stETH on Ethereum Bridges Skyrockets

NOV 08, 2022 • 5 Min Read

Craig Sweney

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🌅 Welcome!

The drama between CZ and SBF likely comes to an end as Binance signs a non-binding agreement to purchase FTX. Meanwhile, the US seized $3.36B of Bitcoin in an arrest associated with the Silk Road.

Today, we examine the amount of stETH currently on bridges and our Research team dives into DYAD, a new approach to decentralized stablecoins.

This is the Delphi Daily. Let’s dive in.


🚨 In Case You Missed It

  • US authorities announce that they’ve seized $3.36B worth of BTC in connection with the Silk Road marketplace.
  • Binance signs a non-binding agreement to acquire FTX.
  • A US Federal Judge rules that LBRY violated securities laws by selling LBC tokens without registering with the SEC.
  • BitDAO asks Alameda Research for proof of holdings following BIT’s sudden 20% drop.
  • The Central Bank of Russia plans on integrating crypto assets into their local financial system.

📊 stETH on Ethereum Bridges Skyrockets

  • Lido Finance deployed on Aribtrum and Optimism on Oct. 7. Since then, the amount of stETH held in Ethereum bridges has surged by over 700%.
  • Since the launch, the Arbitrum bridge has accumulated 7.6K stETH while the Optimism bridge has accumulated 7.1K stETH.
  • Since Sep. 1, the total amount of ETH staked with Lido grew from 4.16M to 4.52M, an increase of 8.7%. The week of Oct. 24 saw the largest amount of ETH staked since May.
  • A driving force behind the increased bridge and staking activity is LDO rewards. Lido is distributing 160K LDO on Optimism and 150K LDO on Arbitrum this month as it strives for more L2 integrations.
  • The rewards program aims to generate wstETH liquidity on Curve, Balancer, Kyber, Beethoven X, Beefy, and Velodrome.
  • ETH deposits to Lido surged from 8.5K ETH in the first half of September to 69.3K ETH in the latter half of the month. This was partly encouraged by stETH returning to parity with ETH.

⚡ Exploring DYAD: A New Approach to Decentralized Stablecoins

  • DYAD is a new algorithmic stablecoin set to launch by end of year or early next year. It borrows concepts from Ampleforth and DAI while adding NFTs into the mix.
  • ETH is the sole collateral asset. It’s built on immutable smart contracts with no governance mechanism and/or governance token. It can only be minted by holders of 10,000 limited-supply DYAD NFTs.
  • NFT holders can deposit ETH into the “ETH collateral vault,” and for every $1 worth of ETH deposited, 1 DYAD gets minted. However, before entering circulation, the DYAD first sits in the “DYAD damping vault.”
  • While in the DYAD damping vault, the NFT that minted the DYAD is marked as its exclusive owner. Only the holder of that particular NFT can withdraw it from the damping vault and release it into circulation.
  • When the NFT holder withdraws the DYAD from the damping vault, the DYAD goes directly to the NFT holder’s address. From there on, it can be freely transferred as an ERC-20 token.
  • NFTs keep track of their share of the damping vault. Another way to think of DYAD in a damping vault is the NFT’s DYAD balance. When DYAD is withdrawn from the damping vault, the NFT’s DYAD balance decreases accordingly.
  • The balance of DYAD in the damping vault is dynamic and expands or contracts based on ETH’s price. The amount of DYAD expands when the ETH price is up and contracts when the ETH price is down.
  • This mechanism allows the damping vault to match the USD value of ETH in the collateral vault, irrespective of price. Once in circulation, the DYAD supply can no longer be expanded or contracted by the protocol based on ETH collateral value.
  • To offset this, the protocol expands and contracts the DYAD supply in the damping vault more aggressively with the implicit goal of ensuring the total DYAD supply (damping + circulation) matches the ETH collateral vault in USD terms.
  • When removed from the damping vault, DYAD acts like any ERC-20 token and can be used as a stablecoin in DeFi, payments, or other use cases.
  • Anyone can redeem circulating DYAD for the ETH collateral, with 1 DYAD being redeemable for $1 worth of ETH.
  • A safety margin limits how much of the total minted DYAD can be circulating at any time. 1.5 DYAD must be in the damping vault for every DYAD in circulation. Once this threshold is reached, no additional DYAD can be released into circulation.
  • All NFT owners can decide how much of their DYAD balance to release into circulation. NFT holders are also responsible for over-collateralizing the DYAD they’ve minted.
  • By releasing DYAD into circulation, NFT holders essentially take on a levered ETH position and, therefore, more risk. If the protocol asks an NFT to burn more DYAD than it has in its balance, that particular NFT becomes insolvent.
  • As the protocol burns DYAD in the damping vault to avoid taking on bad debt, insolvent NFTs continue to accrue debt in the form of unburned DYAD.
  • When an NFT’s debt exceeds 0.01% of the ETH in the collateral vault, the NFT will get burned, and its debt will then be socialized across the remaining NFTs.
  • For more on DYAD, Delphi members can read our Delphi Pro report here.

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