Why Liquid Staking Derivatives Should Fund Basic Research

$70B+ in LSTs is chasing marginal DeFi yields, creating systemic fragility and zero-sum competition. This capital is inert, providing no strategic advantage to the underlying protocol.

• Zero Protocol R&D Funding: Stakers are extractive, not contributive.
• Vulnerability Concentration: Yield farming amplifies smart contract and oracle risk.
• Missed Strategic Leverage: Capital is a weapon; protocols are leaving it holstered.

Redirect a 1-5% share of staking yield into a transparent, on-chain treasury for grants and core development. This turns passive capital into an active strategic asset.

• Sustainable Public Goods Funding: Creates a perpetual, protocol-aligned revenue stream independent of token inflation.
• Enhanced Protocol Security: Funds critical audits, client diversity (e.g., Ethereum's Consensus Layer), and cryptographic research.
• Competitive Moat: Financed R&D (e.g., zk-proofs, MEV mitigation) becomes a defensible advantage vs. forks.

Lido's community approval of a 2% treasury fee from node operator rewards demonstrates the model's viability. This is a blueprint for direct, scalable R&D funding.

• Proven Governance Path: Major stakeholders (e.g., Coinbase, Rocket Pool) can adopt similar frameworks.
• Transparent & Accountable: On-chain treasury and grant voting (e.g., Optimism's Citizen House) ensure efficient capital deployment.
• Network Effects: Funded innovations (like DVT) increase staking resilience, attracting more capital—a virtuous cycle.

Venture capital demands hyper-growth, not incremental science. This creates a funding gap for the foundational cryptography and protocol research that underpins the entire ecosystem.

• Zero commercial upside for private capital in long-tail cryptography.
• Time horizon mismatch: VCs want 5-7 year exits; research breakthroughs can take a decade.
• Creates systemic risk: underfunded core infra leads to catastrophic bugs and protocol stagnation.

Direct a portion of staking yield (e.g., 1-5% of rewards) into a sovereign research treasury via on-chain governance. This creates a sustainable, non-dilutive funding flywheel.

• Capital efficiency: Leverages existing $70B+ LSD TVL without touching principal.
• Alignment: Funders (stakers) are the primary beneficiaries of a more secure, scalable network.
• Transparency: All grants, milestones, and fund flows are on-chain, auditable public records.

EigenLayer's restaking model implicitly creates a massive security budget for Actively Validated Services (AVSs). This is a blueprint for funding research AVSs.

• Model: Dedicate a slice of restaking rewards to an "R&D AVS" that funds peer-reviewed work.
• Mechanism: Researchers stake reputation; the AVS slashes for failure to deliver.
• Precedent: Creates a credible commitment far larger than any grant foundation.

Shift the success metric from token price to quantifiable protocol improvements. This aligns capital with the long-term health of the network.

• Metrics: Fund research that reduces gas costs by >20%, increases TPS by 10x, or eliminates entire attack vectors.
• Governance: Stakers vote on research directions, creating a meritocratic funding pipeline.
• Outcome: Transforms LSDs from passive yield instruments into active governance tools for steering protocol evolution.

LSD protocols like Lido and Rocket Pool capture value from the base layer but reinvest minimally into core R&D. This creates a free-rider problem where security and scalability research is underfunded, making the entire ecosystem fragile.

• Risk: Long-term protocol ossification and vulnerability to novel attacks.
• Solution: Mandate a small protocol fee (e.g., 0.5-2% of yield) directed to grants for client diversity, consensus research, and cryptographic audits.

Without structured funding, critical research agendas are set by a handful of foundations or for-profit entities. This skews development towards features that benefit incumbents rather than foundational improvements.

• Risk: Ethereum Foundation dominance or corporate capture of the roadmap.
• Solution: Create a credibly neutral, LSD-funded research DAO that uses quadratic funding or peer review to distribute grants for work on PBS, DVT, and light clients.

LSD yield is generated on L1, but innovation and user growth happen on L2s (Arbitrum, Optimism, zkSync). This creates a fiscal disconnect where the security provider (L1) is not funded by the scalability innovators (L2).

• Risk: L1 becomes a costly, stagnant settlement layer, threatening the security of all rollups.
• Solution: LSD protocols should fund cross-layer research into shared sequencing, interoperability, and enshrined rollups to ensure symbiotic growth.

The current LSD model is optimized for fee extraction (staking rewards → staker yield) not value creation (funding improvements that increase total network utility and, thus, staking rewards).

• Risk: Short-term profit maximization leads to long-term ecosystem stagnation and declining real yields.
• Solution: Frame R&D funding as a strategic reinvestment. A 1% fee boosting network value by 10% is a 10x return for stakers.

If LSDs are deemed securities, their revenue streams could be frozen or seized. Funding decentralized, public-good research creates a legitimacy moat by demonstrating clear utility beyond financial speculation.

• Risk: SEC action cripples funding for all ecosystem development overnight.
• Solution: Proactively allocate funds to applied cryptography and infrastructure research, building a defensible narrative of technological contribution.

Top cryptographers and systems engineers are lured to well-funded app-layer companies (e.g., Uniswap Labs) because core protocol research is grant-dependent and unstable. This starves L1 of the talent needed for its own survival.

• Risk: Inability to implement critical upgrades (e.g., Verkle trees, single-slot finality) on schedule.
• Solution: Use LSD fees to create endowed research positions and long-term fellowships, making core R&D a viable career path.

Protocols like Ethereum and Solana generate billions in staking rewards, but this capital is trapped in a feedback loop of subsidizing liquidity and marketing. Foundational R&D—like new VMs, consensus mechanisms, or cryptographic primitives—gets starved because it lacks immediate ROI.

• $50B+ in staking rewards annually flows to validators, not researchers.
• Treasury governance is dominated by token-weighted votes favoring mercenary capital.
• The result is a fragile tech stack vulnerable to long-term scaling and security threats.

Liquid staking tokens (LSTs) like Lido's stETH or Rocket Pool's rETH are programmable yield-bearing assets. A fraction of this yield can be automatically diverted to a sovereign, transparent research fund via smart contracts, creating a sustainable funding flywheel.

• 1-5% of staking yield could fund research without impacting user APY meaningfully.
• Transparent on-chain governance for grant allocation, moving beyond VC gatekeeping.
• Creates a perpetual endowment model, aligning long-term protocol health with researcher incentives.

The success of Gitcoin Grants and Optimism's Retroactive Public Goods Funding (RetroPGF) proves the demand and efficacy of community-driven research funding. LST yield provides a superior, automated revenue source compared to volatile donations.

• $50M+ distributed via Gitcoin to OSS and crypto research.
• RetroPGF funds work after it proves value, reducing speculation.
• LST funding is predictable, recurring, and scales with network adoption.

Current scaling solutions (Arbitrum, zkSync, Starknet) are incremental. The next breakthroughs—like succinct ZK proofs, parallel execution engines, or secure bridges—require years of fundamental research. LST-funded labs could tackle these problems head-on.

• ZK Proofs: Reduce proving times from minutes to seconds.
• Consensus: Enable sub-second finality for ~$100B+ TVL networks.
• Interop: Fund robust intent-based bridging research beyond LayerZero and Axelar.