Author | Day Produced by | Vernacular Blockchain (ID: hellobtc)
The completion of the Shanghai upgrade in April made the staked ETH redeemable, thus completing the LSD track. According to a tweet by 21Shares research analyst Tom Wan, the number of pending validators on the Ethereum beacon chain has reached 33,450, a record high, indicating that a large number of users are trying to participate in staking. At the same time, ETH staking deposits have exceeded withdrawals, with a net staking balance of approximately 435,000 ETH, and staking returns have also hit a new high of 8%.
In the past month since the Shanghai upgrade, 70% of Ethereum staking withdrawals have come from CEXs such as Kraken, Coinbase, and Binance, and some of them have flowed into LSD protocols such as Lido and SSV. Although the price of LSD-related tokens has fallen due to the weakening of positive factors, the LSD track is one of the main narratives of the 23rd year or even the next bull market. The Ethereum staking scale is 33.1 billion US dollars, the total locked volume of the DeFi market is 90 billion US dollars, and the staking market size is 36.7% of the DeFi market. The LSD track deserves long-term attention. LSDFi, as a product derived from LSD, will gradually enter everyone's field of vision as the LSD track gradually improves and the market scale expands. At present, LSDFi is a very new concept and has not been tested by the market like LSD. The projects are uneven. The projects mentioned in this article are just to facilitate everyone to understand the possible development direction and application of the relevant track. Today, let's take a brief look at the relevant knowledge of LSDFi. This article is only for the popularization of relevant knowledge and does not make investment advice.
01 What is LSD?
To understand LSDFi, we must first understand the relevant knowledge of LSD. Liquid Staking Derivatives, referred to as LSD, is a liquid staking derivative. Users pledge tokens in exchange for certificates through joint staking. LSD represents the staked assets of the holder. Holding LSD can not only enjoy the benefits of staking tokens, but also participate in derivatives exchange. Here, taking ETH as an example, it is simply understood that users own ETH assets, and ETH itself is issued at a rate of about 4% per year due to its PoS mechanism. Users can pledge their ETH assets to obtain this part of the issuance fee. After staking ETH, you will be given a new certificate at a ratio of 1:1 (such as stETH obtained by staking ETH through Lido), and the value of this certificate (stETH) is not much different from the value of the ETH you staked, and it can be circulated at will.
The introduction of LSD not only enhances the security and stability of the Ethereum network, but also maintains the flexibility of assets. Here is a brief introduction to the features of several mainstream LSD projects:
Market share of each project in LSD track: defillama
Lido: Uses a decentralized validator network to ensure the security and decentralization of the network. Lido accounts for more than 70% of the ETH LSD market share, and its stETH is also the most popular liquidity pledge token, and stETH is also widely accepted as collateral;
Coinbase Staking: With Coinbase’s influence in the crypto world, it also has a significant share in the LSD track. Its user-friendly interface and seamless integration with Coinbase products provide greater liquidity and flexibility than other staking protocols.
Rocket Pool: uses a decentralized node network that allows any node operator to participate in network verification. Anyone can become a node by staking 16 ETH and RPL worth 1.6 ETH;
Frax Ether: Frax Finance owns 20 million veCRV and controls Convex through bribery to adjust the Curve liquidity pool, making its staking yield higher than other LSDs;
Ankr: Provides a variety of blockchain services and products, such as node deployment, developer tools, etc. Users can enjoy the convenience of blockchain technology in one stop;
SSV: As the underlying protocol, it saves node operation and maintenance costs for staking service providers such as Lido through its own scale effect.
From the above, we can see that the first generation of LSD projects mainly solve the problems of lowering the staking threshold (ETH quantity requirements, user staking convenience, no need to build nodes), releasing liquidity (LSD can participate in simple DEFI activities), improving network security, decentralizing operations, and improving node construction. The common goal of these solutions is to solve the pain points faced by Ethereum staking, and the profits obtained mainly come from the issuance of Ethereum (some protocols also charge management fees from it).
02 What is LSDFi? What projects are currently testing the waters?
LSDFi = LSD+DeFi, that is, DeFi products based on LSD. The purpose of LSDFi is to improve the capital efficiency of LSD and achieve higher returns through layers of nesting dolls (the composability of DeFi). Let's take a brief inventory of the current LSDFi projects on the market and possible future directions to help us understand the relevant concepts.
The development direction of LSDFi (note that some of the projects below are still in the early stages, we are only learning, not as investment standards, some of the track projects below have some overlapping businesses, for ease of understanding, we classify them): 1. Trading direction, increase LSD liquidity LSD aggregate trading: At present, due to the different market share and liquidity of LSD Token, the usage scenarios are actually not high, such as the exchange between xxETH, and aggregate transactions like Curve, which increase LSD liquidity while occupying the market share of LSD asset liquidity.
LSDx Finance: LSDx Finance aims to become a DEX with high barriers like Curve in the LSD asset segments (such as stETH, FrxETH, and rETH), effectively capturing the market share of LSD asset liquidity.
Margin exchange: Use xxETH as margin to participate in derivatives and options exchange.
Pendle Finance: Split the interest and principal of xxETH and tokenize them, and use these tokens for exchange. Investors can exchange the future income of LSD assets and increase market liquidity.
2. High APY attracts liquidity mining: supports xxETH to participate in liquidity block production and re-staking of xxETH
Yearn Finance: Issues yETH based on a basket of xxETH for DeFi activities, increasing returns while diversifying risks;
Eigen Layer: Provides multiple staking methods: LSD staking, xxETH is staked on EigenLayer; LSD LP staking, such as Curve's stETH-ETH LP Token is staked on EigenLayer again;
Increase staking income through vote bribing and other means: The project owner has certain control over the top DeFi projects and encourages participation in staking by adjusting pool rewards
Aura Finance: Aura affects the rewards of LSD LP related pools by affecting the BAL reward distribution weight, thereby increasing staking returns;
Frax Finance: Launched frxETH, which increases the fee income and re-staking income obtained by frxETH group LP by adjusting the funding pool emission of the Curve platform.
Protocol dividends: similar to pledge dividends in liquidity mining.
unshETH: A protocol that improves the decentralization of validators through dynamic allocation of incentives, giving higher rewards to LSDs with low market share, thereby promoting the overall decentralization of the Ethereum staking track;
3. Improve capital utilization Leverage: Support xxETH high leverage for exchange arbitrage.
Gearbox Protoco: Supports leveraged lending of xxETH. In leveraged lending, xxETH and debt must be the same asset. Assets borrowed in Gearbox can only be used in the account and can only interact with supported whitelist protocols to prevent users from withdrawing funds and running away. Similar to CEX, after high-leverage lending, assets can only be used within the platform and cannot be withdrawn; circular lending, multiple mortgage lending, and amplification of capital efficiency.
AAVE: Supports stETH revolving loans, achieves multiple leverage borrowing, and improves capital utilization;
AAVE Revolving Loan Process
4. Asset issuance Issue new assets anchored to a basket of xxETH, conduct various DeFi activities, and increase LSD liquidity
MakerDAO: ETHD is issued based on a basket of xxETH. ETHD can be used as collateral to borrow DAI, which can be used for other DeFi activities.
Lybra Finance: Pledge xxETH to mint interest-bearing stablecoin eUSD (eUSD’s security pledge rate is 160%, APY 7.2%). eUSD holders can obtain more profits through DEFI activities.
From the above, we can see that the goal of all LSDFi products is to promote the improvement of Ethereum staking capital efficiency, mainly starting from improving staking income and increasing LSD liquidity.
The income of the LSD project mainly comes from the additional issuance of Ethereum, while the additional income of LSDFi is mainly achieved through DeFi nesting dolls, project subsidies, bribery and other methods.
What are the current problems with LSDFi?
- Contract risk. Generally, the more complex the contract, the more likely it is to go wrong;
- When the market fluctuates greatly, various DEFI nesting dolls are prone to liquidation;
- The track is in its early stages and new projects are prone to failure.
03 Is the LSDFi track worthy of long-term attention?
Is LSDFi worth paying attention to in the long term? Let’s first look at the performance of the pledge data after the Shanghai upgrade: Since the Shanghai upgrade on April 13, except for the serious net outflow in the first few days after the Shanghai upgrade, the number of pledges even exceeded the number of withdrawals in the following days. At present, ETH pledge deposits have exceeded withdrawals, and the net pledge balance is about 435,000 ETH.
Ethereum net withdrawals since Shanghai upgrade: token.unlocks
After the Shanghai upgrade, the locked amount of centralized staking (CEX such as Kraken, Coinbase, Binance, etc.) decreased, while the locked amount of decentralized staking protocols increased.
Ethereum staking changes by category: dune
In particular, the staking volume of protocols such as Lido, Rocket Pool and Frax LSD has increased. On April 13, a total of about 7.73 million Ethereum was locked in the LSD protocol, and by May 11, it increased to 8.73 million ETH, worth $15.9 billion. This is mainly because these LSDs allow users to participate in a series of DeFi transactions and borrowing applications using their Ethereum-based derivatives.
Changes in the staking market of Lido and other protocols: Deflamming
Currently, the total amount of Ethereum pledged is 18 million, worth 33.1 billion US dollars, and the pledge rate is 14.96%. Compared with other public chains, which often have a pledge rate of 50% or 60%, there is still a lot of room for improvement. Of course, this is also largely related to the fact that Ethereum is more decentralized.
Staking Reward
The scale of Ethereum staking is 33.1 billion US dollars. According to defillama data, the total locked amount of the DeFi market is 90 billion US dollars, and the scale of the staking market accounts for 36.7% of the DeFi market. It can be said that staking has been proven to be a viable way to earn passive income. With the arrival of the bull market, Ethereum staking, as a high-quality interest-bearing asset, will surely attract more conservative investors with a stable annualized rate.
Moreover, the price of Ethereum will also increase. It is not an exaggeration to regard LSD as a market with a scale of hundreds of billions. In the last bull market, DeFi was one of the important drivers, and in the future, the LSD track will surely become one of the main narratives of the next bull market.
As the scale of the pledge market expands and the basic soil is built, the emergence of LSDFi and the pursuit of higher returns by some people will become inevitable.
04 Summary
Overall, the most difficult market for cryptocurrencies has passed. With the development of the industry, with high-quality soil like LSD, I believe that more LSDFi innovative projects will emerge. Do you think LSDFi is worth paying attention to in the long term? Why? Welcome to leave a message in the comment area.
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