- The Lido wants to attract more institutional users.
- Ensuring significant liquidity is a major priority.
- The protocol also hints at new features to attract institutional clients.
Resttaking, one of the hottest ideas in DeFi this year, has reached a $15 billion market.
This is huge with so-called DeFi DeGens, risk-tolerant crypto investors who eagerly seek the highest returns on their assets. In recent months, several DeFi protocols have turned to re-easing to take advantage of the trend.
But Lido, the largest DeFi protocol with $25 billion in deposits, was strangely absent from the party.
“It’s not a priority,” said Kean Gilbert, Lido’s manager of institutional relations. DL News.
Instead, Lido will focus on catering to institutional investors on DeFi degeners by further developing its flagship product called stETH – a tradable version of staked Ether.
“Institutions are not optimistic about reinvestment because it is not yet mature,” Gilbert said.
Institutional investors refer to small hedge funds, family offices, venture capital firms, investment funds and trading companies.
Rollback is a way to reuse staked tokens – like Ether – to secure other networks and earn additional rewards for their owners.
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But development is slow. Although staking protocols like EigenLayer promise users increased yields, the protocol still has not implemented this feature.
stETH expansion
Lido is the largest liquid staking protocol. It allows investors to stake Ether for a 3% annual return while receiving stETH, a tradable version of their staked Ether that they can use in DeFi.
The stETH token already represents 70% of the Ether liquid staking market.
But Lido wants more, and institutional investors are a relatively untapped user group.
“The priority is to double down on stETH and liquid staking, and add as much depth as possible,” Gilbert said.
Liquidity is a top priority. Funds and family offices need to know that there is enough stETH to allow them to exit their positions at any time, should the need arise.
“They want to know how much they can sell and how long it takes to sell,” Gilbert said.
Analysts have already pointed to stETH’s declining liquidity as a potential problem. Currently, there is only $198 million in stETH liquidity on decentralized exchanges, a 30% decline year-to-date.
The fear is that if many stETH holders suddenly have to sell their tokens, they will not have enough liquidity to do so. This could cause the asset to break its peg against Ether and trigger a cascade of liquidations.
The likelihood of such a situation impacting institutions is limited, Gilbert said. For what? Because many funds that use stETH transact over-the-counter, selling directly to each other bypassing the open market.
“If people felt it didn’t have enough depth, they definitely wouldn’t use it,” Gilbert said.
Separate swimming pools
Liquidity is one thing. There are other elements that institutions must also take into account.
Some are wary of Lido’s stETH or other liquid staking tokens due to strict regulatory requirements. A 2023 report from Northstake found that approximately 1% of deposits to major liquid staking protocols came from illicit sources.
Even though it is a small amount, it could pose problems for regulated institutions that must adhere to strict anti-money laundering regulations.
Lido plans to create additional features, such as separate staking pools with KYC controls, particularly for institutional clients affected by such regulations, Gilbert said.
Certainly, for many of Lido’s existing institutional clients, the lack of AML controls has not stopped them from using the protocol.
“We believe the Lido is already institutional quality,” Gilbert said. “About 25% of our total value locked today is actually institutional capital. »
TVL is a metric that tracks the amount of cryptocurrency locked in a DeFi protocol’s smart contracts or across all DeFi protocols running on a given blockchain.
Looking for leverage
Another consideration is ensuring that investors can use stETH as they wish.
Leverage is at the top of many institutional investors’ wish lists. Top DeFi lending protocol Aave already has an established market for borrowing and lending stETH.
Lido’s recent partnership with digital asset software company Fireblocks gives institutions even more options.
Institutions holding stETH can now use it as collateral on the Bybit crypto exchange and the Deribit crypto derivatives exchange via Fireblocks.
“We want to create as many opportunities for stETH holders, from an institutional perspective, to do as many interesting things as possible,” Gilbert said.
While giving institutions the ability to use leverage is a great way to attract them, it also has drawbacks.
Leverage has also greased the wheels of every major crypto crash.
Tim Craig is DL News’ DeFi correspondent based in Edinburgh. Contact us with advice at tim@dlnews.com.
