November 29, 2023

Insights and analysis for the professional investor

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Welcome to Crypto Long & Short!

This week, Marcin Kazmierczak, Co-Founder of RedStone & Warp.cc, says the arrival of liquid staking token finance is set to turbocharge activity in the staking market next year.

Then, Colin Butler, Global Head of Institutional Capital at at Polygon Labs, says the tokenization of real-world assets is finally ready for prime-time, due to increased institutional involvement and better infrastructure.

As always, get the latest crypto news and data from CoinDeskMarkets.com.

– Ben Schiller

From the Analyst

Liquid Staking Tokens Are a Hot Ticket for 2024

Twenty-six billion dollars. That's how much money is currently deposited into liquid staking token (LST) protocols, by far the biggest category in decentralized finance (DeFi). And, of course, it is expected to grow even further.

Liquid staking token (LST) is a crypto-specific term that can be hard to grasp at the first sight. It is a utility token issued upon securing proof-of-stake blockchain, like Ethereum, by depositing native cryptocurrency in a dedicated protocol. For example, stETH is an LST issued by Lido when staking ETH on the Ethereum network.

Decentralized applications (dApps), such as Lybra, Prisma, Sommelier, Enzyme, that use these types of tokens are part of the LSTfi (LST finance) category of finance (allowing users to stake their LSTs in a form of collateral, or for other DeFi use cases). In other words, LSTfi is the use of LSTs in DeFi. LST finance (LSTfi) exploded after Ethereum's Shanghai upgrade on April 12 2023, which enabled staked ETH withdrawals.

Here are the three main LST architecture models:

Rebase tokens – tokens that automatically adjust their balance in response to deposits and rewards. This process, known as rebasing, typically happens daily. During rebasing, there is no visible transactional activity for the token holders. Examples of such tokens include Lido's stETH and Binance's BETH, both of which are classified as rebase tokens. This type of LST is designed to be user-friendly, as the balance of your LST increases in line with your staking activities.

For example: staking 1,000 ETH at Lido will give you 1000 stETH, which, after one week, should amount to about 1,000.67 stETH (at today's 3.5% APR).

Rewards-bearing tokens – tokens that increase in value over time, with the value and rewards determined by the changing exchange rate between the token and the staked asset. The quantity of LST stays the same, but its rate varies. This single-token model is convenient, but less straightforward than rebase tokens. Holders benefit from rising rewards, examples of which include rETH, cbETH, swETH, osETH, and ETHx.

For example: staking 1,000 ETH at Stader will give you about 989.78 ETHx that after one week will be the same amount of ETHx, but worth about 1,000.68 ETH (at today's 3.56% APR).

Wrapped tokens – certain LST are available in wrapped versions. After wrapping, these tokens no longer experience automatic balance adjustments and become reward-bearing tokens. Unlike rebasing, which occurs without any transactions, changes in the balance of wrapped tokens are achieved through actions like minting, burning, or transferring. The rewards are integrated into the exchange rate. Wrapped LSTs, such as stETH and BETH, often see higher popularity and volume in DeFi and trading sectors because they aren't subject to rebasing.

For example: wrapping 1,000 stETH at Lido will give you about 874.62 wstETH that after one week will be the same amount of wstETH but worth about 1,000.67 ETH (at today's 3.5% APR).

LSTs Types by Architecture Models (Source: RedStone's LSTfi report)

Liquid staking tokens play an essential role in the DeFi ecosystem, offering users a way to participate in cryptocurrency staking without the hassles of running validator nodes and managing hardware and software. As the DeFi landscape continues to grow, liquid staking tokens will keep providing users with opportunities to earn rewards and participate in cryptocurrency staking with ease.

LST & LSTfi is here to stay. Therefore, it is vital to understand the mechanism behind them and major players on the market. In 2024, my advice is to keep eye on the trending LST protocols, LST-backed stablecoins and put a lot of attention to restaking space, especially with the upcoming mainnet launch of Eigenlayer that is expected in the late March of next year.

Want to learn more? Read the LSTfi Report.

– Marcin Kazmierczak, Co-Founder of RedStone & Warp.cc

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Institutional Outlook

2024 Will Be the Year Tokenization Truly (Finally) Begins

Everyone from TradFi leaders to the crypto cognoscenti predicts that the tokenization opportunity runs to the tens of trillions. While we've already seen some compelling use cases, these are a drop in the ocean compared to the flood of digitized assets that could move on-chain in the next few years.

When will today's trickle of tokenization turn into a torrent? And what is holding it back?

This October, Forbes published a deep dive into the issue under the provocative headline "Why Tokenization is Failing." The author, director of digital assets research, Steven Ehrlich, provides a litany of failed or underwhelming digitization projects and concludes that the issue hindering adoption isn't technology, but trust.

I beg to differ.

The primary reason why the tokenization market isn't in full flood is technical bottlenecks, limitations around current infrastructure and interoperability – an inevitable fact in a young, nascent space.

The last year, however, has seen incredible progress towards overcoming these issues. While it's easy to showcase the projects that didn't deliver, the true story of tokenization in 2023 is about the groundwork being laid that will enable the next wave of tangible on-chain results, driven by the might of major financial players entering the market.

Private Equity Funds And Credit Are Leading The Charge

Speak to anyone intimately acquainted with the tokenization ecosystem, and they'll tell you that 2024 is full of immense promise. For starters, we see intense interest from private equity funds looking to develop new tokenization vehicles for their investors, even further, putting these ideas into production with haste.

This trend is set to continue into the New Year as TradFi titans, including Hamilton Lane and JP Morgan, develop tokenized funds. Inevitably, we'll soon see the development of even more structured instruments, including assets built from new revenue sources such as private credit - the logical next step for financial products that are inherently digital and relatively easy to migrate on-chain.

The Inevitable Expansion Into Other Assets

These instruments are just the start, though. The next generation of tokenized assets will include offerings like bonds and equities. In time, real-world assets such as art and automobiles, commodities, and fine wines will be traded on-chain. In fact, it's already happening, with use cases including fractional ownership of classic artworks.

Tokenized real estate, in particular, could be a significant boon for the market, which has traditionally been complex and slow-moving. Now, not only will these markets become digitally native, but they will also benefit from things like fractional ownership and near-instant settlement.

This stands to make investing more accessible and bring new liquidity into sclerotic markets. Entirely new generations of investors will begin to tap into the possibilities of tokenization and breathe new life into legacy markets. With new institutions and assets will come new payment rails, as well as the requirement for industry-wide standards that make all of these products and markets interoperable.

Not only will this demonstrate the power and utility of tokenization, but it will also foster the trust that Forbes correctly identifies as the key driver of demand. In 2024, we can have every confidence that the flow of new tokenization will turn from a drip-drip into a deluge, marking the most profound revolution in financial affairs for centuries.

- Colin Butler, Global Head of Institutional Capital at at Polygon Labs

Takeaways

From CoinDesk Deputy Editor-in-Chief Nick Baker, here is some news worth reading:

CONTRARY ON ETFS: In this no-bitcoin-ETFs–in-the-U.S. era, the next best thing for years has been the Grayscale Bitcoin Trust (GBTC). Its flaws have been long discussed, though the biggest one – it's done a poor job tracking the value of bitcoin – has mostly gone away lately. The reason it's gone away is enthusiasm that the application to turn GBTC into an ETF will get approved, as will bitcoin ETF applications from the likes of BlackRock and Franklin Trust. Bitcoin's (BTC) price has soared recently on that optimism, and $40,000 is in reach. But not everyone thinks ETFs will support BTC. A JPMorgan analyst just argued that $2.7 billion could flow out of GBTC if it becomes an ETF, and BTC could swoon.
CENSORSHIP?: I've said it once and I'll keep on saying it: As crypto and traditional finance collide – and they are – there will be turbulence. Crypto was set up to circumvent TradFi. TradFi likes crypto, but only parts of it: Bitcoin is a hot new thing Wall Street can sell to young folks ("It's digital gold!") and old folks ("The kids love it!"), and some financial folks think they can do conventional back-office stuff on blockchains more efficiently. So where's the friction du jour? CoinDesk's Brad Keoun just reported: "F2Pool, the third-biggest Bitcoin mining pool, drew ire on social media after a report that it might be censoring transactions from an address subject to U.S. government sanctions." As Binance just found out, when you do finance-y things on planet Earth, the finance cops want you to play by the rules. One of those rules: abiding by government sanctions. If the U.S. says you can't send money to Country X, you can't send money to Country X, whether it's fiat currency or the crypto kind. Over on planet Crypto, though, the ethos among many is that blocking the movement of money on blockchains is akin to censorship. F2Pool's actions are bound to rankle those people. It's hard to see how they win that fight, though.

Want more? For the latest news affecting the crypto markets, listen to CoinDesk's Markets Daily podcast.

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