LSDFi——liquidity pledged derivatives finance

**1. What is LSDFi? **

LSDFi refers to a DeFi protocol built on liquid collateralized derivatives (LSD). LSD is a token that represents the rights and interests of pledged ETH, such as stETH, rETH, wstETH, etc.

LSD can be freely traded in the market, providing liquidity and income for pledgers. LSDFi uses LSD as collateral or assets, providing additional income opportunities and functions, such as lending, trading, stable currency, index, etc.

2. The development status of LSDFi

As the Ethereum network shifts from PoW to PoS, more and more users have participated in the pledge of ETH, and more than 23 million ETH have been pledged so far. This also gave birth to the rapid growth of LSD, and the current total market value of LSD has exceeded 16 billion US dollars. The main provider of LSD is Lido, which holds 31.6% of the market share.

As a downstream application of LSD, LSDFi has also expanded rapidly in the past few months, and currently has a total locked value (TVL) of more than $400 million. The main protocols of LSDFi include Lybra, Instadapp, Pendle, Raft, unshETH, and Asymetrix, etc. These protocols have their own characteristics and advantages, and we will briefly introduce and compare them below.

3. Main projects of LSDFi

1、Lybra

Lybra is a stETH-based stablecoin protocol that allows users to deposit ETH or stETH as collateral and mint eUSD. eUSD is an interest-bearing, over-collateralized stablecoin whose interest comes from the pledge income of stETH. Users can obtain an annualized rate of return of about 5% by holding eUSD.

Compared with other LSD protocols, Lybra has the following advantages:

• It allows users to deposit ETH as collateral and mint eUSD without any borrowing fees or interest. Users can use minted eUSD to buy more ETH, efficiently leveraged to go long ETH at zero cost.

• It provides a simple and efficient user interface for users to deposit, mint and redeem operations.

Lybra is currently the largest protocol in the LSDfi space, with a TVL of over $180 million.

2、Pendle

Pendle is a yield trading (Yield Trading) protocol that allows users to trade the principal and interest rates of LSD separately to obtain better or more stable staking returns. Pendle supports various LSD assets such as stETH and rETH, and provides the following functions:

• Split principal token (PT) and interest rate token (YT) in Pendle using stETH or rETH and trade them on Pendle Exchange or other platforms.

• Use PT or YT to provide liquidity in Pendle and get PENDLE tokens as rewards.

• Use PENDLE tokens to participate in governance in Pendle and enjoy the dividends of protocol income.

Pendle has the following advantages over other LSDfi protocols:

• Pendle can split the income of interest-bearing assets (such as frxETH, stETH, etc.), so that users can purchase assets through discounts, or trade the yield part separately, so as to achieve more profit margins.

• Pendle uses vePENDLE as the governance token. Users can lock PENDLE tokens to increase staking rewards, vote to determine reward distribution, share interest income and handling fees, etc.

• Pendle supports a variety of LST (such as stETH, frxETH, etc.) and other DeFi assets (such as APECOIN, etc.), providing users with diverse choices and strategies.

• Pendle is built on the Ethereum mainnet and Arbitrum, using the second-tier expansion solution to reduce transaction costs and improve efficiency.

Pendle has grown to become the second largest protocol in the LSDfi space, with a TVL of over $150 million.

3、Instadapp

Instadapp is a DeFi management platform that provides a variety of DeFi strategies and services, including LSDfi strategies. With the asset management interface of Instadapp, users can use stETH and rETH as assets or collateral to pursue rich yield strategies.

Instadapp has the following advantages over other LSDfi protocols:

• It provides a variety of LSDfi strategies, allowing users to choose the appropriate strategy according to their risk appetite and income goals.

• It supports multiple LSD assets, allowing users to choose different pledge service providers and tokens.

• It provides a unified and powerful user interface, allowing users to manage their DeFi assets and operations in one stop.

Instadapp is currently the second largest protocol in the LSDfi space, with more than $60 million in ETH locked (not including other DeFi segment TVL).

4、Raft

Raft is a decentralized stablecoin protocol primarily based on stETH, which allows users to deposit stETH and mint R. R is a stablecoin pegged to $1, and its value comes from the staking income of stETH. Users can obtain an annualized rate of return of about 4.5% by holding R.

Compared with other LSD protocols, Raft has the following advantages:

• It allows users to deposit stETH and mint R without any lending fees or interest. Users can use the minted R to buy more stETH, effectively using leverage to go long stETH at zero cost.

• It provides a simple and efficient user interface for users to deposit, mint and redeem operations.

Note: Raft currently also supports rETH, but on a smaller scale.

Raft is currently the fourth largest protocol in the LSDfi field, and its TVL has exceeded $60 million.

5、unshETH

unshETH is a diversified LSD portfolio, which includes different types and sources of LSD, such as stETH, rETH, wstETH, etc. unshETH aims to provide users with the most optimized and stable staking income. Users holding unshETH can obtain an annualized rate of return of about 5.5%.

Compared with other LSD protocols, unshETH has the following advantages:

• It allows users to buy and redeem a variety of LSD with one click without switching between different platforms and service providers.

• It allows users to enjoy a variety of LSD pledge income and transaction fees to achieve diversification and decentralization of income.

• It allows users to participate in the governance and dividends of unshETH and enjoy the long-term growth of the protocol.

unshETH is currently the fifth largest protocol in the LSDfi field, and its TVL has exceeded $30 million.

6、Asymetrix

Asymetrix is a protocol that provides asymmetric reward distribution, which is similar to a lottery, where a small number of winners will share all the staking rewards for a period of time.

Its specific working principle is:

The user deposits the pledged ETH (stETH) into the public pool supported by the smart contract. Once the user deposits to the Asymetrix protocol, the smart contract will mint PST (Pool Share Token) at a ratio of 1:1 and send it to the user's wallet.

• PST tokens reflect the user's share in the protocol and are required for withdrawals.

• The Asymetrix protocol will assign a random profit coefficient to each user based on the amount of stETH deposited by the user and the deposit time. This coefficient determines the proportion of the user's profit in the protocol.

• The profit factor ranges from 0.5 to 2.0, with an average of 1.0. This means that some users will get above-average benefits, while others will get below-average benefits.

Through this asymmetric revenue distribution method, the Asymetrix protocol provides users with a high-return and random experience, and also increases the liquidity of stETH in the protocol.

Asymetrix has the following advantages over other LSDfi protocols:

• The Asymetrix protocol provides an opportunity for users who hold a small amount of ETH to participate in LSDfi, and they can enjoy a high return and random experience through an asymmetric income distribution method.

• The Asymetrix protocol uses Chainlink VRF as a random number generator to ensure the fairness and transparency of the lottery process.

• The Asymetrix protocol uses TWAB (Time Weighted Average Balance) as an indicator to influence odds, preventing the situation where large players enter the protocol at the last moment to "steal" profits from small users.

• The Asymetrix protocol uses PST (Pool Share Token) as proof of the user's share in the protocol, and the user can withdraw his principal and income at any time.

• The Asymetrix protocol uses ASX tokens as governance tokens, and users can participate in the governance and decision-making of the protocol by holding ASX tokens.

Asymetrix is currently the sixth largest protocol in the LSDfi space, with a TVL of over $20 million.

4. Opportunities and challenges of LSDFi

As an emerging market, LSDFi has great potential and opportunities, but it also faces some challenges and risks:

**1. The opportunities for LSDFi mainly come from two aspects: one is the growth of pledged ETH, and the other is the penetration of LSDFi. **

With the transformation of the Ethereum network to PoS, staking ETH will become the choice of more and more users, and LSDFi can provide more liquidity and income opportunities for staking. At present, the funds locked in the LSDFi protocol only account for 2.4% of the total market value of LSD, which means that there is still a lot of room for LSDFi to grow.

**2. The challenges of LSDFi mainly come from four aspects: one is the risk of pledge penalty, the other is LSD price risk, the third is smart contract risk, and the fourth is third-party risk. **

Staking penalty risk refers to the fact that validators who fail to meet certain staking parameters (such as being offline) may face penalties, and users who hold LSD or LSDFi tokens may bear the risk of these penalties.

LSD price risk refers to the fact that the price of the LSD token may fluctuate and differ from the underlying token due to market forces. This can expose users to price volatility and potential liquidation risks, especially when used as collateral.

Smart contract risk refers to the new layer of smart contract vulnerability that exists in every user interaction with a smart contract.

Third-party risk refers to the possibility that some projects may use other dApps as part of their normal operation (e.g., yield strategy). In this case, users face additional counterparty risk.

V. Summary

LSDFi is an LSD-based DeFi protocol, which provides more liquidity and income opportunities for stakers. The LSDFi protocol includes various types and functions, such as lending, trading, stable currency, index, etc.

The main projects in the LSDFi protocol include Lybra, Instadapp, Pendle, Raft, unshETH, and Asymetrix, etc., each of which has its own characteristics and advantages. This type of protocol is developing rapidly with the continuous growth of the LSD market.

As an emerging market, LSDFi has great potential and opportunities, but it also faces certain challenges and risks. When users participate in LSDFi, they should fully understand the relevant information and risks, and make their own judgments and decisions.