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A crypto analyst has offered insights into how the construction of the Ethereum ecosystem may deliver Bitcoin and the broader crypto market down. His evaluation centered on Ethereum’s liquid-staked tokens (LSTs), liquid-restaked tokens (LRTs) and stablecoins backed by these tokens and the way they might result in the following “bubble” burst. 

Magic Money That Could Lead To Bitcoin’s Downfall

In a post on his X (previously Twitter) platform, crypto analyst Duo Nine defined how Ethereum’s ETH is used to create magic cash, with customers being able to stake their ETH on Liquid staking derivatives (LSD) platforms. These customers are then in a position to make use of these LSTs on staking platforms the place additionally they get LRTs (liquid restaked tokens).

Duo Nine’s concern is his perception that this creates “magic money” as these LSTs and LRTs are created out of skinny air and derive their backing from principally nothing. He additionally famous that the invention of those LSTs and LRTs isn’t any totally different from “fractional reserve banking”, the place the cash provide of the economic system is expanded “from thin air.”

However, not like the banking system, the analyst doesn’t consider that the crypto market is well-equipped to maintain such a mirage, which is able to trigger the bubble to burst sooner somewhat than later. Duo Nine additional referred to this bubble as one which is solely “driven by ponzinomics and irresponsible money creation due to greed.”

That is why he isn’t enthusiastic about LSTs and LRTs like stETH and reETH, respectively, as he doesn’t see them as the following smartest thing in crypto. Instead, he labels them because the “next big bubble or ponzi.” He notably highlighted the restaking protocol EigenLayer, which he acknowledged ought to “worry” customers. 

Stablecoins Are In The Mix For Ethereum

Duo Nine additionally alluded to stablecoins, that are backed by these LRT tokens. According to him, the bubble is about to achieve its peak as soon as the crypto market begins to see these LRTs getting used to mint stablecoins. “The higher the market cap of those new shiny stablecoins backed by LRTs tokens, the bigger the bubble.” he additional claimed. 

The crypto analyst additionally highlighted how these LRT stablecoins are at large threat, contemplating that they derive their precise backing from ETH. As such, if ETH declines significantly, they might depeg immediately. In the worst-case situation, these stablecoins may additionally go to zero, Duo Nine added. He famous this might trigger a “liquidation cascade” and panic set in. 

Furthermore, Duo Nine warned of a platform like Blast, the layer-2 network which is able to use LST tokens and stablecoins backed by these LSTs to offer “native yield” to its customers. He defined {that a} enterprise mannequin like this comes with large dangers because it places customers in jeopardy if a complete community like Blast turns into bancrupt attributable to greed. 

To show his concept concerning the risks of such stablecoins, he alluded to Terra’s UST implosion, which precipitated the algorithmic stablecoin to run down. Terra is claimed to have additionally leveraged magic cash to again the stablecoin “while pretending it was real.” Eventually, greed took over, Duo Nine claimed. 

ETH value readies to check $3,000 | Source: ETHUSD on Tradingview.com

Why Crypto Users Should Be Concerned

Duo Nine elaborated on how this phenomenon can finally have an effect on native ETH holders and crypto customers on the whole. He highlighted a state of affairs the place this LRT bubble grows to $50 billion and solely has an precise backing of $5 billion in ETH and even much less. 

Such an imbalance may trigger a crash available in the market in a state of affairs the place merchants need to offset important parts of their LST and LRT tokens. 

The crypto analyst acknowledged that this might finally trigger LST and LRT tokens to crash whereas ETH’s value may additionally decline considerably. Meanwhile, the stables backed by LST/LRT tokens depeg or run to zero. This crash may additionally spiral past the Ethereum ecosystem, as crypto customers may look to Bitcoin because the “liquidity of last resort” in a bid to exit their positions. 

Featured picture from BitPay, chart from Tradingview.com