The Ethereum blockchain is an economic powerhouse in the crypto industry. The majority of NFT, DeFi, and crypto-based gaming activity happens in the Ethereum network. This is the main reason why many projects choose to build on Ethereum and why the apps with the largest TVL are here. Therefore, Ethereum is usually home to new ecosystems and protocols in the crypto industry. One of them is the LSDFI or Liquid Staking Derivatives Finance ecosystem. So, what is LSDFI? How can you use it? This article will discuss LSDFI and its ecosystem.
Article Summary
- 🧠 Ethereum is the dominant platform for various activities in the crypto industry such as NFTs, DeFi, and crypto-based games. One of the emerging ecosystems on Ethereum is Liquid Staking Derivatives Finance (LSDFI).
- ⚙️ LSDFI is a collection of protocols that utilize LSD and LST for financial activities in the DeFi industry. Examples of LSDFI platforms are Lybra Finance and Unsheth.
- 📈 The LSDFI ecosystem, although still new, has shown significant potential with a total locked value (TVL) of $412 million as of June 14, 2023.
- ⚖️ The development of the LSDFI ecosystem may indicate a new trend in the crypto industry, especially with the growing number of liquid staking platforms such as Lido, Frax, and Rocket Pool.
What is LSDFI?
LSDFI is the name for a group of protocols that utilize the LSD (Liquid Staking Derivatives) platform and its tokens for financial activities in the DeFi industry. To understand LSDFI, we need to understand LSD and LST (Liquid Staking Token). In the LSD Platform, we will get LST tokens equivalent to the assets we lock in liquid staking. If we deposit 1 ETH into Lido’s liquid staking, we will get 1 stETH (this is LST). LSDFI applications utilize LST tokens such as stETH for various financial activities in the DeFi industry.
Currently, the LSD ecosystem has the highest locked value (TVL) in the DeFi industry ($18.4 billion dollars). Of this figure, Lido Finance holds about 78% of the LSD market share. LSDFI protocols were created to capture the market of users who utilize liquid staking. In addition, the LSDFI ecosystem was also created with the assumption that Ethereum staking rates in protocols like Lido will continue to increase in the long run.
The LSDFI ecosystem itself can be born due to Ethereum migrating the network to PoS (The Merge). The Shanghai upgrade also made LSDFI platforms more attractive to users as it meant they could add and withdraw ETH in staking freely.
Basically, the LSDFI Platform allows users to earn additional interest on top of the interest earned from staking. This is the main function of LSDFI applications from the user’s perspective. LSDFI applications utilize LSTs such as stETH, rETH, and frxETH in various DeFi activities like collateral for loans and being a liquidity provider. Each LSDFI platform is innovating by adding various use cases to attract users.
LSDFI Dictionary of Terms:
- LSD (Liquid staking Derivative): LSD is the name given to liquid staking applications.
- LST (Liquid Staking Token): A term for the token of an LSD platform such as stETH for Lido, rETH for Rocket Pool, and frxETH from Frax Finance.
- LSDFI (Liquid Staking Derivative Finance): LSDFI is the term for protocols that utilize the LSD (Liquid Staking Derivatives) platform and its tokens for financial activities in the DeFi industry.
How LSDFI Works
The way LSDFI platforms work is actually quite simple. As explained, LSDFI applications like Lybra Finance utilize users who own LST tokens like stETH for other financial activities. In Lybra’s case, users can use their stETH as collateral on Lybra to mint eUSD, Lybra’s decentralized stablecoin. Each LSDFI application has its own uses and offers benefits to users in different ways.
Basically, how LSDFI work is not much different from the usual activities in the DeFi industry. If you’ve ever been a liquidity provider or staked LP tokens, you’ll understand where you get your profits from on an LSDFI protocol. The difference is that you can easily stack multiple interests from several protocols.
The image below shows five common functions of various LSDFI applications today. Some of the emerging LSDFI applications are Lybra, unshETH, Tenet, Raft, and Pendle.
Ethereum LSDFI Ecosystem
1. Lybra Finance
Lybra Finance is an LSDFI protocol with a CDP (Collateralized Debt Position) stablecoin system and LST assets as their collateral. Users can mint eUSD stablecoins using LST such as stETH as collateral. Each eUSD minted will automatically generate interest for the user (25.47% on June 13, 2023).
Furthermore, Lybra has the largest TVL figure in the LSDFI sector at $172 million dollars. This figure places Lybra as the most dominant LSDFI protocol, holding a 41% market share.
The main way you can benefit from Lybra is to print eUSD using the stETH collateral from Lido (or regular ETH that Lybra will automatically convert to stETH). Just from this activity, you already earn interest from Lido (4%) plus Lybra’s interest (25%). You will get the interest from Lybra in the form of esLBR or escrowed LBR. Then, you can stack more interest by becoming a liquidity provider in the eUSD/USDC pool or convert esLBR into LBR and get a share of Lybra’s protocol revenue.
Lybra is already the center of attention of many in the Twitter crypto community. Furthermore, Lybra will launch its V2 update in July or August this year. The V2 update includes implementing OFT (Omnichain Fungible Token) integration from Layer Zero, adding other LSTs as collateral, and tokenomic updates.
Besides Lybra, there are other protocols in the LSDFI category with stablecoins such as Raft, Agility LSD, and Curve that will launch crvUSD.
2. Unsheth
Unsheth or unshETH is an LSDFI protocol that helps users diversify their ESG. It offers the unshETH token, a token that represents a group of LSD tokens like wstETH, cbETH, rETH, and sfrxETH. So, 1 unshETH is equivalent to 1 ETH but the proportion of LSD tokens in it will vary. The main function of the Unsheth protocol is to decentralize liquid staking tokens and give users the ability to diversify LSD assets. Currently, Unsheth has a TVL of $27.5 million dollars.
Furthermore, Unsheth also has an AMM that works to provide highly efficient concentrated LSD-LSD and LSD-ETH pair liquidity. This is done by aggregating all LSD protocol liquidity under the unshETH token. You can swap between LSD tokens freely on Unsheth. In addition, you will still earn interest on LSD tokens if you own unshETH tokens. You can also stake your unshETH to earn additional interest from transaction fees earned by the protocol.
Like Lybra Finance, Unsheth is also working with Layer Zero to convert its tokens into OFT. Currently, Unsheth is already on BNB Chain, Ethereum, and Arbitrum. Unsheth’s governance token is USH which you can also stake to earn interest and participate in Unsheth’s governance system. Unsheth has just launched vdAMM technology to improve its performance and user experience.
Will LSDFI Become a New Trend?
The LSDFI ecosystem is an additional layer of infrastructure on top of Ethereum staking. LSD and LSDFI are expected to drive more people to own ETH. The LSDFI ecosystem also adds new use case for ETH which is now a yield-bearing asset. Furthermore, LSDFI makes liquid staking platforms like Lido, Frax, and Rocket Pool even more attractive to users.
So, will the LSDFI ecosystem be the latest trend in the crypto industry? TVL numbers have been steadily increasing over the last few months, which suggests this is very likely. As of June 14, 2023, the LSDFI sector already has a TVL of $412 million dollars. In addition, there are many other LSDFI protocols that still need to be launched or are waiting for updates. We also haven’t discussed some other popular LSDFI protocols such as Swell, Raft, Pendle Finance, and Asymetrix. This ecosystem has the potential for huge growth correlated with Ethereum and its staking system.
Conclusion
Ethereum is home to many new ecosystems and protocols, including the Liquid Staking Derivatives Finance (LSDFI) ecosystem. LSDFI is a set of protocols that use the Liquid Staking Derivatives (LSD) platform and their tokens for financial activities within the DeFi industry. Users will earn Liquid Staking Token (LST) tokens equivalent to the assets locked in staking.
The LSDFI ecosystem is also created to capitalize on platforms like Lido whose adoption will continue to increase in the long run. The LSDFI platform allows users to earn additional interest on top of the interest from staking. This is the main function of LSDFI apps for the user side.
The TVL figures that have been steadily climbing since the last few months show the huge potential of the LSDFI ecosystem. As of June 14, 2023, the LSDFI sector already has a TVL of $412 million dollars. Ultimately, LSDFI could increase the value and utility of Ethereum as an interest-earning asset, strengthening its position in the crypto ecosystem.
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References
- @lou_markets, “Narratives that gain traction in a bear market go parabolic in a bull. LSDs have emerged as a major DeFi primitive”, Twitter, accessed on 12 June 2023.
- @Defi0xJeff, “𝗟𝗶𝗾𝘂𝗶𝗱 𝗦𝘁𝗮𝗸𝗶𝗻𝗴 𝗗𝗲𝗿𝗶𝘃𝗮𝘁𝗶𝘃𝗲𝘀 (LSD) has proven itself to be the 𝗟𝗮𝗿𝗴𝗲𝘀𝘁 Crypto Sector w/ $𝟭𝟳.𝟴𝟳𝗯 TVL”, Twitter, accessed on 12 June 2023.
- Gabe Tramble dan 0xmoe, An Intro to LSTfi, Shoal Research, accessed on 13 June 2023.
- An Ape’s Prologue, LSDfi: The Next Lego on top of DeFi Composability, Substack, accessed on 13 June 2023.
- WuBlockchain, Analyzing the LSDfi project by Lybra Finance: the interest-bearing stablecoin built on LSD, Substack, accessed on 13 June 2023.
- 0xKira, What Is LSDFi? Overview of LSDFi Protocols and How To Use Them, Coinmarketcap, accessed on 13 June 2023.
- @Delphi_Digital, “LSD finance, or LSDfi, is a term that is used for LSD-related DeFi protocols. This includes mature DeFi protocols”, Twitter, accessed on 14 June 2023.
- @Hercules_Defi, “LSDfi is the Top narrative in DeFi with $18.4Billion TVL. I researched 57+ LSDfi projects on my list to find the best ones for you.”, Twitter, accessed on 14 June 2023.