LSDFI (Liquid Staking Derivatives and DeFi) is a new trend that combines Liquid Staking Derivatives with decentralized finance (DeFi). It allows users to tokenize their staked assets and participate in DeFi protocols while earning staking rewards. This brings liquidity to traditionally illiquid staked assets by creating derivative tokens that represent the underlying staked assets. These derivative tokens can be used as collateral or traded in various DeFi applications.
By utilizing LSDFI, stakers can unlock the value of their staked assets, maintain their staking positions, and simultaneously engage in other DeFi activities such as lending, borrowing, or trading. This integration of staking and DeFi creates opportunities for investors to maximize their returns and access additional financial services within the blockchain ecosystem.
LSDFI is built on the concept of Liquidity Staking, which is an improvement over traditional staking. It enhances liquidity, flexibility, and earning potential, offering users a comprehensive solution that combines the benefits of both staking and DeFi.
With the implementation of "The Merge," the Ethereum network transitioned to a Proof-of-Stake consensus algorithm, which involves the use of validators to confirm transactions instead of miners. To become a validator in the Ethereum network, one needs to "lock" 32 ETH in a smart contract. Why become a validator?
Considering that the entry barrier for traditional staking is quite high, specifically 32 ETH or $60,000, staking pools have emerged. These are smart contracts that automatically pool users' funds and allow staking to a much larger number of users since the entry requirement is lower. Additionally, users who participate in staking pools receive LSD (Liquid Staking Derivatives), which are tokens equivalent to the amount they contributed to the pool. This allows users to earn staking rewards without locking up their liquidity.
These are DeFi protocols that dispose of LSD tokens. LSDFI leverages the liquidity of staked assets by creating derivative tokens that represent the underlying staked value. These tokens can then be utilized in DeFi protocols for lending, borrowing, trading, or other financial activities. LSDFI provides an avenue for stakers to earn staking rewards while also participating in the broader DeFi ecosystem and accessing additional financial opportunities.
The integration of liquid staking derivatives and DeFi aims to enhance the liquidity and utility of staked assets, opening up new possibilities for investors and users in the evolving landscape of decentralized finance. LSDFI projects and platforms offer innovative solutions to bridge the gap between staking and DeFi, creating synergies between these two important components of the blockchain ecosystem.
Lido is a project that focuses on providing liquid staking solutions for Ethereum 2.0. It offers stETH (staked ETH) and wstETH (wrapped stETH) tokens, which represent the staked value of ETH in the Ethereum 2.0 network. Users can stake their ETH through Lido and receive stETH or wstETH tokens in return, allowing them to maintain the value of their staked ETH while also assessing liquidity for other purposes.
The Lido Finance protocol offers a convenient and efficient way for ETH holders to participate in Ethereum 2.0 staking while maintaining the flexibility of their staked assets. By providing liquidity to staked ETH, Lido Finance contributes to the growth and accessibility of the broader DeFi ecosystem.
Rocketpool is a decentralized staking network that allows users to participate in Ethereum 2.0 staking without the need for the minimum 32 ETH requirement. It offers rETH tokens, which represent a user's stake in the Rocketpool network. Users can earn staking rewards and have their rETH token balances grow over time.
BETH represents ETH staked on the Binance platform. With BETH, users can participate in Ethereum 2.0 staking and earn rewards on their staked ETH. Binance facilitates the staking process, allowing users to engage in Ethereum's Proof-of-Stake consensus algorithm without the need to run their own validator node.
On the other hand, WBETH is an ERC-20 token called Wrapped Binance ETH. It represents ETH on the Binance Smart Chain (BSC), which is a separate blockchain interoperable with the Ethereum network. WBETH enables the use of ETH within the Binance Smart Chain ecosystem, allowing users to interact with decentralized applications (DApps) and other DeFi protocols on BSC using their ETH assets.
Coinbase, a popular cryptocurrency exchange, offers cbETH (Coinbase ETH) tokens, which represent ETH staked through the Coinbase platform. Similar to other platforms, cbETH allows users to earn staking rewards on their staked ETH while maintaining liquidity.
Pendle is a permissionless yield-trading protocol where users can execute various yield-management strategies.
There are 3 main parts to fully understand Pendle:
1. Yield Tokenization.
First, Pendle wraps yield-bearing tokens into SY(standardized yield tokens), which is a wrapped version of the underlying yield-bearing token that is compatible with the Pendle AMM. SY is then split into its principal and yield components, PT (principal token) and YT (yield token) respectively, this process is termed as yield-tokenization, where the yield is tokenized into a separate token.
2. Pendle AMM.
Both PT and YT can be traded via Pendle’s AMM. Even though this is the core engine of Pendle, understanding of the AMM is not required to trade PT and YT.
3. vePENDLE.
As a yield derivative protocol, we are bringing the TradFi interest derivative market (worth over $400T in notional value) into DeFi, making it accessible to all.
The project has managed to raise $3,700,000 from Mechanism Capital, HashKey Capital, CMS Holdings, Crypto.com Capital, Lemniscap, LedgePrime, and others.
EigenLayer is a protocol built on Ethereum that introduces restaking, a new primitive in cryptoeconomic security. This primitive enables the reuse of ETH on the consensus layer. Users that stake ETH natively or with a liquid staking token (LST) can opt-in to EigenLayer smart contracts to restake their ETH or LST and extend cryptoeconomic security to additional applications on the network to earn additional rewards.
The project has managed to raise $64,000,000 from Polychain Capital, Ethereal Ventures, Figment Capital, Blockchain Capital, Coinbase Ventures, and others.
The project has three types of users: bond holders (manage the keys to the node and monitor the node), LSD holders (delegate ETH to the node and can exchange eETH for ETH at any time), and node operators (maintain the node in exchange for a percentage of the stakers' rewards).
The project has managed to raise $5,300,000 from Chapter One, Maelstrom, Node Capital, Purpose Ventures, Arrington XRP Ventures, North Island Ventures, and others.
Swell is a non-custodial liquid staking protocol with a mission to deliver the world’s best liquid staking experience, simplify access to DeFi, while securing the future of Ethereum.
With Swell, users are able to earn passive income by staking ETH to earn blockchain rewards and in return be provided with a yield bearing liquid staking token (LST) to hold or participate in the wider DeFi ecosystem to earn additional yield.
The project has managed to raise $3,750,000 from IOSG, Framework Ventures, Apollo Capital, Maven 11 Capital, Mark Cuban, Kain Wawick, and others.
LSDfi protocols have witnessed significant growth in Total Value Locked (TVL), surpassing $400M and doubling in just one month. This expansion is attributed to the increased participation in liquid staking after the Shapella event. Considering the substantial presence of over $16.9B in LSDs on Ethereum and a TVL of approximately $412M in LSDfi protocols (equivalent to around 2% penetration), the potential for further growth remains high.
It is crucial to emphasize the associated risks of LSDfi and liquid staking, such as slashing risks for validators, price volatility of liquid staking tokens, vulnerabilities in smart contracts, and third-party risks. Therefore, users are advised to conduct thorough due diligence before engaging in these protocols.
LSDfi protocols present attractive opportunities for yield-seeking LSD holders, incentivizing staking and fostering the expansion of liquid staking. The continuous development of innovative solutions and the wider adoption of LSDfi will shape the emerging landscape of this ecosystem. Stay tuned for an upcoming data-driven report that delves into the details of liquid staking.
