The Shapella upgrade happening later today is a lucrative event for investors because they will finally be able to unstake their tokens, and associated rewards offered through Ethereum’s staking programs.
But investors with staking rewards aren’t the only winners from the event. Investors in Lido, the world’s biggest staking service, are also booking profits. The service, which accounts for more than thirty percent or $7.6 billion worth of all staked ether right now, has been a hit with investors since its launch. However, if investor selloffs of its governance token are any indication, the Shapella upgrade is the beginning of its end.
A Simple Operation
Lido started operations in December 2020 after the Beacon Chain’s launch.
Its premise is simple. It reduces the expensive and technical costs of staking participation by pooling ether from customers to deposit at validators that are already part of Ethereum’s network. Typically staking requires the depositing of 32 Eth (approximately $61,264, at today’s prices) to run a validator. With Lido, customers can earn rewards by depositing as little as one ether.
Like most crypto projects, the service has also cloaked itself in the flimsy sheen of a so-called decentralized autonomous organization (DAO). The DAO setup has repeatedly proved itself to be a fraudulent organization that enables insiders to benefit from a jump in prices for governance tokens.
A Rush for LDO
Lido’s case is no different. It raised $167 million in three rounds of funding, including one last year for $24 million, and handed out millions of governance tokens, called LDO, to investors.
But the purpose of its governance token is unclear. Under normal circumstances, such tokens are supposed to “democratize” governance by allowing ordinary voters to influence important operational decisions. Yet a glance through the holders list of LDO tokens reveals that 51% of the total supply of LDO tokens is held in just ten wallets.
The rush to get in on Lido’s game has attracted an eclectic bunch of investors. It includes crypto heavy hitters like Andreessen Horowitz and Coinbase Ventures as well as questionable players like Alameda Research, Three Arrows Capital, and Terraform Labs – issuer of the infamous UST stablecoin that set off crypto’s implosion last year. Even Binance, the world’s biggest cryptocurrency exchange that operates its own Ethereum staking service, holds 18 million LDO tokens.
A Time for Profits
One of the reasons to hold tokens is profits. LDO has a volatile price trajectory, similar to most cryptocurrencies, that allows investors whose vesting schedule has expired to sell the tokens in crypto markets. This year, the price of LDO tokens has skyrocketed by 120 percent since January. That price increase has galvanized early investors in the service to book profits. Many are exiting their investments at a frenetic pace.
For example, Terraform Labs sold its entire stash of 20 million LDO on March 12, when the token’s price was curving towards a weekly peak. Lido seed investor MakerDAO’s Rune Christensen also exited his investment in February. According to this spreadsheet, FTX’s market maker Alameda Research has sold eighty-six percent of its LDO holdings. And the list goes on.
Lido itself is on a path to rid itself off the sham DAO garb. LDO’s price jumped by 18 percent in February after the Lido DAO decided to “donate” 22 million LDO tokens to a grants association that would manage its future operations. So much so for decentralized governance.
Not surprisingly, complicated negotiations were involved in the process. One of them was to honor “a diversity of bespoke LDO arrangements over time.” In plain English, this means that early investors, apprehensive of the service’s future, needed reassurance that they would still be able to make profits. We already know there are fat profits awaiting crypto token investors who get in on the ground floor of governance token sales.
The average net dilution, a measure of investors and equity holders diluting their holdings in a project, for Lido DAO surged last month to almost 16 million tokens and is already up to 6.7 million for this month. It is not clear if Lido can survive the rapid equity dilution.
The source of its yields, which, at times, surpass those offered at Ethereum itself, remain a mystery. It employs dubious practices, such as MEVs and rebasing, to generate returns for investors. The service has also postponed ether withdrawals by a month even though Ethereum’s developers have said investors can withdraw their staked ether after the upgrade later today. All of this means that Lido is an easy target for regulators, if and when they choose to take action.
Meanwhile, ether itself is in danger of being classified a security because of its staking program. The selloff in LDO tokens is a sign of things to come for the staking service.