LSDFi Ecosystem Overview: From Liquid Staking to Diversified Yield Strategies

LSDFi is a DeFi product based on LSD, which allows staked ETH to be converted into tradable assets through LSD, thereby improving liquidity. LSD also drops the staking threshold for ETH, enabling users to stake any amount of ETH and receive LSD, while also utilizing LSD to gain multiple yields.

LSDFi is backed by the composability of DeFi, where new projects attract users to stake ETH/LSD on their platforms through incentives to gain market share and control over LSD. Some projects utilize dynamic yields to encourage users to stake on smaller decentralized platforms to enhance the decentralization of validators.

LSDFi mainly has the following forms:

1. LP ( earns 10% + )

Before the Shanghai upgrade, LSD could not be directly exchanged for ETH, so many DeFi projects established LSD-ETH liquidity pools. The base yield generally does not exceed 5%, mainly increasing APY through token subsidies. Stakers not only receive ETH staking rewards but also LP fee rewards. After the Shanghai upgrade, the scale of LPs may further increase.

2. Circular lending ( yield 10% + )

Leverage betting on the Ethereum merged mainnet through AAVE and LIDO's STETH:

• Stake ETH on LIDO to obtain STETH
• Deposit STETH into AAVE and borrow ETH
• Repeat the above operation

The liquidation risk is relatively high, and the APR depends on the number of cycles. Theoretically, all lending protocols can be realized, and automatic circular lending products may emerge in the future.

3. Yield (10%+)

Yearn Finance has established a liquidity pool on Curve, increasing the LSD APY to 5.89%. Users can directly stake stETH, and the current pool size is approximately $16.4 million. There are many similar established projects that enhance returns by aggregating yields from multiple platforms and providing subsidies.

4. EigenLayer ( income unknown )

EigenLayer offers various staking methods, including Liquidity staking and ultra-Liquidity staking. Ultra-Liquidity staking allows LP to stake, specifically including:

• LSD stake: Assets that have been staked in Lido or Rocket Pool can be staked again in EigenLayer.
• LSD LP stake: For example, re-staking Curve's stETH-ETH LP Token to EigenLayer

5. Incentive LSDFi Projects

Improve capital efficiency through leverage, structured strategies, options, bond derivatives, etc., or attract savings or achieve other goals using high APY.

Some representative projects include:

Pendle: A Decentralized Finance yield protocol that offers various yield management strategies. Users can buy ETH at a discount and earn returns by locking it up, while also adding Liquidity to earn returns. Currently, the yields are high, but mainly due to PENDLE token subsidies.

Ion Protocol: Tokenizes LSD tokens and stakable asset tokens into allETH and vaETH. Plans to aggregate LSD yields with the help of EigenLayer and others. In early stages.

unshETH: Improve the decentralization of validators through dynamic allocation of incentives. Provide higher rewards to LSD platforms with low market share, encouraging users to stake ETH on smaller platforms. Currently, only supports certain LSD.

LSDx Finance: The goal is to become the DEX for the LSD asset sub-market. It adopts a GLP architecture similar to GMX to establish a unified liquidity pool ETHx. Recently launched on exchanges, with investors announced and attention rapidly increasing.

Liquid Staking Derivatives: LSD Aggregator, solving liquidity issues and maximizing asset leverage through tokenization and issuance of derivatives. Users stake ETH or LSD to receive token rewards, which can be used for governance or liquidity mining.

Stader Ethereum: ETHx is coming soon. Users deposit ETH to receive ETHx, and ETH is allocated to three different pools. Plans to collaborate with multiple Decentralized Finance protocols to enhance composability.

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

Parallax Finance: provides liquidity infrastructure, currently only available on Arbitrum. Its product Supernova offers not only staking rewards but also leverage and lending services.

bestLSD: The testnet is about to begin. It seems to be a Real Yield aggregator that uses aggregated yield to subsidize its own LSD (bestETH).

0xAcid DAO: A management protocol for maximizing LSD asset returns. Most assets are placed in stable nodes, with some used for high-yield strategies. Collaborating with Pendle for yield leveraging and offering services such as lending and LP.

Index Coop: Issued two LSDFi related products: dsETH( diversified stake ETH index ) and icETH( leveraged liquidity stake strategy product ).

Gitcoin: Collaborating with Index Coop to launch Gitcoin Staked ETH Index (gtcETH), with part of the revenue used for public goods donations.

Overall, incentive LSDFi projects are competing for the discourse power of LSD, which will affect their future cooperation and position in the DeFi ecosystem. Strategy stability is key, but high returns may become the norm for a period of time. Different strategies cater to users with different risk preferences, ranging from purely seeking high returns to strategies that balance risk and return. The impact of LSDFi on the decentralization of validators is still limited, but it may improve in the future. There is room for collaboration among projects, and a product line with different risk-return levels may form in the future. The LSD War is expected to last until the Ethereum staking rate stabilizes above 25%.