Analysis of the Five Forms of LSDFi: From LP to the Earnings and Risks of Incentive Projects

LSDFi is a DeFi product based on LSD. Through LSD, stakers can convert their staked ETH into tradable assets, thereby unlocking liquidity. LSD lowers the threshold for users to stake ETH, allowing any amount to be staked, and they can receive LSD after staking, while also benefiting from multiple earnings brought by LSD.

LSDFi is built on the Lego of Decentralized Finance, and the combination of Decentralized Finance is based on the Lego of yields. New entrants will attract users to stake ETH/LSD on their platform through bribery, acquiring third-party tokens, or incentivizing with their own tokens, thereby capturing market share and control over LSD. Some LSDFi projects utilize variable incentive multipliers or dynamic yield rates to encourage users to stake on smaller decentralized staking platforms to obtain LSD, aiming for greater decentralization of validators.

The following are the five forms of LSDFi:

1. LP (yield 10% +)

Before the Shanghai upgrade, LSD could not be directly exchanged for ETH, so many DeFi projects established corresponding LSD-ETH liquidity pools. Taking stETH as an example, the base yield generally does not exceed 5%, and the APY is mainly increased through token subsidies. At this time, stakers not only receive network rewards for staking ETH but also earn LP fee rewards. After the base of LSD increases, the scale of LP may not decrease but rather increase after the Shanghai upgrade.

2. Circular Lending (Yield 10%+)

AAVE and LIDO's STETH have leveraged billions in bets on the activation of the Ethereum post-merge mainnet. The steps are as follows:

1. Stake ETH on LIDO to obtain STETH
2. Deposit STETH into AAVE and borrow ETH
3. Repeat the above operation

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

3. Yield (10%+)

Yearn Finance has created a liquidity pool on Curve, increasing the LSD APY to 5.89%. Users can choose to directly stake stETH, and the current pool value is 16.4 million USD. There are many similar older projects that increase yields by aggregating earnings and subsidies from multiple platforms.

The entry of established DeFi projects like Yearn into the LSD sector also reflects the importance of this track.

4. EigenLayer (unknown yield)

EigenLayer offers multiple staking methods, including liquidity staking similar to Lido and ultra liquidity staking. Ultra liquidity staking allows for staking of LP pairs, specifically including:

• LSD stake: Assets already staked in Lido or Rocket Pool are staked again to EigenLayer
• LSD LP stake: For example, the stETH-ETH LP Token from Curve is staked again to EigenLayer.

5. Incentive LSDFi project

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

Some representative projects include:

• Pendle: A Decentralized Finance yield protocol that provides staking services and liquidity pools for ETH, APE, LOOKs, etc.
• Ion Protocol: Tokenizes LSD tokens and stakeable asset tokens into allETH and vaETH
• unshETH: A protocol that enhances the decentralization of validators through dynamic incentive allocation.
• LSDx Finance: Aims to become the DEX for the LSD asset sub-market.
• Liquid Staking Derivatives: LSD aggregator, solving liquidity issues through tokenization and issuance of derivative tokens.
• Stader Ethereum: ETHx is coming soon, collaborating with multiple Decentralized Finance protocols to unleash composability.
• Hord: An LSD project that achieves higher APR through various means.
• Parallax Finance: provides liquidity infrastructure on L2
• bestLSD: Real Yield aggregator, using the aggregated returns to subsidize its own LSD.
• 0xAcid DAO: A management protocol that maximizes returns on LSD assets
• Index Coop: Issued two LSDFi related products, dsETH and icETH.
• Gitcoin: Partnered with Index Coop to launch Gitcoin Staked ETH Index (gtcETH)

Overall, the LSDFi sector is rapidly developing, with various projects competing for market share and influence through different strategies. High yields may become the norm for a period of time, but the long-term sustainability of projects still requires attention. The impact of LSDFi on validator decentralization is currently limited, but it may change with the development of the industry. In the future, there will be ample room for cooperation among LSDFi projects, potentially forming products with various yield tiers to meet the needs of users with different risk preferences.