Author: basedpotato

Translation: ShenChao TechFlow

ShenChao's Guide: Crypto KOL basedpotato points out that LDO has dropped 96% from its peak, but Lido's staking revenue has not followed suit. The protocol has an annual revenue of about $40 million, but its market capitalization is only $275 million, bringing the valuation multiple back to a reasonable range. More critically, the DAO has just passed a proposal to buy back LDO with 10,000 stETH (approximately $22 million), equivalent to 8% of the circulating supply, yet the market hardly reacted.

Lido is buying itself back from "death," but no one is watching.

I understand that the ETH trend is very weak, and there have been consecutive security incidents over the past two quarters, with the EVM DeFi ecosystem lacking innovation. Apart from a few projects that can consistently deliver annualized returns of over 8% (like @Neutrl, which has integrated the STRC yield engine), DeFi has almost no new tricks for attracting new capital.

But that doesn't mean there’s no value to be mined. In fact, many of the most successful compounding players during the last cycle earned their highest PnL precisely from places that others were reluctant to look.

This round doesn’t have so many bloated treasuries to arbitrage, and DAOs seem to be outdated. However, there are still a few projects that not only talk about governance tokens but also recognize, to some extent, their fiduciary responsibility to token holders. LDO is one of them.

The logic behind this transaction is straightforward, with two reasons:

Valuation Misalignment

For most of LDO's history, I would confidently say it was overvalued. Continuous insider unlocks and sales pressure, coupled with overly aggressive valuation multiples (peaking at 30-35 times), implied that the protocol would grow indefinitely. But what actually happened was that LDO's liquid staking (LSD) market share and the proportion of LSD in total staking both hit a ceiling, naturally leading to a peak in revenue.

The good news is that LDO has dropped 96% from its peak. Its valuation has finally returned to a reasonable range.

The revenue quality is high because staking users do not easily churn. Therefore, while the valuation has plummeted, the revenue has remained basically unchanged. Moreover, that $40 million in annual revenue is settled in ETH; when ETH rises, revenue rises too.

With a market capitalization of $275 million, this corresponds to about 7 times revenue, or a 14% yield assuming zero operating costs. Compared to the valuations expected in 2024, a protocol that will always incur costs is incredibly cheap right now.

By the way, there is also downside protection. The treasury currently holds $157 million in ETH and stablecoins. Indeed, LDO is currently spending a bit much, and the treasury is shrinking, but we have talked to some contributors and they expect stricter cost control moving forward.

Buyback

This is the part that truly brings the transaction to fruition. We know LDO can generate decent revenue, and we know more revenue will flow to the treasury because they need to cut costs, but how do tokens benefit now?

Just today, the LDO team passed a Snapshot proposal to allocate 10,000 stETH for buying back LDO, and practically no one reported on it.

📎 Extended reading: Snapshot proposal link

At current prices, that amounts to $22 million, equivalent to 8% of the circulating supply. This is a clear "quantitative easing" plan, yet the token price has hardly moved.

For comparison: @monad publicly stated it would buy back $30 million of its own tokens by the end of January, and as a result, it has been one of the best-performing altcoins over the past three months.

LDO has an average daily trading volume of about $3 million on Binance. If we assume the buyback period is 6 months, that means $122,000 a day, approximately 4% of the daily trading volume. Adding the possibility of an ETH price increase (after all, the revenue base is entirely ETH), that number looks pretty good.

My Conclusion

Lido has revenue, its market dominance is unshakable, its moat is very deep, and its revenue will not disappear (basically, it will never disappear). Contributors are also exploring new growth directions, but all of this current pricing is effectively zero.

The DAO has finally started putting real money into its own tokens. Yet almost no one is discussing it on CT.

If we are in an environment of rising risk appetite, LDO should be more worthwhile to buy than ETH, and it has greater elasticity. If it’s a risk-off environment and you want to find a place to put money, LDO’s downside protection isn’t bad either.

At current valuations, LDO is extremely cheap, and insiders seem to think so too.

Note: I hold a long position in LDO.