Ethereum LSTs, LRTs, And Stablecoins: Decoding The Effects Of ‘Magic Money’ On Bitcoin And Crypto

A crypto analyst has provided insights into how the structure of the Ethereum ecosystem could bring Bitcoin and the broader crypto market down. His analysis focused on Ethereum’s liquid-staked tokens (LSTs), liquid-restaked tokens (LRTs) and stablecoins backed by these tokens and how they could lead to the next “bubble” burst. 

Magic Money That Could Lead To Bitcoin’s Downfall

In a post on his X (formerly Twitter) platform, crypto analyst Duo Nine explained how Ethereum’s ETH is used to create magic money, with users being able to stake their ETH on Liquid staking derivatives (LSD) platforms. These users are then able to use these LSTs on staking platforms where they also get LRTs (liquid restaked tokens).

Duo Nine’s concern is his belief that this creates “magic money” as these LSTs and LRTs are created out of thin air and derive their backing from basically nothing. He also noted that the invention of these LSTs and LRTs is no different from “fractional reserve banking”, where the money supply of the economy is expanded “from thin air.”

However, unlike the banking system, the analyst doesn’t believe that the crypto market is well-equipped to sustain such a mirage, which will cause the bubble to burst sooner rather than later. Duo Nine further referred to this bubble as one which is simply “driven by ponzinomics and irresponsible money creation due to greed.”

That is why he isn’t excited about LSTs and LRTs like stETH and reETH, respectively, as he doesn’t see them as the next best thing in crypto. Instead, he labels them as the “next big bubble or ponzi.” He particularly highlighted the restaking protocol EigenLayer, which he stated should “worry” users. 

Stablecoins Are In The Mix For Ethereum

Duo Nine also alluded to stablecoins, which are backed by these LRT tokens. According to him, the bubble is about to reach its peak once the crypto market begins to see these LRTs being used to mint stablecoins. “The higher the market cap of those new shiny stablecoins backed by LRTs tokens, the bigger the bubble.” he further claimed. 

The crypto analyst also highlighted how these LRT stablecoins are at huge risk, considering that they derive their actual backing from ETH. As such, if ETH declines considerably, they could depeg instantly. In the worst-case scenario, these stablecoins could also go to zero, Duo Nine added. He noted this could cause a “liquidation cascade” and panic set in. 

Furthermore, Duo Nine warned of a platform like Blast, the layer-2 network which will use LST tokens and stablecoins backed by these LSTs to provide “native yield” to its users. He explained that a business model like this comes with huge risks as it puts users in jeopardy if an entire network like Blast becomes insolvent due to greed. 

To prove his theory about the dangers of such stablecoins, he alluded to Terra’s UST implosion, which caused the algorithmic stablecoin to run down. Terra is said to have also leveraged magic money to back the stablecoin “while pretending it was real.” Eventually, greed took over, Duo Nine claimed. 

Why Crypto Users Should Be Concerned

Duo Nine elaborated on how this phenomenon can eventually affect native ETH holders and crypto users in general. He highlighted a situation where this LRT bubble grows to $50 billion and only has an actual backing of $5 billion in ETH or even less. 

Such an imbalance could cause a crash in the market in a situation where traders are looking to offset significant portions of their LST and LRT tokens. 

The crypto analyst stated that this would eventually cause LST and LRT tokens to crash while ETH’s price could also decline significantly. Meanwhile, the stables backed by LST/LRT tokens depeg or run to zero. This crash could also spiral beyond the Ethereum ecosystem, as crypto users could look to Bitcoin as the “liquidity of last resort” in a bid to exit their positions.