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Target Name

Lido DAO

Ticker

LDO

Strategy

long

Position Type

other

Current Price (USD)

1.66

Circulating Market Cap ($M)

1,484

Fully Diluted Market Cap ($M)

1,662

CoinGecko

Link

Lido DAO (LDO): Ethereum's Liquid Gold

Cryptodamus

•

14 Jul 2024, 08:47pm

Lido DAO (“LDO”) is a protocol that facilitates liquid staking for Ethereum and other Proof of Stake (“POS”) blockchains. LDO is the dominant staking provider on ETH (accounts for ~29% of all staked ETH).
- $1.61/token, $1.61bn fully diluted mkt cap, $1.44bn circulating
- $30.71bn TVL and $67mm run-rate revenue
LDO has a compelling value proposition for users
- The real innovation provided by LDO is “liquid staking”, which solves the liquidity and composability issues that otherwise exist when staking tokens to a validator.
- The second benefit of LDO is that it makes it easier for the average user to participate in staking, as they can do so in any size (as opposed to 32ETH increments) and can outsource the validator operations to a specialized third-party.
- LDO is a high quality business that benefits from network effects and scale
- Staking is an inevitable business with recurring revenue and high growth prospects: staking it is core to L1 protocols like Ethereum and will likely forever be in existence as long as the underlying protocol exists. Growth is tied to staking penetration (low for Ethereum but growing over time) and the price of underlying asset (e.g. ETH).
- Scale begets scale: liquid staking is conducive to a winner-takes-all market because liquidity is a moat, with compounding network advantages for larger players
  - LDO has 29% share of staked ETH and is 8x larger than its next biggest competitor Rocket Pool. No competitor has gained material share.
- High margin and operating leverage business: operating a liquid staking protocol has low variable cost so it will be high margin at scale, as LDO itself doesn’t bear any of the operating cost of node validation

Why now?
- Fundamentals improving: Market share has improved after share losses earlier this year due to Eigenlayer and related liquid restaking protocols. Points farming for those protocols resulted in market share losses for Lido earlier this year, which are a finite-duration headwind that is now behind. The market may have misinterpreted Lido's market share declines as structural rather than one-time in nature.
- New value creation opportunity: The Lido Alliance has positioned Lido to compete effectively against EigenLayer and other restaking protocols and at the same time earn tokens in up and coming protocols. The combination of Symbiotic, Mellow, Drop, and other Alliance members could trigger capital migration from competitors to Lido, potentially growing Lido's market share for the first time in two years.
  - Recent data shows strong performance in Lido Alliance-related protocols (Symbiotic: $1.01B TVL, +225% in 7 days; Amphor: $82.7M, +129%; Mellow: $443.69M, +9.90%), contrasting with TVL declines in competing protocols (Renzo: $2.26B TVL, -24% in 7 days; Kelp DAO: $791.12M TVL, -23% in 7d); Eigenlayer: $14.15B TVL, -18% in 7 days).
  - As initial token distributions from EigenLayer restaking projects diminish, Mellow Finance’s more attractive airdrop opportunities are drawing additional capital to Lido, further boosting its market position and potentially increasing LDO's value.
  - Lido DAO is receiving significant token allocations from Alliance projects, aligning incentives and potentially adding value. For example, 10% of DROP and MLW tokens will be sent to a Lido Alliance legal entity after their respective TGEs, with 12-month locks followed by extended vesting periods.
Valuation is attractive at this level. LDO has pulled back 35% from the local peak or 23% relative to ETH, and is trading as low as it has been since 10/20/23, when ETH was trading 46% lower at $1,604. This represents $106mm revenue and $67mm run-rate earnings. We see 91% upside excluding any change in ETH price.
- ETH ETF approval could be a catalyst for increased attention to and activity in the Ethereum ecosystem. The next natural step would be to launch ETH ETFs that incorporate staking yield, which would be a tailwind to Lido fundamentals.
- Lido DAO is likely to clarify how LDO accrues value once pending legal cases are resolved. The first is the SEC vs Consensys lawsuit, part of which makes the claim that liquid staking is a securities transaction (timeline: legal proceedings 7/20-11/26, possible decision by late 2024 or early 2025). The second is the class action lawsuit against Lido in California that claims LDO a security, for which Lido DAO is seeking dismissal.
Cultural shift. Lido realizes they've fallen behind and we believe there is no a cultural shift and new sense of urgency underway internally. This is not measurable qualitatively, but these cultural inflections can be very powerful.
Underowned. We know many funds have sold out of Lido both due to over-indexing on near-term fundamentals weakening YTD and technical price action. As fundamentals start to turn, that narrative changes and we expect many investors to come back. If you are a fundamentals focused fund, missing on Lido is an unforgivable offense with career risk because it is such a classically high quality protocol with strong fundamentals.

Near-term Valuation and Reward/Risk
- Valuation – expensive on run-rate basis, has re-rated post merge
  - 23.2x EV/Revenue and 152.0x P/E on 2Q24 run-rate basis
  - 19.3x EV/Revenue and 50.6x P/E on 2024E base case
  - Justifiable for high-quality, high-growth infrastructure asset
- 270% 1yr upside to $5.95 PT
  - $106mm 2025E revenue at 63% margins = $67mm earnings
  - $67mm earnings at 50x P/E = $5.32bn market cap
- Downside scenarios
  - 29% 1yr downside to $1.40 PT (2023 Revenue at 40x EV/Revenue)
  - Technical downside: 8% downside to $1.45 PT (1yr low) or 72% to $0.45 (2yr low)
Long-Term Valuation
- $2.12tn TAM assuming modest price appreciation (total PoS blockchain market cap)
  - Assumes $15k ETH x 120mm ETH circulating supply = $1.8tn ETH market cap
  - Assumes ETH is 95% of the PoS market
- $562mm revenue at 35% staked, 33% market share, 5.1% staking yield and 5.0% take rate
- $449mm earnings at 80% margin (software-like, no taxes for now)
- ~8.4x upside to $13.48bn Market Cap / $13.48 PT at 30x P/E (in-line with high-quality growth)
  - V and MA trade at 25-30x P/E
  - ETH price sensitivity: every $2500 change in ETH price impacts PT by $1.50 and implied MOIC by 0.93x / implied IRR by 5%

•

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Comments (6)

close ⌘ /

Cody Poh

•

thanks so much for the write up - one quick question on my side

wondering if you find this investment compelling relative to ETH when in your base case scenario ETH goes up by almost 5x (i.e. from 3.1k to 15k) while LDO will only outperform that by a margin and do a 5.6x

Cryptodamus

•

Good Q. The difference between 5x and 5.6x might not be large over 5 years, but if the majority of the 5.6x gains come in the next year or sooner –– which I believe will happen –– then that’s a homerun. Plus, my long-term math here doesn’t consider the value of the Symbiotic stuff, which I ballparked at ~$500mm, so that’s an additional ~30% of returns.

Jason Kam

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Good timing: https://x.com/EricBalchunas/status/1813568531750899970

Jason Kam

•

Very thorough; thank you Cryptodamus.

Jason Kam

•

Thank you sir for the write-up. Agree valuation is attractive on a ETH basis vs. historical. A few Q's:

1 - Can you discuss the SEC risk factor further? Cases had been dropping w/ higher Trump odds = generally prob a nothing burger, but how strong is SEC's case here you think?

2 - It'd seem like a lot of the rerating in the short-term hinges on TVL shifting from Eigen ecosystem to Symbiotic ecosystem + ETH ETF -- do you have a strong opinion on what the potential airdrop value could be for stETH and whether Lock & burn could be apart of accruing such airdrops?

3 - Can you comment on the supply dynamic on (a) whether there's any lock-ups left and (b) whether there's any significant overhang or sellers ready to dump the token?

4 - Can you provide some more color on the timing of the value-capture re: buy&burn?

5 - The story and your PE-based math on future ETH price (btw we'd all go to Valhalla if it goes to 15k) is very very consensus. The same long-term thesis is very much true in May 24 and Oct 23, anything else they you didn't point out changed in your mind to want to be long here, aside from the valuation & Symbiotic?

Cryptodamus

•

(1) I have the strong view that nothing happens. A couple of recent rulings undermine the SEC’s case:

Coinbase Wallet Ruling: Judge Failla ruled that Coinbase Wallet was not acting as a broker/dealer, despite receiving transaction-based compensation. The key factor was that users retained custody of their private keys, unlike traditional securities dealers. MetaMask operates similarly, with users maintaining custody of their assets. This precedent weakens the SEC's argument that MetaMask is acting as a broker.

SEC vs. Binance Ruling: Judge Jackson's ruling in Washington D.C. undermined the SEC's position that secondary transactions of tokens are securities transactions. This is crucial because MetaMask Swaps facilitates secondary market transactions. If these aren't considered securities transactions, it significantly weakens the SEC's case against MetaMask.

(2) Lido-Alliance ecosystem could create $440mm - $591mm of value for stETH/LDO holders in the next year.

Drop raised at $40mm, while Mellow and Symbiotic are currently raising at $150mm and $250mm, respectively. Assuming those can 5x in the next year and that 5-10 other protocols join the Lido Alliance with a similar combined valuation, I think that could create $440mm of value to stETH/LDO if 10% is airdropped, which is the precedent set by the Drop and Mellow Lido Alliance applications.

Alternatively, if we sum the FDVs of EIGEN + ETHFI + ALT + PENDLE + REZ, then we can estimate the value of the Eigenlayer ecosystem at $11.82bn. If we assume the Symbiotic ecosystem will be worth half as much and that 10% will be airdropped to stETH/LDO holders, then that will be $591mm of value.

I think a capital return mechanism will look similar to what UNI has set up, which is staking for governance and in return receiving fee share (which would include any token allocations from Lido Alliance).

(3) LDO is 100% unlocked. 300M LDO is held by long-term investors who received their tokens in December 2020 with minimal selling to date. Another 70M LDO is held by Paradigm, which won't sell given they recently doubled down on the Lido ecosystem via Symbiotic.

(4) I know there are large holders focused on this and close with mgmt. in the background. Likely to follow resolution of SEC v. Consensys and the class action lawsuit.

(5) The hardest part about buying high quality compounders is that you rarely get an opportunity to do so at a reasonable valuation. It only happens when there is crisis and controversy. This is exactly that. We have the opportunity to buy a high quality compounder at a meaningful discount to its history and relative to ETH, because of the controversy, while fundamentals are actually improving, and there is a huge new value creation opportunity.