How the Structure of the Ethereum Ecosystem Could Affect Bitcoin and the Crypto Market
A crypto analyst has raised concerns about the potential impact of Ethereum’s ecosystem on Bitcoin and the broader crypto market. The analysis focuses on Ethereum’s liquid-staked tokens (LSTs), liquid-restaked tokens (LRTs), and stablecoins backed by these tokens, suggesting that they could contribute to the next “bubble” burst.
The Creation of “Magic Money” on Ethereum
The analyst, Duo Nine, explains that Ethereum’s ETH is used to create what he calls “magic money.” Users can stake their ETH on Liquid staking derivatives (LSD) platforms, which allows them to obtain LSTs. These LSTs can then be used on staking platforms to acquire LRTs.
The Concern: “Magic Money” Backed by Nothing
Duo Nine raises concerns about this process, arguing that LSTs and LRTs are created out of thin air with no substantial backing. He compares it to fractional reserve banking, where money is created from nothing. However, he believes that unlike traditional banking systems, the crypto market is not equipped to sustain such a mirage, leading to an inevitable burst of the bubble driven by greed.
Labeling LSTs and LRTs as the Next Big Bubble
Duo Nine expresses skepticism about the potential of LSTs and LRTs like stETH and reETH, viewing them as the “next big bubble or ponzi.” He specifically highlights concerns about the restaking protocol EigenLayer, which he believes should worry users.
The Role of Stablecoins in Ethereum’s Ecosystem
Stablecoins backed by LRT tokens are also mentioned by Duo Nine. He predicts that the bubble will reach its peak when these LRTs are used to mint stablecoins. According to him, the higher the market cap of these stablecoins, the bigger the bubble.
Risks for LRT Stablecoins
Duo Nine warns that LRT stablecoins are at significant risk since they rely on ETH as their backing. If ETH experiences a considerable decline, these stablecoins could instantly depeg or even go to zero. This could trigger a “liquidation cascade” and panic among users.
The Dangers of Platform Risks
Duo Nine highlights the risks associated with platforms like Blast, which plans to use LST tokens and stablecoins backed by LSTs to provide “native yield” to users. He warns that such business models expose users to jeopardy if the entire network becomes insolvent due to greed.
Implosion of Terra’s UST
To support his theory about the dangers of stablecoins, Duo Nine mentions Terra’s UST implosion. Terra allegedly used magic money to back the stablecoin while pretending it was real, ultimately leading to its downfall due to greed.
Why Crypto Users Should Be Concerned
Duo Nine explains how this phenomenon could eventually affect native ETH holders and crypto users in general. If the LRT bubble grows significantly without sufficient backing from ETH, it could cause a crash in the market when traders try to offset their LST and LRT tokens. This crash may lead to a decline in ETH’s price and depegging or running to zero for stables backed by LST/LRT tokens. As a result, crypto users may turn to Bitcoin as a liquidity exit strategy, impacting both Ethereum and the broader crypto market.
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