Yang Ge Gary: LSD detonates demand, LYD solves revenue

Original Author: Yang Ge

Source: Yang Ge Si Xue

In the first week of 2025, Crypto Market staged a wonderful scene. Before the final competition in the BTCFi race, people with different perspectives and positions have complex mentality and feelings. This article summarizes the previous situation and analyzes the future opportunities. LSD has gradually ignited a new round of DeFi demand since its inception from Lido, and how to face the future development of the market after the extra confidence brought by Trump's victory in the two months of the Crypto bull market, I believe it is the most concerned issue for everyone in Q1 2025.

tl;dr

1. LSD defines narrative explosions in the market, while LYD emphasizes Yield weakening the negative impact of Staking on Liquid.

2. LSD starts from Lido, providing a liquidity balancing mechanism for token issuers and holders, gradually evolving and forming an industry pattern.

3. LSD captures BTC ecology and BTCFi as the development carriers, achieving a batch of projects in the TVL and Listing competition in 2024.

4. LSD essentially drives the process of capital accumulation in the Crypto market, and the competition of the project parties is similar to the TradFi banking mindset.

5. Due to Over Staking, LSD has two negative problems, which pose risks and are unsustainable in development.

6.LYD is aimed at Yield, introducing sustainable value to the market through the Trade Off game process of realizing Liquid and Yield.

7.LYD solves the problem of sustainable Real Yield, and the project party will assume roles such as Crypto fund, asset management, and asset side.

8.LYD will promote Protocol Asset Management and serve as the foundation for AI Agent's participation in financial management, forming AIFi.

9.LYD will trigger the transformation of Crypto from virtual to real, becoming the foundation for practical payments, asset income, and other financial scenarios

1. What is LSD and LYD

The original intention of LSD (Liquid Staking Derivatives) is to generate various derivative scenarios through pledging Crypto liquidity, thereby providing income for Cypto holders. LSD is a very ingenious and excellent narrative concept, which cleverly combines Liquid, Staking, and Derivatives into one word, forming a pattern and directly targeting the essence of Crypto and DeFi with a very native method, successfully igniting the market and leading a new round of rapid development of DeFi and CeDeFi ecosystems.

The meaning of LYD (Liquid Yield Derivatives) is to seek a balance in the binary state of crypto liquidity and interest income, and form various derivative product scenarios based on this. LYD inherits the native concept of LSD, weakens the negative issues and bubble phenomena brought by staking to Liquid, and emphasizes the importance of real yield for the sustainability of the crypto market and derivatives, opening and promoting a benign market environment for the next stage of being secure, scalable, & sustainable.

2. The Initiation and Original Intention of LSD

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

The original intention of LSD in the early stage is different from that in the later stage. The rebase mode represented by stETH anchors the rewards of Ethereum POS network staking. Although it is not the fixed-rate exchange promised by the foundation, it has a relatively solid underlying value. This mode attracts a large amount of TVL through expected returns, which is a KPI indicator for industry evaluation. It can also derive various interesting innovative derivatives gameplay, thus quickly evolving and forming a rich DeFi and CeDeFi industry landscape.

3. The outbreak and competitive pattern of LSD on BTCFi

Shortly after the emergence of LSD, in the late bear market of 2022, it gradually captured and awakened a real need of BTC holders: BTC holders hope to increase the value of their BTC but are frustrated by the lack of suitable ecology and financial assets.

Merlin's appearance opened up the BTC ecosystem, BVM and BTC Layer 2, as well as the prelude to BTCFi, quickly becoming an important track in the Crypto industry in 2024. From the Battle of a Hundred Regiments to the continuous iteration of several core projects, the final competition of BTCFi based on the LSD strategy gradually becomes clear in Q3 2024. The project team quickly achieved a TVL of tens of billions of dollars in funding by pledging users' BTC liquidity through income expectations.

This cycle has a Marketplace like Pendle formed by pattern innovation, as well as a yield strategy formed by stable coins like Ethena. By the end of 2024, in the ongoing competition of TVL and listing, Solv and Babylon may become the ultimate winners.

The industry significance and value of 4.LSD

Staking process. In other words, the project behind LSD is essentially similar to the thinking of a bank, and the competition of BTCFi essentially lies in the competition of the project's hoarding of BTC.

The significance and value of LSD from appearance to evolution to the market are as follows:

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

ii. Provide interest products and asset markets to meet the common interest needs of token holders.

iii. Gather token holders' funds to form the process of attracting deposits and Crypto banking

5. Dilemmas and Problems of LSD

Since it is about attracting deposits, the competition is bound to be fierce. In order to obtain TVL more quickly, projects, players, and the market are trying their best to differentiate the ecology and gameplay. The rapid evolution of asset nesting such as staking, restaking, and rererestaking is very common, and the core issues of LSD are beginning to surface.

The ingenuity of the invention of the term LSD eventually became the problem because it overly emphasizes Staking and ignores the importance of Real Yield in the face of Derivatives. In essence, the operation of this LSD cycle still follows the usual route of innovative narrative, depicting expectations, building consensus, and issuing coins for realization. Without Real Yield and Real Application as the underlying support for assets and ecology, even if Trump's victory has boosted confidence expectations for two months, it is difficult to maintain the sustainable development of the market.

The over staking caused by LSD has brought two fundamental negative issues:

i. For users: After overuse, the lack of transparency in the underlying staking and the cumbersome redemption process create a lot of information asymmetry and time asymmetry, greatly reducing the fairness for users to use liquid value for trade-off profits, thus forming a conflict of interests between the project and users, and leading to bubbles and hidden risks.

ii. For the industry: excessive staking affects the liquidity of a large number of ecological native tokens, creating damping. While it resists falling in a bear market, it also hinders the flexible development of the ecosystem and the rapid fluctuation of prices in a bull market.

Interestingly, to address the situation arising from LSD, many projects have introduced T-Bill as the underlying asset. Projects such as Ondo and OpenEden are essentially products of the LSD cycle, using T-Bill as a 'cushion' and enlisting some Big Names for credit endorsement. A few seemingly simple (but not easy) operations have formed a market branch, achieving a market value of tens of billions of dollars. The emergence of this branch actually illustrates the fundamental problem - the LSD market severely lacks Real Yield.

The Inevitability of LYD's Emergence

Staking

Liquid and Yield are both binary seesaws and contradictions. Whether as issuers, holders, or the overall market, the balance between the two needs to be considered. The same goes for government bonds, funds, and Crypto Derivatives.

The decision-making process for Liquid and Yield is a trade-off, and the choice of this trade-off should not be restricted by rules unilaterally set by one party, but should be a market game mechanism that can be embodied by a protocol in Web3 and Crypto. The R²Protocol proposed by CICADA in 2024 Q4 achieves this very well.

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

7.LYD solves surface issues

The emergence of LYD will shift the focus of the market, project parties, and funding parties that have already formed a competitive landscape to real and sustainable income-generating assets. Gradually introduce various RYA (Real Yield Asset) into the Marketplace, and work and compete in the development, selection, and provision of Real Yield, forming a stable and benign development environment.

The LYD project advocates that Crypto Protocol will assume the role of Crypto asset management and asset side in this process, similar to asset management, trust, fund, and family office in TradFi, corresponding to the Crypto deposit and class banking institutions formed by the LSD cycle, providing various real yield interest solutions, forming a more complete financial system.

8. The fundamental problem solved by LYD

From a micro perspective, LYD allows Crypto Holders and Crypto Investors to choose the balance between Liquid and Yield. Each institution and individual can make a trade-off between Liquid and Yield based on their own circumstances, information analysis, and risk preferences. This is the common sense that TradFi has iterated so far, it is a practice of returning freedom to the market, and it is also the inevitable for the sustainable development of the Crypto Market.

In terms of macro significance, LYD is the trend that is driving the rapid entry of real yield assets RYA and real world assets RWA into the Crypto Market. This trend will soon transform from quantitative changes to qualitative changes, driving the global economic and financial sectors into the Protocol and AI era. More Protocol Asset Management and Smart Contract Asset Management will emerge, which will also become the foundation for AI Agents to participate in managing the economy and finance and form 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 in the Crypto Market for many years. This turning point is not a transition from prosperity to decline, but a transition from virtual to real.

Many people in the early stages of this bull market were saying that this was the last chance. In fact, the so-called last round is not the final round of the Crypto market. On the contrary, Crypto is changing the global economy, finance, and payment systems in an unstoppable way. The so-called last round here actually refers to the end of the narrative consensus construction in the early dissemination stage of Crypto.

The next stage will be a major development stage for Crypto in practical applications, including actual payments, asset yield, and various financial scenarios, all of which will quickly enter the Crypto Market and become an integral part of the new generation global economic and financial system, with LYD playing an important role in it.