LSDFi Depth Analysis: Five Forms, High-Yield Projects, and Future Development Trends

LSDFi is a Decentralized Finance product based on LSD. Through LSD, stakers can convert staked ETH into tradable assets, unlocking liquidity and dropping the staking threshold. Any amount of ETH can be staked, and upon staking, LSD is obtained, while also leveraging LSD to generate multiple returns.

LSDFi is built on DeFi Lego, and new entrants will attract users to stake ETH/LSD on their platform through token incentives to gain market share and control over LSD. Some projects utilize dynamic incentives to encourage users to choose smaller decentralized staking platforms to enhance the decentralization of validators.

The following are the five main forms of LSDFi:

1. LP ( yield 10% + )

Before the Shanghai upgrade, LSD could not be directly exchanged for ETH, and many DeFi projects established LSD-ETH liquidity pools. The base yield generally does not exceed 5%, mainly increased APY through token subsidies. Stakers can earn ETH network rewards as well as LP fee rewards. After the Shanghai upgrade, the LP scale may further increase.

2. Circular borrowing ( yield 10% + )

Achieve high yields by repeatedly staking and borrowing ETH and STETH. The specific steps are as follows:

• Stake ETH on the staking platform to receive STETH
• Deposit STETH into the lending platform and borrow ETH
• Repeat the above operation

This strategy carries a certain liquidation risk, and the returns depend on the number of cycles. Automated circular lending products may emerge in the future.

3. Yield Aggregation (10%+)

Some established DeFi projects like Yearn Finance increase the APY of LSD by aggregating yields from multiple platforms. For example, Yearn creates liquidity pools on Curve, raising the APY of stETH to 5.89%. These types of projects increase overall yields by integrating yields from multiple platforms and providing additional subsidies.

4. EigenLayer (收益未知)

EigenLayer offers multiple staking options, including Liquidity staking and Ultra-Liquidity staking. Among them, Ultra-Liquidity staking allows staking LP for:

• LSD assets that have been staked on other platforms can be staked again on EigenLayer.
• Some LSD related LP Tokens can also be staked to EigenLayer

5. Incentive LSDFi Project

These types of projects improve capital efficiency through leverage, structured strategies, options, bond derivatives, and other means, or attract savings with extremely high APY. Representative projects include:

Pendle: Provides staking services and liquidity pools for ETH, APE, LOOKs, etc. Users can purchase ETH at a discount price to earn yields, and also obtain high returns by adding liquidity. Currently, the discount price is about 12.5%, and the annualized yield of the liquidity pool can reach up to 95.7%, but most of it is subsidized by PENDLE tokens.

Ion Protocol: Not yet launched. Plans to tokenize LSD tokens and stakable asset tokens into allETH and vaETH. allETH is an ERC-20 token, 1 ETH = 1 allETH. vaETH tracks the earnings generated from allETH positions.

unshETH: Improve the decentralization of validators through dynamically allocated incentives. Provide higher rewards for LSD platforms with smaller market shares, thereby guiding users to choose smaller platforms to stake ETH. Currently supports sfrxETH, rETH, wstETH, cbETH, etc.

LSDx Finance: Committed to becoming the main DEX in the LSD asset segmentation market. Utilizing a GLP architecture similar to GMX, a unified liquidity pool ETHx is established. Currently, the types of LSD supported are limited, and functionalities are still under development.

Liquid Staking Derivatives: LSD aggregator, enhancing asset liquidity and leverage through tokenization and issuance of derivatives. Users can stake ETH or LSD to earn token rewards, which can be used for governance or participation in Decentralized Finance projects.

Stader Ethereum: The ETHx will be launched soon. Users will receive ETHx after depositing ETH, which will be allocated to three different validator node pools. The ETHx program plans to collaborate with over 30 Decentralized Finance protocols to enhance composability.

Hord: stake ETH to earn LSD hETH. Achieve a higher APR through various means, including ETH staking, MEV rewards, and HORD token subsidies.

Parallax Finance: Currently, liquidity infrastructure is only available on Arbitrum ( at L2 ). Its product Supernova not only provides staking rewards but also offers leverage and lending services for staked assets.

bestLSD: Testing is about to begin. It may be a Real Yield aggregator that uses the actual yield obtained from aggregation to subsidize its own LSD - bestETH.

0xAcid DAO: A management protocol for maximizing LSD asset returns. Most assets are placed in stable nodes, while a portion of the funds is used for high-yield strategies. Collaborating with Pendle for yield leverage, and providing services such as lending and LP.

EigenLayer: In addition to the functions mentioned earlier, there are also some potential DeFi Lego possibilities, such as LP obtained from LSD staking or "LSD of LSDs" continuing to form LP stakes with ETH/LSD, Re-staking leveraged returns, automatic leveraged Re-staking strategies, etc.

Index Coop: Issued two LSDFi related products:

• dsETH: An index composed of multiple LSDs, automatically adjusting the ratio to optimize returns.
• icETH: A leveraged liquidity staking strategy product provided by AAVE v2.

Gitcoin: In collaboration with Index Coop, launched the Gitcoin Staked ETH Index (gtcETH). Earnings come from user-staked ETH/LSD/USDC in various strategy pools, with a portion of the earnings used for public goods donations.

Summary:

1. Many incentive LSDFi projects are competing for LSD market share, which will affect their future development and ecosystem building.

2. The stability of the strategy and high returns are the dilemma of the LSDFi project. High returns may bring sustainability issues, but they may become the norm for a period of time.

3. From a pure profit perspective, the optimal strategy is to stake with liquidity staking providers that have a smaller market share, such as frxETH, and then look for high APY mining projects like unshETH, LSDx, etc. Those who are good at utilizing lending protocols may achieve higher returns, but the risks are also greater.

4. LSDFi currently has limited impact on validators, with LP + token subsidies being the mainstream model. However, as the LSD War progresses, it may actually enhance the level of decentralization in validation.

5. There is vast room for cooperation among LSDFi projects. In the future, various products with different levels of risk and return may be formed, with APY ranging from 4% to over 500%.

6. The LSD War has already begun and may continue until the Ethereum staking rate stabilizes above 25%. Due to the uniqueness of Ethereum, even with LSDFi incentives, staking may not be cost-effective for most people.