Original title: Lido's Big Break?

Original author: Jack Inabinet, Bankless

Original translation: Deng Tong, Golden Finance

The dominance of Ethereum smart contracts has been challenged as never before in this cycle. Growing concerns that Ethereum will lose users to alternative L1s like Solana have led some in the community to advocate for prioritizing technical improvements to the L1 execution layer over increasing aggregated data availability bandwidth.

This shift will have a significant impact on the network. It will also have an interesting impact on the revenue of various ETH infrastructure protocols. Today, we will dive into how the shift in ETH priorities can bring huge benefits to the liquidity staking platform Lido and LDO holders.

Optimizing Execution

Ethereum L1 daily transactions have remained relatively stable at around 1 million transactions per day for the past four years, but transaction fee revenue has fallen sharply; in early 2021, Ethereum's transaction fee revenue was regularly over $20 million per day, but in 2024, it would be lucky to get that level of transaction fee revenue in a month.

Despite the obvious demand for Ethereum adjacent block space, as evidenced by the almost uninterrupted upward trend in L2 transaction throughput, Ethereum's revenue from such activity is extremely limited.

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

While rollups and L2s offer fast transaction times and low transaction costs, their users lack the same security guarantees as Ethereum L1, where their transactions are processed by a decentralized set of validators and the integrity of the blockchain is maintained by proven economic incentive schemes such as slashing.

Ethereum’s greatest strength is its world-class settlement guarantee, which guarantees that any user transaction will be reliably processed (assuming they can afford the necessary transaction fees), and many ecosystem thinkers believe that the time is right to combine this core capability with improved L1 execution.

While the significant roadmap deviations required to achieve this vision will require some controversial changes — such as increased hardware requirements or native parallelization — the implementation of such upgrades could reinvigorate Ether’s faltering narrative power by making Ethereum L1 the default landing point for all on-chain valuable financial transactions.

Simple Staking Economics

While an abrupt shift to execution-first seems unlikely at this point, it is an attractive path forward for the Ethereum ecosystem to consider.

The forward-looking nature of the market means that investors often try to “front-run” one another by positioning themselves to take advantage of a shift before it actually happens, in which case LDO could emerge as a leading performer in the coming weeks.

LDO’s recent outperformance, up 26% from its August 15 relative low, suggests that investors may have spotted the bull run brewing for the token.

A renewed focus on execution will drive more transactions to Ethereum L1, especially the most desirable computationally intensive, high-value DeFi transactions. Individual transaction costs will likely fall, but in this case, the total fees generated by all transactions are expected to increase, positively impacting the main variable behind Lido’s revenue: ETH staking yield.

Furthermore, assuming that an available Ethereum L1 leads to a measurable increase in blockspace demand while generating desirable second-order effects such as net ETH deflation, then Ethereum could become the more obvious smart contract platform choice from both an investment and usability perspective. If the restoration of this distinction increases the price of ETH, then Lido would stand to see greater USD-denominated profits for a given level of on-chain activity.

While discussions about shifting Ethereum roadmap priorities are still in the early stages (and controversial!), it is undeniable that these potential shifts could provide some strong incentives to reinvigorate L1 as a place where real users are happy to pay transaction fees for strong settlement guarantees. If this grand vision can be realized, then LDOs may finally start to perform well.

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