LSDfi: The Next Lego on top of DeFi Composability
As $ETH staking infrastructure matures and users get increasingly comfortable holding and earning with $ETH in its staked form, it is time to look forward to the next step in DeFi composability - LSDfi.
Following Lido V2, interest in staked $ETH remains strong. Currently, LSDs sum up to nearly 48% of the 18.8M $ETH staked to date.
Given the expectation of continued staked $ETH growth, various protocols have emerged to serve this pool of capital that would potentially be seeking out more utility and yield.
While not comprehensive, below are protocols we currently find notable within the LSDfi category.
LSDfi protocols allow LSD holders to efficiently manage the yield from their staked assets, simplifying technical complexities and reducing gas costs. Examples of these are “selling” the yield through Lybra's $eUSD or boosting of underlying yield through $unshETH.
Thanks to Lido's dominant market share of over 70% in the LSD market, $stETH is the most widely accepted LSD across LSDfi protocols. Origin Protocol's $OETH, along with $unshETH, are among the products that accept the widest range of LSDs currently.
Although Lido has experienced limited outflows aside from Celsius after enabling $stETH withdrawals in V2, it must remain vigilant in maintaining its position as the market leader.
The competition for LSD market share is growing with the surge of $rETH and $frxETH. Throughout the year, both $rETH and $frxETH have steadily gained traction, a factor that LSDfi protocols might consider when developing their product offerings.
LSDfi products usually fall into two general categories: Loans and Yield Optimizers:
1) Loans - that work to offset themselves or disproportionately reward loan token holders via staking yields
2) Yield Optimizers - that offer boosted yield to pool contributors
To start, Lybra Finance stands out with its LSD backed stablecoin, $eUSD.
$eUSD rebases based on the yield earned by the LSD collateral within the protocol.
With TVL growing by 400% the past week, $LBR has attracted the most interest within the LSDfi category.
unshETH, with its derivative $unshETH, works with a basket of staked ETH assets to produce the best risk-adjusted yield.
LSDs held with the protocol also earn additional yield through its vdAMM swap fees as they serve to make the protocol the liquidity hub for $ETH LSDs.
Origin Protocol, while not new, launched its new product, $OETH, on May 17th. It aggregates various LSDs to generate boosted yields through liquidity provision on top of standard staking yield.
Gravita Protocol issues $GRAI, a 0% interest loan token with a natural price ceiling of $1.10 and a hard price floor of $0.97.
Backed by a hybrid basket of LSDs and bLUSD (boosted LUSD by Liquity), that continue to yield interest while the loan is active.
Bringing Alchemix’s self repaying loan concept to LSDs, Zero Liquid lets users mint $zETH with LSD collateral without any risk of liquidation.
The protocol then periodically harvests the user’s collateral yield to reduce the debt over time.
LSDfi is an interesting innovation, providing LSD holders with broader access to unique yield strategies. Catering to a diverse set of LSD owners, it enhances the attractiveness of holding $ETH as an income-generating asset, therefore enriching the entire Ethereum ecosystem.
While so, investors speculating these protocols should consider LSDfi incumbents like Frax Finance, Pendle, and Alchemix as they are capable of building similar products should they choose to dedicate resources to it.
No matter, LSDfi as a whole should well be here to stay.