financial and payment systems in an unstoppable way. The last round mentioned here actually refers to the end of the initial dissemination stage of Crypto that uses narratives to build consensus.
The next stage will be the major development stage of Crypto in practical applications, including actual payments, asset interest, and various financial scenarios. These will quickly enter the Crypto Market and form a new generation of global economic and financial systems. LYD will play an important role as a link in this.
Weiliang
Miyuki
Joy
Brian
Alex