LSDFi is one of the fastest growing categories in 2023 as TVL in LSDFi protocols has increased by 5,870% since January. What makes this Defi product attract such huge inflows in the context of this market? What is the recent bear market as well as the potential and investment opportunities with LSDFi in the near future?
What is LSDFi?
LSDfi stands for Liquid Staking Derivatives Finance, referring to DeFi protocols (including Dex, Lending, Yield,...) built to increase use cases for LST (stETH, RETH,...) . With LSDFi, users participating in staking now have more financial service options to increase capital efficiency and optimize profits.
Context of LSDFi's birth and potential for growth
The LSDFi scene was born
The strong development of LSDs (Liquid Staking Derivatives) protocols is the main reason behind the birth of LSDFi projects.
Since the Ethereum network switched from POW to POS, anyone can become a validator by staking ETH to the network and receive rewards. However, before the Shapella update, there were 2 main barriers that prevented the majority of users from participating in Sstaking:
Finance: need at least 32 ETH to participate in Sstaking, this is a large number for most cryptocurrency investors. Furthermore, this ETH will be locked and therefore you will be "stuck in capital", unable to invest in other opportunities.
Equipment: requires a sum of money and knowledge to invest and operate equipment for Sstaking.
The mechanism that helps LSD thrive
At this time, Liquid Staking platforms such as Lido, RocketPool,... have appeared to solve the above two problems, users can now stake the amount of ETH they want. Liquidity is also improved because when you stake through LSDs, you will receive back LSTs (liquid staking tokens) to use in Defi services. In short, with its outstanding features, LSD protocols make staking closer and more attractive to all users.
However, it was not until the Shapella upgrade that LSD's TVL really exploded as millions of ETH poured into the protocols. At the same time, the market shows a strong need to develop LSDfi projects to further explore LST use cases and serve growing user needs.
Development potential
The room for development is still very large, tens of billions of dollars may flow into this trend because:
The ETH Staked rate is only 22.68%, BNB Staked is 14.62%, much smaller than the 40-70% figure of other Pos networks such as Solana, Cardana, Solana.
Of the $49.51B ETH being staked, LSD protocols account for about 45% with TVL reaching $22B.
Although the TVL of LSDFi protocols has increased dozens of times since January 2023, it has only reached about $870M, accounting for less than 4% of LSD's TVL.
Remember, the more ETH staked into Liquid Staking platforms, the more LST will be issued and thus the more LSDFi projects will be used and grow.
LSDFi ecosystem
LSDFi ecosystem
With LSDFi projects, users participating in Staking not only take advantage of stable annual rewards, but can also earn other sources of income. LSDFi currently includes long-standing DeFi projects that integrate LSDs (MakerDao, Curve, Aave,...) and new projects built entirely on LSDs, which can be divided into 6 main categories.
DEX
DEX is a very important piece of the puzzle for the LSDFi sector. Previously, if you wanted to withdraw staked ETH, you had to wait a while in line to withdraw. However, with DEX, you can immediately exit your position by swapping #LST to ETH. Therefore, LSDfi needs a DEX to facilitate instant exchange for native ETHEther.
Curve, Balancer, Uniswap and Maverick are the leading DEXs today. Currently, LSTs transactions are mainly carried out on Uniswap. Maverick is a new project but is also attracting significant transaction volume.
LST trading volume on DEXs
Lending
Lending is the basic and most frequently used financial service by users in Defi. Users can stake LST tokens such as stETH to make desired loans.
Aave is the largest lending protocol for LST, monopolizing the LST lending market share of over 90%, followed by Compound, Morpho, Silo, & FraxLend. Notably, in the structure of the most used tokens for collateral on Aave, LST even surpasses WETH when accounting for 33.21% of the total protocol. This shows that LST is being used more and more commonly.
LST makes up the majority of the structure of low-positioned tokens on Aave
CDP Stablecoin
Stablecoins are perhaps one of the most successful applications of cryptocurrency. Users can mint CDP stablecoins by depositing and locking LST into the protocol. The stablecoin mint allows users to hedge against ETH price fluctuations and earn additional profits by participating in other Defi products.
It is not surprising that MakerDao continues to lead this market as Dai is always the top choice of users. Meanwhile, Lybra is a sister project to pay attention to, this project offers a special model with eUSD as an interest-bearing stablecoin, meaning users can earn stable profits of about 7-8% 1 year just by holding eUSD in wallet. The model's effectiveness has been proven when after just over 5 months of launch, Lybra's TVL has reached $246M. It should be noted that the project is not listed on Binance yet.
Featured CDP Stablecoin projects
Index LSDs
Some protocols issue tokens that represent a group of LSTs. For example:
Index Coop's $dsETH represents three LSTs: rETH, stETH, and sETH2.
Yearn Finance's $yETH represents a group of tokens including rETH, wstETH, and sfrxETH.
The purpose of these tokens is to spread the risk when accessing LSTs. For example, instead of just buying stETH, users can buy Index Coop's dsETH to limit the risk if one of the LSTs is attacked.
Yield Strategies
This is a very diverse type of protocol, allowing users many different ways to generate profits using LSD, often preferred and used by experienced Defi investors.
A typical project that you can learn about related to this field is Pendle.
Restaking
Restaking is one of the latest discoveries in LSDFi, pioneered by the EigenLayer project. Essentially, the project allows users to take staked ETH and stake it on a new protocol to earn additional rewards. If all goes well, users will receive additional profits from the protocols, on the contrary, the punishment mechanism carries the risk of losing part of the ETH staked. The project has raised $64.5M and is working very effectively.
summary
Both #lsd and #LSDfi are very new trends and are in the early stages of development. These two trends are closely related to each other. More ETH staking on LSD protocols will spur more LSDFi projects to grow. On the contrary, LSDFi unlocks new features of LST by providing ways to earn more profits, thereby creating attraction for users to use LSD. Hope this article is useful for you in learning and finding opportunities with LSDFi.
