This post discusses the future of Web3 scaling and introduces thoughts on the future of liquid staking derivatives (LSD).

First on crypto’s future (as a technology). There is some consensus amongst researchers and experts on how blockchains will scale to service billions of users 24/7/365. One leading theory is laid out in the Endgame research article by Ethereum’s co-founder Vitalik Buterin.

When considering the long-term value offering of decentralized finance and composable finance, Liquid Staking Derivative tokens stand out as an elementary and critical piece to the puzzle.

Rocket Pool’s $rETH token is a solution for a collateralized and decentralized Ethereum LSD. rETH has the potential to be a pristine Web3 asset and here is an introduction to why.

The End Goal is the Endgame

To start, first a little context on the title ‘The Endgame’. The lead founder of Ethereum, Archangel Vitalik Buterin, coined the term ‘Endgame’ in the blockchain space with his research piece on scalability.

Endgame by Vitalik Buterin - TL:DR: Here is a list of the requirements for a      blockchain ecosystem that is acceptably trustless and censorship-resistant.

A quick summary of his research is that multiple layers of blockchains will be required to power the needs of Web3’s demands. Ethereum’s goal is to remain the base layer for Web3 commerce as the #1 security and data availability ecosystem.

Taking this a step further to real-world applications, like Decentralized finance and investing, check out this infographic with the applications built on top of Ethereum.

Ethereum is the foundation that enables trust networks for every blockchain, product, or application within the DeFi global economy. Now Ethereum is still very early in it’s the evolution to a global trust network that billions of individuals can use every day.

For the Ethereum ecosystem to reach billions of users, the speed and cost of using the services on top of Ethereum have to go down to be competitive for all types of users. There are many groups and individuals working on scaling Ethereum with new blockchains and technology using the ideas in Vitalik’s post.

If you want a fantastic deep dive on Ethereum’s progress toward its endgame see this article.

Now, how does the future of blockchain scaling relate to a term LSD which is often associated with psychedelic drugs?

We believe that liquid staking derivatives of Ethereum will be a bedrock asset in global financial markets ahead and help user in new large-scale investors.

LSDs as the Endgame for Institutional Investors

We believe that liquid staking derivatives tokens will be a part of the endgame strategy for large global investors in Web3. Liquid staking derivatives are Defi in its purest form and LSDs have the potential to be the base layer of natively digital assets in Defi.

Why are LSDs so awesome?

LSDs provide users with all the benefits of self-staking without the associated risks and complexities. It turns out, most investors want “set-it-and-forget-it” opportunities that provide passive income with little to zero effort and low risk.

To stake Ethereum and earn a ‘risk-free’ rate of return for securing the network, there is too much risk and work for the average investor.

To de-risk and simplify the earning passive return on Ethereum’s native asset $ETH, new protocols and companies have been created to service the market demand for liquid staked $ETH.

Liquid-staked $ETH differs from direct staking in that the assets are not completely locked up. With Rocket Pool, users can stake 1 ETH and receive 0.95113 rETH (as of this writing) and use the rETH within DeFi to lend or leverage their assets.

*               Quick caveat - Why not exactly 1 rETH for every 1 ETH?*

Good question. rETH is actively earning passive income via the staked Ethereum in their network and thus their staked ETH asset continues to go up in value in Ethereum-denominated returns.

Back to LSDs and how they work.

At a high level, LSDs operate on a mint-and-burn 1:1 ratio. Stakers receive liquid staking derivatives in exchange for staking their assets, representing their claim on the underlying stake pool and its yield.

With Ethereum Investors, users lock up their $ETH, generating a passive yield, and then a new liquid asset $rETH is made available for use in DeFi. This gives investors two avenues for generating income.

LSDs balance risk, reward, and сonvenience for investors. I believe that Ethereum’s decentralized ETH staking protocols will lead the way in unlocking new forms of composable finance with trillions of dollars of value flowing through the global ecosystem. LSDs enable investors to achieve new risk/reward ratios that today’s capital markets just can’t offer.

To give a comparison to today’s markets. The average investor like myself cannot go buy a government bond (ex. US10Y) and then borrow against it to provide liquidity in DeFi to earn additional passive income.

We believe the future will demand composable finance where investors can have it their way. Investors will want to earn passive income in a variety of ways that native assets like staked ETH cannot provide.

Now if you’re still with me, let’s dive into the leading LSD options today for Ethereum investors.

Ethereum LSD Options - Pick Your Trade-Offs

Here is a summary of the Ethereum LSD options today.

In our view, the key requirements for a pristine Ethereum LSD include:

• Permissionless & Open Source Code - The true web3 ethos

• Trust minimized counterparties - Cut out the middlemen and deal with code instead of human actors when possible

• Fully collateralized - Eliminate the chance of a run on the bank or inability to pay back investors

These requirements lead us Rocket Pool’s $rETH solution. We believe other investors will also have similar requirements and this will lead to more demand for Rocket Pool’s self-custody, decentralized, collateralized, and trust-minimized offering in $rETH.

rETH’s Status Today in Ethereum LSD Growth

With ~3.2% of the global Ethereum LSDs market today, Rocket Pool has grown to a top Ethereum LSDs in a little over a year. The #1 leader Lido has grown quickly due to its early launch and compelling offering with stETH. In #2 is Coinbase and then in #3 is our friendly decentralized solution by Rocket Pool with rETH.

We estimate rETH to continue to grow in market share over the next few years as more investors prefer a decentralized and fully collateralized Ethereum LSD.

We believe that liquid staking derivatives will be the foundation of composable finance for global investors ahead.LSDs are an essential part of DeFi’s endgame and we believe Rocket Rool’s rETH will be a part of this endgame.

Thanks for your time.

Additional Resources

• Check out the rETH introduction here

• See here for the Eth2 liquid staking balances chart above and more analytics on Ethereum LSDs.

• See here for a research article on the different Ethereum LSD competitors and why rETH will win.

This is not investment advice. Web3 investments involve risk, please do your own research.