6 min read

stETH is the decentralized reserve currency for the sovereign internet


  • Ethereum is a neutral, decentralized world computer and Ether serves as a natural candidate for the base money in this digital economy
  • Holding or using Ether incurs an opportunity cost, as it could be used for staking to secure the network, which yields a return in exchange for the risk of slashing.
  • Lido's stETH democratizes access to the risks and benefits of validation without compromising liquidity or fungibility, and has other features that make it a suitable decentralized reserve currency in the internet of value

Ethereum is a neutral, decentralized world computer

There’s an intriguing idea that the fabled metaverse of the future (cursed meme) actually exists already. Millions of people live most of their waking hours as ‘avatars’ in some respect. Whether they are a name + surname combination on Outlook, a videogame athlete or a milady, digital existences already play an outsize role in the lives of many, and I expect the number of people in this condition to increase with time.

In this context, Ethereum is the ultimate world computer, allowing people to form partnerships, transact amongst each other, and intermediate complex financial relationships1 in a peer-to-peer way without the need for government oversight to supposedly protect users. Today, while the digital economy remains a curiosity for most normal people, it has the potential to be tomorrow’s neutral mediator in a complicated and mistrustful multipolar world.

In a world of BRICs/NATO/NAM with no persuasive hegemon, Ethereum is a sort of future digital Switzerland. A neutral network that can credibly help maintain capital flows, trade and shitcoins all around the world regardless of the state of trust or geopolitics. This neutrality confers on it an innovative and important new variety of sovereign dominion. The more out of reach this base network is for any one government or organization, the more valuable it becomes for everyone, including governments.

This emergent, sovereign, internet economy needs a common vocabulary for exchange to minimize friction. Given Ether’s preponderance as an industrial commodity for the space, it is a natural candidate as the base money too. Ether itself already satisfies many traditional functions of money, such as medium of exchange (Sotheby's quotes in ETH), store of value (would you rather hold ETH or US government coins?), and unit of account (Etherscan is the ultimate auditor). However, it is also a commodity money because it can be used to pay for transactions and has value as fuel for gas.

Holding or using Ether incurs an opportunity cost

Because of this commodity characteristic, holding or using pure Ether incurs an opportunity cost. One of its most productive uses is as collateral for staking to secure the network, which yields a return in exchange for risk of slashing. Ether could be used to validate the network but is instead being held or used as gas. Would we still regard pure gold in the same way, if in order for gold to retain its ‘goldness’ you had to stake it and earn some amount of risk/return? It would obviously still be valuable to hold, but you might hesitate to mint it into coins.

Liquid staking tokens, like Lido's stETH, allow people to delegate validating the network. This democratizes access to the risks and benefits of validation, and does so without compromising liquidity or fungibility. Furthermore, stETH in particular has the features, decentralization and scale to become the standard reserve currency in this new ecosystem centered on the internet of value (let’s reclaim this useful term from the WEF bugmen).

Lido’s stETH is a compelling candidate as a decentralized reserve currency

stETH allocates entirely to Ether's most productive default use-case, network staking, without compromising on key characteristics of money. stETH returns 90% of the rewards to users just by holding it. Finally, the Staking Router (Lido’s marquee v2 feature), will establish stETH as the most decentralized guarantor of Ethereum network security by creating a dynamic market for stake allocation on behalf of holders.

stETH allocates its assets to the most productive default use-case for Ether

stETH represents a 1:1 pro-rata share on Ether staked using Lido. To keep the tracking value as close to 1:1 as possible, stETH rebases once a day, delivering a real-time risk-loaded interest rate to holders. This design choice sets stETH apart from many other liquid staking tokens. stETH also inherits the benefits of ERC-20 tokens, such as transferability and standardization, while layering in one of the most productive default use-cases for the underlying commodity.

We can extend SebVentures' cryptobanking diagrams for DeFi protocols to Lido by drawing stETH in circulation as liabilities and ETH staked in validators as the assets. Clean stablecoin-like simplicity, with a single focus.

Illustrative schematic capital structures as an illustration

stETH returns 90% of the rewards to stETH users just by holding it

As we wind the clock back to a world of >0% interest rates, yields on developed economy government securities have increased to as high as 5% depending on the maturity (and the government). However, savings accounts have failed to follow suit. The average deposit rates in the US show a disconcerting rent extraction on the part of American banks, whose last remaining value proposition at this point is to stand between between US government debt and depositors.

At time of writing, the range of rate differences across maturities between US dollar deposit accounts and US government treasury yields varied between 2.47% and 4.77%. Rather than going from government interest payments to US dollar holders, this is all getting stuck inside banks for ? reasons.

stETH fulfills the disintermediation promise of DeFi with minimal extraction as a stake aggregator, returning 90% of the underlying Ether staking rewards to stETH holders on a regular basis–an industry leader among staking services on this basis. It is fundamentally a thin protocol that aspires to become a neutral settlement layer backed by decentralized Ether staking.

Lido's Staking Router will establish stETH as the most decentralized guarantor of Ethereum network security

Today, Lido's stETH validator set is a diverse group of node operators with broad geographic and jurisdictional exposure. Lido’s early and user-friendly launch has been key to keeping Ethereum's validator set decentralized. The biggest risk to the growth of Ethereum is for centralized providers such as Liquid Collective, Coinbase, and so forth, to take a large or controlling share of network validators. Centralized validators have a role to play in overall security, but at length could compromise the network they are staking to ostensibly protect. Lido's early release of stETH preempted the formation of large centralized oligopolies and arguably created the conditions for the dynamic marketplace of liquid staking tokens that we know today.

Lido's Staking Router, set to launch in v2, will turn stETH into an aggregator by allocating Ether to groups or types of node operators, allowing for the emergence of a dynamic market in Ether allocation. This feature marks the start of solo staking as part of Lido's validator sets, offsetting their limited capacity for stake with the benefits of greater decentralization and network security. The Staking Router has the potential to create a validator agnostic platform for many different types and approaches to staking.

Evolution of an illustrative schematic capital structure in Lido v2

As the fight shapes up between centralized staking providers and decentralized protocols such as Lido, the Staking Router will provide the opportunity for decentralized validators to rally under the network effects of stETH and make a stand for Ethereum’s security against monolithic corporations.

stETH is one of the most interesting innovations in a newly sovereign supranational space, in its role as a standard-bearer currency for the internet of value, and a well-designed stablecoin in its own right.

1: One of the major use-cases people have found for this network is dollar-denominated stablecoins. I'm a fan of Dai, for example, as the perfect vehicle for world dollarization and neutral access to a settlement layer of dollar-denominated value. The self-governing bodies in Maker governance, admittedly, look a bit unhinged when viewed with a traditional lens. But the discussions take place in public and decisions are voted on in full view of the blockchain, which is actually an improvement relative to having lizard people in boardrooms make decisions behind closed doors. When we say ‘systemically important’ we really mean ‘we have surrendered our society as hostages to them’.

Note: adcv is a Chef at Steakhouse Financial, which serves as the Finance Workstream for Lido Finance and MakerDAO