Yang Ge Gary: LSD ignites demand, LYD solves returns

Original Author: Yang Ge

In the first week of 2025, the Crypto Market staged a spectacular scene. Before the final competition in the BTCFi track, people with different perspectives and positions had complex mindsets and emotions. This article does not aim to gossip but to summarize the previous market patterns and analyze future opportunities. Since its inception with Lido, LSD has gradually ignited a new wave of DeFi demand. After two months of additional confidence brought by Trump's election victory, how to face the future development of the market is believed to be the most concerning issue for everyone in Q1 2025.

tl;dr

LSD defines the narrative that ignites the market, while LYD emphasizes Yield and mitigates the negative impact of Staking on Liquidity.
LSD originated from Lido, providing a liquidity balancing mechanism for token issuers and holders, gradually evolving to form the industry landscape.
LSD captures the BTC ecosystem and BTCFi as a development vehicle, achieving a number of projects in the competition for TVL and Listing in 2024.
LSD essentially promotes the deposit process in the Crypto market, with project competition resembling TradFi banking thinking.
LSD has led to two negative issues due to Over Staking, posing risks and making development unsustainable.
LYD focuses on Yield, introducing sustainable value to the market through the trade-off game between Liquid and Yield.
LYD addresses the sustainable Real Yield issue, with project parties taking on roles such as Crypto funds, asset management, and asset sides.
LYD will promote Protocol Asset Management, forming the basis for AI Agent participation in financial management, creating AIFi.
LYD will trigger a shift in Crypto from virtual to real, becoming the foundation for the development of actual payments, asset income, and other financial scenarios.

1. What are LSD and LYD

LSD (Liquid Staking Derivatives) originally means providing returns to Crypto holders by forming various derivative scenarios through staking Crypto liquidity. LSD is a very clever and outstanding narrative concept that cleverly combines Liquid, Staking, and Derivatives into one term, forming a model that directly hits the essence of Crypto and DeFi gameplay in a very native way, successfully igniting the market and leading to a rapid development of a new round of DeFi and CeDeFi ecosystems.

LYD (Liquid Yield Derivatives) means seeking balance in the binary state of Crypto liquidity and yield, thereby forming various derivative scenarios. LYD inherits the native concept of LSD, mitigating the negative issues and bubble phenomena brought by Staking on Liquid, and emphasizing the importance of Real Yield for the sustainability of the Crypto Market and Derivatives, opening and promoting the next stage of a secure, scalable, and sustainable market environment.

2. The Initiation and Original Intent of LSD

LSD began with the launch of stETH by Lido in December 2020 and exploded in 2023-2024. This model is very similar to the role of U.S. Treasury bonds for the U.S. dollar, essentially utilizing yield expectations to trade off liquidity, seeking a liquidity balance for token issuers and holders.

The original intent of LSD at its inception differed from its later stages. The rebase model represented by stETH anchored the rewards of staking in the Ethereum POS network. Although it is not a guaranteed fixed rate promised by the foundation, it has a relatively solid underlying value. This model attracted liquidity to staking through yield expectations, bringing a large amount of TVL as a KPI marker for industry evaluation, and could derive various interesting innovative derivatives gameplay, thus rapidly exploding and evolving, forming a rich DeFi and CeDeFi industry landscape.

3. The Explosion and Competitive Landscape of LSD in BTCFi

Shortly after the emergence of LSD, it gradually captured and awakened a real demand from BTC holders at the end of the bear market in 2022: BTC holders wanted to appreciate their BTC holdings but struggled with the lack of suitable ecosystems and financial assets.

The emergence of Merlin opened the curtain on the BTC ecosystem, BVM, BTC Layer 2, and BTCFi, quickly becoming an important track in Crypto for 2024. From a hundred schools of thought to the continuous iteration of several core projects, the competitive endgame of BTCFi based on LSD gradually became clear by Q3 2024, with project parties rapidly achieving tens of billions of dollars in funding scale by staking user BTC liquidity through yield expectations.

This cycle includes marketplaces like Pendle formed through model innovation and yield strategies shaped by stablecoins like Ethena. By the end of 2024, in the ongoing competition for TVL and listings, Solv and Babylon may become the final winners.

4. The Industry Significance and Value of LSD

The capture of BTC holders' demand by LSD is real, essentially forming a deposit process for Crypto Tokens through Liquid->Staking. In other words, the project parties of LSD essentially think like banks, and the competition in BTCFi is essentially a competition for BTC deposits by project parties.

The emergence and evolution of LSD have brought the following significance and value to the market:

i. Providing a liquidity balancing mechanism for token providers (issuers) and holders (users).

ii. Capturing the common yield demand of token holders and providing yield products and asset marketplaces.

iii. Gathering funds from token holders to form a deposit process and Crypto bank.

5. The Dilemmas and Issues of LSD

Since it is a deposit process, competition is bound to be fierce. To quickly gain TVL, project parties, players, and the market have tried various ways to differentiate ecosystems and gameplay, with staking, restaking, and rererestaking asset nesting rapidly evolving. The phenomenon of "one shovel digging multiple pits" is very common, and the core issues of LSD have begun to emerge.

The cleverness of the term LSD has ultimately become a problem; it overemphasizes Staking while neglecting the importance of Real Yield in the face of Derivatives. Ultimately, the operation of this LSD cycle still follows the usual route of innovation narratives, depicting expectations, building consensus, and monetizing tokens. Without Real Yield and Real Application as the underlying support for assets and ecosystems, even the two-month confidence boost from Trump's election victory is unlikely to sustain the market's sustainable development.

The over-staking caused by LSD has led to two essential negative issues:

i. For users: After excessive staking, the underlying opacity and cumbersome redemption process create a lot of information asymmetry and time asymmetry, greatly reducing the fairness of users' initial use of liquid value for trade-off yields, thus forming a conflict of motives and interests between project parties and users, leading to bubbles and risk hazards.

ii. For the industry: Excessive staking has affected the liquidity of many ecosystem native tokens, creating damping effects. While it resists declines in bear markets, it also leads to short bull markets, hindering the flexible development of ecosystems and rapid price fluctuations.

Interestingly, to address the situation derived from LSD, many projects have introduced T-Bills as underlying assets. Projects like Ondo and OpenEden are essentially products of the LSD cycle, using T-Bills as a "cushion" and bringing in some Big Names for credit endorsement. A few seemingly simple (but not easy) operations have formed a market branch and achieved a market value of several billion dollars. The emergence of this branch actually highlights the essential problem: the LSD market severely lacks Real Yield.

6. The Inevitability of LYD's Emergence

The success of LSD lies in the smooth and coherent process of Liquid->Staking->Derivatives, but Staking should not be compared with Liquid, as Staking is a liquidity management tool used by issuers to weaken Liquid. What should be compared with Liquid is not a method or tool, but a financial essence: Yield.

Liquid and Yield are a binary seesaw and a community of contradictions. Whether as issuers, holders, or the overall market, all parties must consider the balance between the two. This applies to government bonds, funds, and Crypto Derivatives alike.

The choice process between Liquid and Yield is a trade-off, and this choice should not be restricted by unilaterally imposed rules from one party, but should be a market game mechanism, which can be embodied by a Protocol in Web3 and Crypto. The R²Protocol proposed by CICADA in Q4 2024 does this well.

The problem with LSD is that the process of Staking limits the game mechanism, and for Crypto to truly pump production value into the market for sustainable development, it must release this limitation, allowing the market to form a free game between Liquid and Yield. Such an ecological mechanism and financial derivatives are LYD.

7. The Surface Issues Solved by LYD

The emergence of LYD will shift the focus of the market, project parties, and the already established competitive landscape of funding parties towards real and sustainable yield-generating assets, gradually introducing various RYA (Real Yield Assets) into the Marketplace, working and competing in the development, selection, and provision of Real Yield, thereby forming a stable and healthy development environment.

Projects advocating for LYD and Crypto Protocols will take on roles in Crypto asset management and the asset side in this process, similar to asset management, trusts, funds, and family offices in TradFi. This will correspond to the Crypto deposit and quasi-banking institutions formed during the LSD cycle, providing various real yield solutions, thus creating a more complete financial system.

8. The Essential Issues Solved by LYD

On a micro level, LYD allows Crypto Holders and Crypto Investors to choose their own balance between Liquid and Yield. Each institution and individual can make trade-offs between Liquid and Yield based on their own needs, information analysis, and risk preferences. This is a common principle that has evolved in TradFi, a practice that returns freedom to the market, and is an inevitability for the sustainable development of the Crypto Market.

On a macro level, LYD is promoting the rapid entry of real yield assets (RYA) and real-world assets (RWA) into the Crypto Market. This trend will soon undergo a qualitative change, pushing the global economic and financial landscape into the Protocol and AI era. More Protocol Asset Management and Smart Contract Asset Management will emerge, which will also form the basis for AI Agents to participate in managing the economy and finance, creating AIFi.

9. LYD Will Trigger a Turning Point for Crypto

The relay transition from LSD to LYD is likely to trigger, or even become, an important turning point for the Crypto Market in many years. This turning point is not a shift from prosperity to decline; rather, it should be described as a shift from virtual to real.

Many people have been saying that this early stage of the bull market is the last opportunity. In fact, the so-called last round is not the final round for the broader Crypto market; on the contrary, Crypto is changing the global economic, financial, and payment systems in an unstoppable manner. The "last round" mentioned here refers to the imminent end of the initial phase of Crypto's dissemination, which is characterized by narrative construction and consensus building.

The next stage will be a significant development phase for Crypto in practical applications, including actual payments, asset income, and various financial scenarios, all of which will rapidly enter the Crypto Market, forming a new generation of the global economic and financial system, with LYD playing an important linking role in this process.

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