Bankless: Why is Lido expected to have a major breakthrough?

Author: Jack Inabinet, Bankless; Translation: Deng Tong, Jinse Caijing

The dominance of Etherum Smart Contract has faced unprecedented challenges in this cycle. There is growing concern that Ethereum may lose users and switch to alternatives like Solana as L1, leading some in the community to advocate prioritizing technical improvements to the L1 execution layer over increasing the availability bandwidth of aggregated data.

This transformation will have a significant impact on the network. It will also have interesting implications for the revenue of various ETH infrastructure protocols. Today, we will delve into how the shift in ETH priority will bring huge benefits to the Liquidity stake platform Lido and LDO holders.

Optimizing Execution

Over the past four years, the daily volume of ETH Ethereum L1 has remained relatively stable at around 1 million transactions, but transaction fee revenue has dropped sharply. In early 2021, Ethereum's daily transaction fee revenue often exceeded $20 million, but by 2024, it will be lucky to have a month's transaction fee revenue reach this level.

Despite the obvious demand for block space in the adjacent ETH block, as evidenced by the almost uninterrupted rise in L2 transaction throughput, the revenue obtained by the ETH block from such activities is extremely limited.

Due to its rollup-centric roadmap, Ethereum has optimized for relatively cheap data availability storage on its L2. This is the only direct service in the rollup relationship where Ethereum stakers get paid, and it generates only a few cents of revenue per transaction.

Although rollup and L2 offer fast transaction times and low Transaction Cost, their users lack the same level of security as ETH's L1. On ETH's L1, their transactions are processed by a group of Decentralization validators, and the integrity of the blockchain is maintained by verified economic incentive schemes (such as slashing).

The biggest advantage of ETH is its world-class Settlement guarantee, which ensures that any user transaction will be reliably processed (assuming they can afford the necessary transaction fees). Many ecosystem thinkers believe that now is the time to combine this core capability with improved L1 execution.

Although achieving this vision will require some controversial changes to the major roadmap deviation - such as increasing hardware requirements or native parallelism - the implementation of such upgrades can revitalize the shaky narrative power of Ether by making ETH L1 the default landing point for all on-chain valuable financial transactions.

Simple Stake Economics

Although it may not be possible to suddenly shift towards execution priority at present, for the Ethereum ecosystem, this is an attractive path worth considering.

The forward-looking nature of the market means that investors often try to "outpace" each other by positioning themselves ahead of actual occurrences to take advantage of the transition, in which case, LDO may emerge as a leading performer in the coming weeks.

LDO price has recently shown strong performance, pumping 26% from its relative low point on August 15th, indicating that investors may have already discovered the Bull Market brewing for this Token.

Re-following the execution will drive more trades to ETH Square L1, especially the most ideal computation-intensive high-value Decentralized Finance transactions. The individual Transaction Cost is likely to decrease, but in this case, the total cost of all transactions is expected to increase, thus having a positive impact on the main variable behind Lido's revenue: ETH stake yield.

Furthermore, assuming that the available ETH on L1 of the block chain leads to a significant increase in block space requirements, while generating desirable second-order effects, such as net ETH deflation, then from an investment and availability perspective, ETH may become a more obvious choice of Smart Contract platform. If the recovery of this distinction can increase the price of ETH, then at a given level of on-chain activity, Lido will earn greater dollar-denominated profits.

Although the discussion about changing the priority of the ETH roadmap is still in its early stages (and controversial!), it cannot be denied that these potential changes may provide powerful incentives to revitalize L1, making it a place where real users are willing to pay strong Settlement guarantees for Money Laundering. If this grand vision can be realized, then LDO will eventually be expected to perform well.