CryptoLenz | Liquid Staking Derivatives (LSDs): Unleashing the Power of Staked Assets In Crypto
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Liquid Staking Derivatives (LSDs): Unleashing the Power of Staked Assets In Crypto

Published On
28 Jun 2023 12:46

1. What is Liquid Staking Derivative?

Liquid Staking Derivative (LSD) is a term used to describe tokenized representations of staked assets on the blockchain. When you stake an asset on the blockchain to earn staking rewards or yield, it is typically locked for a certain period, limiting your ability to use or trade it. Liquid Staking Derivatives, or Tokens (LSDs or LSTs), address this limitation by allowing you to trade or utilize the staked asset while still earning staking rewards.

Proof of Stake (PoS) chains such as Solana, Avalanche, Cosmos, and recently Ethereum (as it transitions to a PoS chain) offer Liquid Staking Derivatives.
For example, if you hold ETH and want to earn yield through staking, but you also want the flexibility to sell it in the future, you can stake your ETH into a liquid staking derivatives protocol like Lido. Lido will provide you with stETH, a token that represents your staked ETH on a 1:1 basis. By holding stETH, you continue to earn ETH yield while retaining the ability to sell it at any time. Additionally, you can deposit stETH into other decentralized finance (DeFi) protocols like AAVE to earn additional yield or use it as collateral for borrowing purposes.

2. What are the cons of LSDs?

While Liquid Staking Protocols offer significant benefits, there are some risks associated with them. Since these protocols are implemented as smart contracts, there is a potential for smart contract vulnerabilities. Additionally, third-party risks exist because these protocols are often developed by external developers. Therefore, it is crucial to carefully choose the Liquid Staking Protocol you use to mitigate these risks.

For instance, in a rare case where Lido gets hacked, you could potentially lose all of your ETH. Alternatively, if Lido experiences significant negative news, the peg of stETH to ETH may be affected, resulting in a deviation from the 1:1 ratio.

Despite these risks, the benefits of Liquid Staking Derivatives generally outweigh the potential drawbacks, which is why they have gained significant popularity. Their Total Value Locked (TVL) has experienced exponential growth as more users recognize the advantages they offer.

3. Let’s explore LSD protocols landscape!

According to DefiLlama, LSD protocols currently hold the highest Total Value Locked (TVL) among all DeFi categories, reaching $20.4 billion. The second highest TVL belongs to the Dexes category, with $15.6 billion. When we look specifically at the LSDs category, we find that Lido holds the largest market share at 69%, followed by Coinbase at 10%, and Rocket Pool at 9%.

It's worth noting that Liquid Staking Derivatives (LSDs) also exist on other blockchain networks apart from Ethereum. For instance, Solana has a Liquid Staking Derivative called "stSOL," and Avalanche has an LSD called "sAVAX."

List of Decentralized LSD Protocols

  • Lido 
  • RocketPool
  • Frax
  • Ankr
  • StarFi
  • StakeWise
  • Parallel DeFi
  • StakeHound
  • Stader
  • Swell
  • EigenLayer

List of Centralized LSD Protocols:

  • Coinbase
  • Binance
  • Okex

Each LSD protocol offers unique features that cater to different types of users and risk profiles. It's important to conduct thorough research before choosing the right one for your needs. If you're uncertain, it's generally advisable to opt for well-known and reputable decentralized protocols such as Lido, RocketPool, and Frax, or centralized protocols like Coinbase, Binance, and Okex.

4. Maximizing the yield of your liquid staking tokens with LSDFi

LSDfi are protocols that are built upon LSDs Protocols. These protocols consist of familiar DeFi elements such as decentralized exchanges (DEXs) and lending platforms, along with more advanced projects that take advantage of the distinct characteristics of LSD.

List of LSDFi protocols:

4.1. Borrow/Lending Protocols: Platforms that facilitate borrowing and lending activities involving LSDs:

  • Aave
  • MorphoAave
  • Exactly
  • SonneFinance
  • Agave
  • ParaSpace Lending
  • dForce
  • SiloFinance
  • Granary Finance
  • Radiant
  • Spark
  • Cat in a Box
  • MYSO
  • Iron Bank
  • LSDx Finance

4.2. CDP (Collateralized Debt Position): Protocols that generate their own stablecoin by utilizing collateralized LSDs.

  • Lybra Finance
  • Curve
  • Raft
  • PrismaFi
  • Agility

4.3. Yield Protocols: Generate extra yield by utilizing LSDs.

  • Convex Finance
  • Aura
  • Asymetrix
  • Concentrator
  • Instadapp
  • Magpie
  • PendleFi
  • StakeDAO
  • Merkl
  • Flashstake
  • Parallax Finance
  • Sense
  • Extra Finance
  • Vector Finance
  • Premia
  • Wombex Finance
  • Gamma
  • Acid DAO

4.4. Liquidity Protocols: Increase your potential earnings by supplying liquidity for LSD pairs.

  • Curve
  • Balancer
  • Beethoven X
  • Hop Protocol
  • Velodrome
  • Platypus Finance
  • PancakeSwap
  • Uniswap
  • Camelot
  • WombatExchange
  • KyberSwap
  • Trader Joe
  • Ramses
  • Chronos
  • SushiSwap
  • Quickswap
  • Arbitrum Exchange
  • Forge
  • Orca
  • 3xcalibur
  • Bancor
  • SwapFish
  • Gamma
  • Arrakis

4.5. LSD Baskets: Construct diversified indexes comprising multiple LSDs to mitigate risk.

  • IndexCoop
  • UnshETH
  • Asymmetry Finance

Caution: Just like LSD protocols, LSDFi Protocols also carry risks associated with smart contracts and third-party involvement. Therefore, it's important to exercise caution and conduct thorough due diligence before using them.

5. What does the future hold for LSDs?

Currently, 34% of staked ETH exists in the form of Liquid Staked ETH, and this trend shows no signs of slowing down. LSD has become an essential component in any Proof-of-Stake (PoS) system and is currently one of the hottest trends in DeFi. It plays a vital role in fueling the incredible growth of DeFi. LSDs allow you to unlock your staked assets and earn a steady, low-risk income with minimal effort. Additionally, when LSDFi is introduced, LSDs further enhance the liquidity of a blockchain, creating a robust and thriving on-chain economy.

6. How can you capitalize on this LSD trend?

As mentioned earlier, LSDs and LSDFi Protocol are undoubtedly here to stay and will play a crucial role in PoS chains. However, the crypto space can be unforgiving, and only a few of these protocols will last, while the majority may have short lifespans. Therefore, it is essential to exercise due diligence before investing in any projects. Here are some checkboxes that I personally use when researching promising projects:

  1. Website Evaluation: Is the website professionally designed with careful attention to detail? Are there any errors or inconsistencies? Generally, a polished and visually appealing website indicates a higher likelihood of a legitimate project.
  2. Roadmap and Team Analysis: Examine the project's roadmap and assess if it strikes a balanced pace of development. Research the team members to gauge their expertise and track record. Look into their involvement in previous projects and how those projects are doing. Pay special attention to the founder; if they have been associated with unsuccessful or fraudulent projects in the past, it may indicate potential red flags.
  3. Tokenomics Assessment: Tokenomics is a crucial aspect of any crypto project. Look for projects with reasonable vesting schedules and avoid excessive token allocations to private investors, founders, and advisors. It is even better if you can find information about the seed token price and private token price. If these were sold at extremely low prices or have short vesting schedules, it could potentially create selling pressure.
  4. Backing from Established Investors: It is generally advisable to stay away from projects without Tier 1 venture capital (VC) support. The absence of Tier 1 VCs may indicate potential red flags that deter top investors from getting involved.
    Technical Innovation: Focus on projects that tackle unsolved problems or significantly enhance existing functions. Avoid investing in projects that merely replicate what others are already doing.
  5. Market Capitalization Consideration: Your risk tolerance will determine your desired returns. If you seek substantial gains like x10 or x20, focus on projects with a market capitalization below $100 million, the lower the better. However, remember that higher returns also come with increased risks, so thorough research is crucial. If you prefer a safer approach, consider investing in reputable projects with high market capitalization.
  6. What is trending in LSD landscape? If you observe the list of top LSD protocols you can see that the largest LSDs protocols are all related to staking Ethereum. This is not surprising since Ethereum is the largest smart contract platform. Therefore, if you are seeking a potential investment with significant growth, it would be wise to focus on protocols built on Ethereum.

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