Decentralized finance (DeFi) has introduced a fascinating and exciting narrative called LSDfi. LSDfi is a collection of protocols that revolve around Liquidity Staking Derivatives (LSD) and encompass various aspects of the DeFi ecosystem. Within DeFi, Liquid Staking initiatives have paved the path for LSDfi’s development. These initiatives act as the foundation, upon which more advanced and inventive products are constructed. LSD, gaining popularity rapidly, has become the dominant category in terms of Total Value Locked (TVL), with projects like Lido leading the charge. As a result, LSD now plays a vital role in propelling the overall growth of the DeFi ecosystem.
In a span of just two months, the LSDfi sector has experienced an impressive 370% growth. This growth is paving the way for the emergence of specialized decentralized exchanges (DEXs) or aggregators exclusively tailored to LSD. Notably, the protocol recently achieved a remarkable milestone with a record-breaking influx of $25 million in a single day. This surge in confidence reflects the strong belief in LSD’s potential for long-term success. Throughout this article, we will explore some of the most popular protocols within the LSDFi realm and uncover how DeFi users can maximize their benefits.
What is LSDFi?
To break it down, LSDs are basically financial tools that serve as evidence of a token being staked in a DeFi protocol. They offer users the ability to stake their tokens while still having the freedom to use these LSDs in other decentralized applications (DApps). LSDFi takes things further by incorporating LSD tokens into the DeFi landscape, enhancing their usefulness and creating more ways for LSD token holders to earn yields. These possibilities include borrowing against LSD tokens, speculating on or protecting against LSD token yields, creating indexes of LSD tokens, and so on.
LSDFi is a vast realm encompassing various projects with a wide array of functionalities. These projects range from traditional decentralized exchanges (DEXs) and lending protocols to more intricate protocols that leverage distinct properties of Liquidity Staking Tokens (LST). The total value locked (TVL) in LSDFi stands impressively at over $396 million.
Currently, LSDfi has evolved into an autonomous domain within DeFi and continues to make notable progress. One notable element of LSDfi is the introduction of the LSD Basket concept. With multiple liquid staking solutions available for Ethereum (ETH), protocols have been devised to combine these solutions into a single basket, forming an index. This approach not only enables risk diversification but also enhances the convenience of investing in LSD.
Top LSDFi Protocols to Watch Out for in 2023
Maverick Protocol brings a fresh framework for decentralized finance. Its purpose is to create highly fluid markets that benefit traders, liquidity providers, DAO treasuries, and developers. This innovative platform operates with an Automated Market Maker (AMM) at its core. You might be curious about the reasons behind Maverick’s inclusion on this list. Well, on Maverick, you have the opportunity to contribute liquidity using your LSD/LST tokens and reap the rewards derived from the associated fees. They aim to establish themselves as the top decentralized exchange for LSTs, and the outlook is extremely optimistic.
Maverick, much like TraderJoe, strives to address the challenges faced by Liquidity Providers (LPs) on Uniswap V3. These challenges include Position Management, the lack of directional LPs, and low Capital Efficiency. Moreover, the platform is designed to be affordable for users. By leveraging the Maverick AMM smart contract, all liquidity relocations are performed seamlessly within the platform itself, eliminating the need for LPs to pay gas fees when moving their liquidity. The Boosted Positions feature allows projects and other users to direct liquidity precisely to where it is most required, thereby optimizing the effectiveness of their incentives.
Since its introduction in April, Lybra has swiftly emerged as the prominent player in the LSDfi domain when it comes to Total Value Locked (TVL). Lybra Finance operates as a stablecoin protocol with an interest-bearing mechanism. It offers users the ability to deposit ETH or Lido Staked ETH (stETH) as security, allowing them to borrow Lybra’s stablecoin, eUSD, up to a collateral ratio of 170%. The noteworthy aspect is that Lybra does not impose any charges for minting eUSD or accruing interest on borrowed amounts.
If you want to create $eUSD, the process involves placing ETH or stETH as your deposit. As the protocol operates, it distributes the generated proceeds from stETH to holders of $eUSD. Essentially, by depositing ETH or stETH and minting $eUSD, you have the potential to earn an annual percentage yield (APY) of approximately 8.4%. Within the LSDFi sector, Lybra has emerged as one of the top performers, with a remarkable surge in Total Value Locked (TVL) of over ten times in the past two weeks alone. Notably, the LBR token experienced an astonishing increase of more than 2000%, reaching its all-time high of $4.6352.
Lucid stands out as a decentralized lending platform that allows you to borrow funds against your Ethereum holdings while earning yields. Just like Lybra, users have the option to deposit their assets, create $DUSD, and passively generate returns. What sets Lucid apart is its support for various LSTs, such as $rETH, $bETH, $cbETH, and $frxETH, in addition to LP tokens from Curve (enhanced by Convex), Balancer (amplified by Aura), and Yearn Finance. Another notable distinction is that rewards are distributed based on the amount of collateral you deposit.
The majority of the yield (80%) generated from users’ collateral comes in the form of $DUSD. What’s noteworthy is that this yield is obtained in a stablecoin, ensuring stability and protection against market volatility. DUSD is designed to be omnichain, meaning it can operate across multiple blockchain networks. It is also non-custodial, meaning users have full control over their funds, and it is immutable, meaning transactions cannot be altered or tampered with. Moreover, DUSD is censorship-resistant, safeguarding it from any attempts at interference. The strength of DUSD lies in its ability to continuously grow, even while it remains in your wallet.
Curve has just launched a new stablecoin called $crvUSD. This stablecoin is unique because it uses ETH LSDs as collateral to maintain its value. Currently, crvUSD only accepts Frax Staked Ether (sfrxETH), $wstETH, and $wBTC as collateral options. However, there are future plans to add more types of collateral, such as stETH. By using your LST, you can create $crvUSD, which is considered one of the most secure stablecoins available. If LSDfi experiences growth, both $crvUSD and $CRV will also grow in tandem.
crvUSD stands out because of its special liquidation system, called the Lending Liquidation AMM Algorithm, or LLAMA for convenience. When a borrower’s collateral value starts to decrease, LLAMA initiates a “soft liquidation” by converting a portion of the collateral into crvUSD as the value drops. Then, when the collateral value rises again, the crvUSD is changed back into the original collateral asset. This method helps minimize losses compared to the traditional approach of liquidating the entire collateral amount in one go. With LLAMA, gradual adjustments are made, making the process smoother and less risky.
I would describe Instadapp as a remarkable application that lets you conveniently engage with various protocols using its user-friendly digital wallet. It’s fascinating to note that this particular protocol holds significant potential in the DeFi realm, yet it seems to be largely overlooked by many. In essence, the Instadapp protocol, which is referred to as ‘DSL,’ serves as an intermediary that brings together multiple DeFi protocols into a single smart contract layer that can be upgraded. This unique structure empowers Instadapp to fully tap into the benefits of Decentralized Finance.
By staking your LSDs (the token associated with Instadapp), you can effortlessly enjoy attractive yields. At the moment, the Annual Percentage Rates (APRs) range from 3% to 3.6%. Instadapp caters to individuals who are new to the space or have limited experience, providing them with a user-friendly interface and seamless user experience. This aspect positions Instadapp for substantial growth in the times to come. The DSL protocol primarily focuses on two key functionalities: account extensions and upgradability.
Prisma presents itself as the ultimate solution for Liquid Staking Tokens (LSTs). By utilizing Prisma, users gain the ability to create $acUSD, a stablecoin that derives its value from a diverse range of LSTs. The underlying code is derived from the Liquity Protocol, ensuring its immutability. Prisma goes beyond single collateral stablecoins by incorporating five distinct LSTs: $stETH, $cbETH, $rETH, $frxETH, and $bETH. Additionally, users have the option to stake $PRISMA and acquire vePRISMA, granting them voting privileges to influence emission allocations towards their preferred LST collateral for stablecoin creation.
I’m really optimistic about this project because it has an incredible team consisting of former members from Curve, Yearn, and Maker. Plus, they just secured a new round of funding, which means they have more resources to drive the project forward. In Prisma, the key players are the providers of LST, the holders of LST, and the holders of vePRISMA. All of them have a stake in the success of this venture. If you closely follow the LSD/LST storyline, you’ll notice how it has been evolving and gaining more functionality. I strongly believe that the Prisma model will take this game to the next level and foster healthy competition among LST providers.
At Alchemix, they have a special loan option known as a “self-paying, interest-free, non-liquidating loan.” Here’s how it works: when you deposit your assets, they are put to work in yield farming strategies. As these assets generate yields, you have the ability to mint $alUSD. This unique stablecoin allows you to access a loan. You can borrow up to 50% of your initial deposit, and the best part is that the loan is automatically repaid over time using the yields generated by your initial deposit. This means you don’t have to worry about paying any interest on the loan.
Additionally, since your assets are being used as collateral to farm yields, there’s no risk of liquidation if their value happens to drop. The platform takes self-repaying loans to a whole new level by allowing users to take out self-repaying loans using ETH LSDs (Liquid Staking Derivatives) as well. The process works similarly to the stablecoin scenario we discussed earlier. Users have the option to deposit either stETH or rETH into Alchemix and in return, they can obtain a loan in the form of alETH tokens.
Index Group is a protocol run by a decentralized autonomous organization (DAO) that mainly offers users organized DeFi goods and important tokens. Essentially, it provides ERC-20 tokens representing various DeFi sectors. Alongside the recent advancements in the LSD and LST protocols, Index Group presents two index tokens, $dsETH and $icETH, for ETH holders. These tokens aim to streamline the process of earning rewards.
Most of these LSD and LST protocols operate on the Ethereum mainnet, making it costly to deposit ETH into multiple LSD platforms or purchase various LSTs from the secondary market for diversifying investments. Index Coop recognizes this dilemma and offers a solution by consolidating popular LSTs into a unified ERC20 token called dsETH. So, if you have a positive outlook on LSDfi protocols but are unsure which one to invest in, you can conveniently acquire one of their indices and enjoy a more relaxed investment experience.
The realm of LSDfi is constantly evolving, giving rise to more intricate and distinct ventures. We are thrilled to witness the exciting advancements that lie ahead in the realm of LSDfi. As the DeFi ecosystem progresses, the expanding significance of LSDfi underscores the growing demand for sophisticated yield farming opportunities. It is expected that LSDfi will continue to allure both experienced DeFi enthusiasts and newcomers seeking inventive avenues to optimize their investments and achieve higher returns.