An Exploration into Trending LSD StakeWise

StakeWise is a liquid staking protocol that has no minimum taking requirement. Apart from using their staked ETH (sETH2) capital to earn yield throughout DeFi, users are also free to unstake at any time.

StakeWise provides two products, Pool and Solo (N/A for new deposits).

• Stakewise Pool

StakeWise Pool offers a non-custodial pooled staking solution. Staked ETH will be tokenised into sETH2 (a LSD), while rETH2 will be minted to represent staking rewards, both in a 1:1 ratio with ETH. A 10% flat fee is applied to the rewards earned by the Pool. Entering Phase 2, users can take their staking back by burning sETH2 and rETH in the StakeWise app to redeem ETH deposits and rewards.

• Stakewise Solo

StakeWise Solo previously supported users to run their own validator nodes using StakeWise’s infrastructure as a sole custodian by depositing 32 ETH. Registered by their withdrawal credentials, users are charged a monthly fee of 10 DAI per validator they operate. Rewards were directly linked to the beacon chain, which cannot be withdrawn before ETH 2.0.

Token: $SWISE

TVL: ~$144m

Market Cap: ~$29.6m

FDV: ~$149m

Comparables

Figure 1: Top 5 LSD Protocols, Source: Greythorn Research Team, Data: DefiLlama

• Although StakeWise only accounts for less than 1% of the total number of staked ETH, the growth rate of its deposits post-Merge (13.21%) indicates that users want to use the emerging product.
• StakeWise’s potential can be observed through its Staked ETH:FDV ratio since a higher ratio highlights that the FDV of the protocol is relatively lower compared with the ETH it has staked, which acts as an “endorsement” of its usefulness. Although Lido retains its dominance, SWISE comes second and is more attractive than competitors RPL, FIS, ANKR, FXS, and pSTAKE from this metric.

Figure 2: Staked ETH/FDV across various LSDs (02/02/2023), Data: Dune Analytics, CoinMarketCap

Bullish Fundamentals

1. Security

The withdrawal key for funds in the Pool is split into seven parts, distributed among trusted entities and stored in cold storage, known as the Horcrux mechanism.

• To be shifted to a fully non-custodial solution once validator withdrawals are enabled.
• StakeWise has finished six audits related to sETH2, rETH2, StakeWise Pool, etc. The Bug Bounty Program started on 31/05/2022. As of 01/2023, the protocol has not experienced any security-related issues.

2. Decentralisation

The protocol will become more decentralised after the Shanghai Upgrade once funds become non-custodial.

3. Dual token model

The dual token model of $sETH2 (staked ETH) & $rETH2 (ETH rewards) isolates their idiosyncratic risks.

4. StakeWise v3

StakeWise v3 is to be published (29/09/2022): The purpose of v3 is to reduce the degree of centralisation in ETH staking through two innovations. Namely, the Vault Network and the over-collateralised liquid staking derivative $osETH (Litepaper).

• The Vault Network: Node Operators (i.e. solo stakers or institutions) can create their own vault providing users with an option of vaults to select from based on their rankings & past performance metrics.
• The over-collateralized LSD osETH: sETH2 and rETH2 to VLT will reflect the value of both the deposit and the staking rewards. VLT is designed to be over-collateralised to decrease the potential slashing loss within the Vault.

Bearish Fundamentals

1. Principal (sETH2) cannot be automatically compounded under the dual token model. Users need to exchange their earned rETH2 to ETH through protocols like Uniswap and re-deposit back into staking for more sETH2. This leads to low capital efficiency.
2. The use cases of $SWISE are limited along with LT supply facing pressure. Team & Investors account for ~47% of the token supply. Investor allocations (25.2%) will fully unlock in April 2023, followed by the teams in two years. This can be expected to bring about longer-term supply pressures.

References

• CoinGecko. 2023. Cryptocurrency Prices, Charts, and Crypto Market Cap | CoinGecko. [online] Available at: <https://www.coingecko.com/> [Accessed 30 January 2023].
• CoinMarketCap. 2023. Cryptocurrency Prices, Charts And Market Capitalizations | CoinMarketCap. [online] Available at: <https://coinmarketcap.com/> [Accessed 2 February 2023].
• DefiLlama. 2023. DefiLlama. [online] Available at: <https://defillama.com/> [Accessed 6 February 2023].
• Introduction to Stakewise (2023) StakeWise. Available at: https://docs.stakewise.io/ (Accessed: February 3, 2023).

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