Prospects for Pledge Economy and DeFi New Opportunities after Ethereum Merger

ETH Under the background of national debt, the secondary utilization of interest bearing assets provides a feasible path for DeFi 2.0.

By Loki, Huabi Incubator

1、 Merge is a major turning point in ETH fundamentals

1.1 When miners die, nodes flourish

A large amount of mining income has been obtained by miners,Ethereum In July 2022, the total income of miners reached $596 million. According to this data, the annual income is estimated to be about $7 billion ($18 billion in 2021). According to the data in 2021, the electricity cost accounts for about 33% of ETH's mining revenue, and the mining machine cost accounts for 10%, corresponding to the cost of $7.7 billion and $3.5 billion in 2021 and 2022.

On the one hand, ETH miners are also ecological participants, maintaining the operation of the network. On the other hand, ETH miners are also competitors of the ecology and ETH holders, and they need to sell ETH to cover costs. Turning ETH to POS can significantly reduce the cost of network maintenance, and it is estimated that the fixed output will be reduced by 90%. That is, the cost of maintaining system operation is reduced to 700 million (2022E) and 1.8 billion (2021E). Considering the combustion mechanism, ETH may enter into substantial deflation. Based on the revenue of 1 billion yuan, nodes can also obtain very considerable APY.

1.2 Against the background of anti supervision, the importance of consensus layer is further highlighted

Recently, the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury added the address related to Tornado Cash to the entity sanctions list, which is a landmark event because it is the first time to impose sanctions on smart contract applications. This behavior and further behavior in the future will cause several problems:

(1) ETH Ecology, USDCUniswap It has shown its weakness, and DeFi may be divided in terms of whether to review.

(2) The review has risen from the address level to the agreement level, and may continue to rise to the consensus level in the next step. On August 20, Ethermine in the Ethereum Ore Pool no longer produced a block containing Tornado Cash transactions. After ETH is transferred to POS, verifiers become potential regulatory targets, and anti regulation and decentralization at consensus level become new issues.

1.3 Bonded ETH becomes similar to national debt and ETH becomes more like a super sovereign economy

National debt is the cornerstone of the modern financial system. The history of recent decades shows that the United States provides safe assets to the world, in fact, with its sovereign credit as collateral, leveraging global resources. The so-called "safe assets" refer to assets that can maintain stable value under various conditions (including systemic risk shocks).

ETH also has high liquidity, endorses with ecological services, has a relatively stable near risk-free rate of return, and can circulate freely. ETH currently has a market value of 200 billion US dollars. In addition, there are a large number of ERC-20 assets and NFT, which can be ranked as Top 60 in the global national net wealth ranking based on the conversion of 300 billion US dollars, about the same as Ukraine and Argentina.

2、 StakingFi becomes the direct beneficiary of ETH Merge

2.1 Significant improvement of StakingFi fundamentals

Liquidity Staging refers to the process in which users obtain liquidity by pledging their assets. The process starts 

When investors mortgage tokens (i.e. ETH) into an agreement, the agreement pledges on behalf of investors 

Pledge, and then cast the claim asset of the mortgaged asset 1:1 for the investor, and then the Staking reward will be attributed to 

The flow of Staking tokens is similar to the situation of LP tokens in a decentralized exchange. These flowing 

Staking tokens can be exchanged or used as collateral to borrow assets.

In fact, in addition to Staking rewards, it can unlock additional sources of revenue. Including but not limited to: 

  • Discount income unlocked in advance 

  • Income from governance right 

  • Proceeds from reuse of capital mortgage certificates 

With the gradual increase of Bonded ETH, the fundamentals of StakingFi&New DeFi will be significantly improved. For StakingFi, stable and reliable sources of income will emerge. Previously, Lido, Kiki and other StakingFi projects were all due to LUNA The collapse of LUNA is accompanied by a thunderstorm. The market value of LUNA is about 1/5 of ETH. The StakingFi project will be directly impacted.

As of the beginning of 2022, the current market value of all pledged tokens is about $146 billion, while the total value currently locked in DeFi is $186 billion. The market size of the mobile Staging agreement is $10.5 billion, with a penetration rate of about 7%. Messari estimates that with the large-scale transformation of encryption networks such as Ethereum to the PoS consensus mechanism, mobile staking may usher in a wave of considerable market growth. 

By 2025, it is expected that the annual reward of Staking will reach 40 billion dollars, and the average yield of Staking will be between 5% and 10%, which means that the total market value of pledged tokens will be between 400 billion and 800 billion dollars. Even assuming no increase in permeability, the annual growth rate from 2021-2025 can be 17% to 40% 

Within the range of.

The governance value is estimated by 1%/2%/3% of the Staking scale

2.2 ETH Staking Mode Comparison

ETH offers a variety of Staging modes:

Independent pledge and pledge as a service are relatively high barriers, so collective pledge and centralized exchange pledge are expected to be the main battleground of the service competition of Staking. As of August 25, 2022, the total number of ETH2 pledges is 4.88 million ETHs, of which Lido accounts for 90% of the market share. For the StakingFi project, its Bonded Token is the golden key to finance and governance, and Lido's market position is also reflected in the recognition of stETH.

It should be noted that if stakingFi forms a monopoly, it may control the mainstream DeFi protocols or establish its own DeFi ecosystem through bribery, governance attacks, TVL attacks, etc., forming a DeFi trust organization. The governance of anti centralization and monopoly giants will also become a new topic. DVT (such as SSV) technology is expected to play a greater role.

3、 The rise of ETH's national debt and StakingFi has created conditions for DeFi 2.0

The typical representative of DeFi 1.0 is liquidity mining. The essence of this "mining" is to use the time value of assets to exchange short-term or long-term benefits and bear potential risks, including smart contracts, systems, joint and several risks, etc. For the demander, the DeFi agreement "mining" mechanism can also implement larger scale financial business after helping to improve liquidity.

Generally speaking, the capital cost required to lease TVL=risk-free rate of return+risk rate of return=risk-free rate of return+contingency loss expectation+other loss expectation (such as theft, Rug, etc.)+risk appetite premium

The biggest pain point of DeFi 1.0 is the need for a large number of TVLs, which will bring huge use costs, access thresholds and potential safety hazards. Removing capital deposition, improving efficiency and reducing costs are important directions of DeFi 2.0. In the context of ETH's national debt, the secondary utilization of interest bearing assets provides a feasible path for DeFi 2.0.

3.1 Asset reuse stable currency

Both the existing stable currency agreement and the lending agreement need to pledge a large number of valuable assets. Because the value storage and use functions of assets are not separated, these assets cannot be used and the asset utilization efficiency is not high. After the ETH Merge, a large number of ETHs were pledged, and the pledgers received pledge vouchers. The value storage and use functions of ETH are separated. As a kind of collateral with high value and high liquidity, pledge vouchers can be used to forge stable currencies or borrow assets in large quantities. It will be a high certainty that a new stable currency or ETH pledge certificate with ETH pledge certificate as collateral will occupy a larger share in MakerDAO.

3.2 DEX protocol based on superfluid pledge

Allowing token holders to use their tokens for pledge and providing liquidity at the same time (so they can enjoy two returns) can not only improve network security, but also maximize capital efficiency.

The implementation method on ETH is as follows: ETH is used as the transaction pair of all tokens, xETH is used for pricing within the agreement, and 50% of ETH is put into pledge. Users can exchange the ETH at 1:1 when swap is xETH, and dynamic interest rates are implemented according to the actual content of the current ETH when add and remove liquidity.

3.3 Bond Discount Agreement

Similar to the reverse repurchase of government bonds and discount of large deposit receipts in the real financial interest rate, the essence of Curve's stETH pool is a bond discount agreement, which can also be realized by agreement acceptance.

3.4 Fixed income securities products&interest rate derivatives

Products similar to the US bond market may emerge.