Key Points
A crypto analyst has shared his insights on the potential risks that the structure of the Ethereum ecosystem poses to Bitcoin and the wider crypto market. His analysis revolves around Ethereum’s liquid-staked tokens (LSTs), liquid-restaked tokens (LRTs), and stablecoins backed by these tokens, which he believes could trigger the next crypto bubble burst.
The Risk of Magic Money
In a post on his X platform, the analyst, Duo Nine, explains how Ethereum’s ETH is used to generate what he terms “magic money”. ETH holders can stake their ETH on Liquid staking derivatives (LSD) platforms, generating LSTs which can then be used on staking platforms to acquire LRTs. Duo Nine expresses concern that this system creates “magic money” as LSTs and LRTs seem to be created from nothing. He likens this to “fractional reserve banking”, where the economy’s money supply is artificially inflated.
Unlike the banking system, Duo Nine does not believe the crypto market can sustain such a system, predicting it will lead to a bubble burst. He refers to this bubble as one driven by irresponsible money creation due to greed. He is particularly critical of LSTs and LRTs like stETH and reETH, which he sees as the next big bubble. He singles out the restaking protocol EigenLayer as a cause for concern among users.
Stablecoins, which are backed by these LRT tokens, also come under scrutiny. Duo Nine predicts that once these LRTs start to mint stablecoins, the bubble will near its peak. He warns that these LRT-backed stablecoins are at risk, especially if ETH’s value declines significantly, which could cause them to depeg instantly. In the worst-case scenario, these stablecoins could become worthless, causing a “liquidation cascade” and widespread panic.
Duo Nine also warns against platforms like Blast, a layer-2 network that will use LST tokens and LST-backed stablecoins to provide “native yield” to its users. He argues that such a business model comes with significant risks, as it could lead to insolvency if the entire Blast network falls prey to greed. As evidence of the dangers of such stablecoins, he points to the implosion of Terra’s UST, an algorithmic stablecoin that also used “magic money” as backing.
The Implications for Crypto Users
Duo Nine goes on to explain how this situation could impact native ETH holders and crypto users in general. He paints a picture of a scenario where this LRT bubble grows to $50 billion, but is only backed by $5 billion or less in ETH. This imbalance could trigger a market crash if traders try to offset large portions of their LST and LRT tokens. This could lead to a crash in the value of LST and LRT tokens, a significant drop in ETH’s price, and the depegging or collapse of LST/LRT-backed stablecoins. This crash could even extend beyond the Ethereum ecosystem, with crypto users potentially turning to Bitcoin as a last-resort liquidity source in an attempt to exit their positions.
