Notes 4/18: LSD Tokens, BNB Burns

Prices for tokens of Liquid Staking Derivatives (LSD) platforms have soared in the week after Ethereum’s Shapella upgrade. LSD platforms simplify the staking process and ensure liquidity for staked ether, even after it is locked in a smart contract. For their services, staking platforms have accumulated some of the biggest holdings of staked ether. An example is Lido – a platform that accounts for slightly more than 30% of all ether staked.

The price of its token stETH (Lido-staked ether) is up by 10.4%, as of this writing. Other LSD platforms whose tokens have witnessed notable gains include Frax Ether and Rocket Pool. Their tokens, FrETH and RPL, are up by 9.16% and 19% respectively. EtherFi, another LSD platform, also claims to have witnessed a “surge” of deposits after Ethereum’s latest upgrade.

Will LSD Tokens Survive?

A price increase for LSD platforms denotes investor confidence in the future of such platforms. But their survival is not guaranteed. There is considerable regulatory uncertainty associated with staking. The promise of yields from the collective efforts of Ethereum’s developers and those of the platform itself almost make it certain that tokens associated with the activity, including ether, are securities. There is also no clarity about how rewards accruing from ether staking will be taxed.

Then, there are the problems with the platforms themselves. Lido is riddled with regulatory red flags that will make it difficult for the service to exist after withdrawals are completed from its platform. [But its “DAO”, already the richest in DeFi, will have made enough profits for everyone involved]. Rocket Pool, which is based in Australia, is slightly better in that it enables decentralized staking to ensure that private keys to access ether always remain with the crypto’s owner. But it is also largely unregulated across most jurisdictions. Frax Ether also suffers from the same problems.  

Overarching these issues is the problem of tokens issued by the platforms. Like the overwhelming majority of crypto tokens, they are not necessary. They are also derivatives to ensure liquidity of a locked asset. LSD platforms resort to unreliable maneuvers, such as rebasing and increasing the number of derivatives, to multiply yield for customers. Many of these strategies are executed at decentralized finance (DeFi) platforms like Uniswap and Curve, which are infamous for rampant illegal practices like violating KYC and AML practices.

In the last week, regulators across the world have begun circling DeFi platforms. That creates uncertainty about the future for such tokens. LSD tokens will have to fall in line or be regulated out of existence.

Binance Burns More BNB

Binance announced last week that it had “burned”, meaning removed, two million BNB from circulation. Based on existing prices of the token at the time, the removal purged $674 million worth of BNB tokens from circulation. Since launching BNB in 2017, Binance has performed quarterly burns of the token.

The number of tokens burned varies based on the exchange’s revenue in the quarter, according to a previous CoinDesk piece. For example, the numbers for burned BNB rose to 3 million tokens in the crypto bull market of 2021. Bitcoin price set two price records and BNB price peaked at $676 in May that year. The past couple of quarters have witnessed average burns of two million tokens. Considering the fraudulent numbers peddled in crypto, it is difficult to know what that figure means for Binance’s revenues.

The decline in circulating supply of a useful token should inflate its price. And so it was for BNB, whose price jumped by 12% in the last week. It is up by 40% from the beginning of this year. As of this writing, it is trading at $340.92, an increase of 5% in the last week.

More Demand or An Illiquid Ecosystem?    

A price rise indicates more demand for BNB among investors and developers. But BNB, like most exchange tokens, is a worthless token that has no cachet outside the Binance network. It is mostly used for staking on the BNB chain and has additional applications in simulating monetary transactions on the Binance Smart Chain for decentralized finance (DeFi) applications.

There is not much demand for BNB among traders either. According to research firm Kaiko, BNB is “one of the most misleading tokens from a liquidity perspective.” The company collected data from 19 exchanges and found that, while BNB ranks third in market capitalization for non-stablecoin tokens, it is eleventh in terms of liquidity. Lest that sentence did not provide sufficient clarity, the firm goes onto write that the token has “far outsized market caps relative to its liquidity.” Kaiko compares BNB to bankrupt exchange FTX’s native token FTT – a coin that now trades for pennies in crypto markets.

That is not the only black mark against the token. BNB’s yields from staking and its promised returns to investors also means that trading in it is accompanied with significant regulatory risk. Changpeng Zhao, chief executive officer at Binance, admitted as much during an interview in 2018, when he said that the exchange had a “financial incentive” in developing use cases for BNB so that it “grows in value.”

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