LSDs, or Liquid Staking Derivatives, are the financial instruments that represents the receipt of staked tokens within DeFi. It allows the users to stake their assets like Ethereum and earn rewards, while still being able to use it else where in the DeFi ecosystem. Popular LSD protocols include Lido Finance (which issues stETH), RocketPool, and Stakewise.

LSDFi, an abbreviation of LSD Finance, is a new emerging sub-sector of DeFi that builds on top of LSDs. It provides additional yield opportunities for LSD holder by allowing them to leverage their assets and maximize returns. It is rapidly growing sub sector with total value locked surpassing 600 million dollars as of July 2023. The growth is primarily driven by rise of staked ETH in the recent months, leading many to speculate of LSDFi summer, reminiscent of the DeFi summer of 2020.

There are various LSDFi protocols which has gained initial traction.

Pendle allows the users to tokenize and sell future yields. Users can lock up their assets (like stETH) and receive the tokenized version of the asset in return.

For instance, when the user locks 1 stETH (in form of wrapped SY-stETH) in the pendle protocol, they receive two tokens: 1 PT-stETH and 1 YT-stETH, which represents principal component of the staked ETH and yield bearing component of the staked ETH respectively. The split gives more flexibility to the users to trade yield of their otherwise illiquid staked Ether. In this case, if the user is bullish about the yield of stETH going up, they can increase their exposure to YT-ETH and hedge against it when they believe that yield of Ether will go down. Both of these split components have maturity date, which means that the user have to convert them back to the unspilt asset before the it matures.

Pendle uses Curve protocol to provide liquidity for their token. It currently supports stETH and stAPE. Similar to the famous Curve-war, we are also seeing signs of LSDFi-war shaping up with projects like Equilibria and Penpie, which offers yield boosters for Pendle.

As of July 2023, the total value locked in the pendle protocol is 59.28 million USD.

Following Ethereum’s Shanghai upgrade, a new type of stablecoin called interest-bearing stablecoin came into the picture. These stablecoins aim to solve the issue of the current absence of decentralized interest-bearing stablecoins in the DeFi ecosystem. By leveraging the yield provided by LSDs, Lybra has built an interest-bearing and over-collateralized stablecoin called eUSD. Each 1 eUSD is backed by at least $1.5 worth of stETH as collateral.

Lybra Protocol users can earn regular stable income by holding minted (borrowed) eUSD. This income is powered by the LSD income generated from the deposited ETH and stETH. Simply holding eUSD generates a stable income with an APY of approximately 8%. Moreover, there's no borrowing interest when minting eUSD, allowing users to go leveraged long on ETH with zero loan cost.

Currently, ETH and stETH are the only collateral types accepted by Lybra. Additionally, users have to deposit 1 ETH at minimum to open a position.

As of July 2023, the total value locked in the pendle protocol is 276.68 million USD

Maverick AMM is a decentralized exchange protocol for Liquid staked tokens. Similar to Uniswap v3, Maverick offers concentrated liquidity. Maverick is a Dynamic Distribution AMM, capable of automating liquidity strategies that before now have required daily maintenance or the use of meta-protocols.

All liquidity movement in the Maverick AMM is governed by TWAP (Time-weighted average) of a given pool. Once every block, the contract updates the TWAP and checks if any liquidity needs to be moved, based on the rules of each movement mode. If it finds a bin that needs to be moved, it moves it. Users can also incentivize the any distribution of liquidity in a pool as part of the boosted position.

Maverick is currently operational on Ethereum and zkSync-Era.

As of July 2023, the total value locked in the Maverick Finance protocol is 15.7 million USD.

Similar to Lybra, Raft Finance users to generate $R stablecoin by depositing liquid staked tokens as collateral. Raft has a lower collateral requirement than Lybra. Users can borrow 1 R for every $1.2 worth of stETH deposited. User need to generate atleast 3000 R to open a position.

Apart from stETH, Raft also support rETH (rocket ETH) as collateral. Raft also differs from Lybra in that it allows frontend operators to operate independent frontend to interact with the underlying contracts. Raft encourages all operators to deploy their frontend on IPFS. This approach can effectively lead in circumventing geoblocking requirements that many DApps have to adhere to in jurisdictions like the US.

As of July 2023, the total value locked in the Raft Finance protocol is 62.92 million USD.

Similar to Pendle, Flashstakes allows for splitting yield from the principal component of the asset. But unlike pendle, user can claim the future yield immediately after staking the asset. Flashstakes has “Time vaults” that allows users to trade the future time value of the asset for upfront capital.

For instance, if a user has 10 ETH, they can stake it in Lido and earn 0.4 ETH in yield after a year. But instead, they can lock it on Flashstake for 365 days and receive 0.4 wstETH (wrapped staked ether) right away. The user's ETH will still be staked, and if they withdraw it before 365 days, they will need to return the yield for the remaining period, calculated using the staking APR rate at the time of repayment.

If a user decides to withdraw their ETH before 365 days, they will need to return the wstETH that they received. They will also need to pay a fee, which is calculated as a percentage of the yield that they earned. The fee is used to cover the costs of operating Flashstake.

As of July 2023, the total value locked in the Flashstakes protocol is 8.89 million USD, while the total value locked in Flashstakes strategy vault is 4.53 million USD.

Similar to Lybra and Raft, Gravita is a stablecoin lending protocol which brings interest bearing stablecoin to the Ethereum Ecosystem. The user deposits LSTs like stETH to mint USD pegged GRAI.

Gravita uses an interesting mechanism called Stability pool, which is the first line of defence in maintaining system solvency. It achieves that by acting as the source of liquidity to repay debt from liquidated Vessels (which are essentially Maker CDPs) — ensuring that the total GRAI supply always remains backed.

For improved user experience, Gravita Protocol employs interest-free borrowing with a low one time maximum fee of 0.5% for positions longer than 6 months, which is different from many protocols that offer variable borrowing APR which requires constant checking by the users to avoid liquidations.

Gravita is similar to Lybra and Raft in many ways - It has a minimum debt position of 2000 GRAI. It offers a similar collateralization ratio to Raft which is at 117.6% for wstETH , which means that user can borrow 1 GRAI for every 1.176 USD worth of locked wstETH. It also differs from the aforementioned protocols in some ways - Gravita smart contracts are immutable, which means that they can’t be mutated based on governance approval. Also, Gravita has a recovery mode, during which, vessels (CDPs) with an Loan-to-Value ratio 71.4% or higher can be liquidated. This is true for all collateral types supported by the protocol, with an exception of bLUSD. The goal of Recovery Mode is to incentivize borrowers to behave in ways that promptly reduce the LTV back below the Maximum System LTV and to incentivize GRAI holders to replenish the Stability Pool.

As of July 2023, the total value locked in the Gravita protocol is 15.56 million USD.

Asymetrix is a LSDFi protocol for asymmetric yield distribution generated from staking. It gives users a chance to earn a much higher APR compared to regular staking or holding of stETH.

It is similar to PoolTogether’s no-loss lottery. However there are some differences, Asymetrix uses a "winner-take-all" lottery format, while PoolTogether uses a "dividend" format. In Asymetrix, only one user wins the lottery and receives the entire prize pool. Asymetrix uses a "volatility-based" lottery, instead of “time-based” lottery mechanism used by PoolTogether. The odds of winning the Asymetrix lottery are determined by the volatility of the underlying asset. The odds of winning the PoolTogether lottery are determined by the amount of time that a user has staked their assets. Furthermore, The size of the Asymetrix prize pool is not fixed and is determined by the amount of assets that are staked in the protocol.

Users deposit stETH in a pool to participate in a weekly lottery. The prize fund is the total staking yield generated by all the stETH in the pool during the week. At the end of the week, three winners are randomly selected from among the participants. The first prize is 50% of the total yield, the second prize is 30%, and the third prize is 20%. The draw is called a "no-loss" lottery because all participants also earn ASX tokens.

As of July 2023, the total value locked in the Asymetrix protocol is 24.65 million USD.

The emergence and growth of the LSDFi ecosystem is encouraging to watch. Apart from the LSDFi protocols explained in this report, there are various early stage protocols like ZeroLiquid and LSDx that have been heads-down building during the bear market. ZeroLiquid offers interest-free, liquidation-free, and self-repaying loans for LSD tokens. LSDx is building ETHx, a basket of assets containing various types of Ethereum backed LSDs, along with UM, which is a stablecoin overcollateralized by ETHx.

Veteran protocols like Maker has also been building on top of LSDs and technically also qualify as a LSDfi protocol. Maker vaults like rETH-A provides LSD borrowing products for users through the largest DeFi lending protocol. In May 2023, Curve also launched crvUSD, which is one of the largest LSDFi stablecoin protocol now with 65.01 million USD in total value locked. crvUSD can only be currently minted with sfrxETH (a LSD from Frax Finance).

Interest-bearing overcollateralized stablecoins have emerged as the largest usecase in the LSDFi ecosystem. Apart from Lybra, Gravita, and Raft there are many yet-to-be launched LSDFi stablecoin projects that use the same mechanics. Lucid Finance, is a similar pre-launch protocol that is building DUSD, a LSD backed stablecoin built on LayerZero omnichain interoperability protocol, which will make it available on Optimism, Polygon, and Arbitrum within weeks of launch.

Apart from LSD-backed stablecoins, the other emerging protocols in the LSDFi ecosystem can be categorized as AMMs (Mavrick, Curve), Yield boosting protocols (Penpie, Equilibria), Index LSDs (Indexcoop, LSDx, unshETH, Asymmetry), and Yield strategy protocols (InstaDapp, Flashstakes, Pendle).

Furthermore, Layer1 blockchain project called Tenet employs Diversified Proof of Stake consensus algorithm using LSDs. Instead of letting validators stake just the native coin, Tenet supports PoS staking of LSDs bridged from different chains using LayerZero, such as stETH. Persistence, a blockchain in the cosmos ecosystem is optimized to LSDFi DApps. pStake Finance is one DApp built on the Persistence Core-1 Chain. It is a multi-chain liquid staking protocol for issuing LSTs that allows users to stake their assets while participating in DeFi across Ethereum, BNB, Cosmos, and the Persistence ecosystem.

ETH core developers have recently proposed raising the validator limit from 32 ether to 2,048 ether. The proposed cap will also introduce the possibility of auto-compounding validator rewards. At present, rewards earned beyond the 32 ETH cap must be redirected elsewhere to generate any staking yield. If the cap were to be lifted and raised, these rewards could immediately be compounded, providing validators with an effective means to earn more from their staked ETH. This can work as an exciting catalyst for the LSDFi app to gain breakthrough traction in future.

LSDs, or Liquid Staking Derivatives, are the financial instruments that represents the receipt of staked tokens within DeFi. It allows the users to stake their assets like Ethereum and earn rewards, while still being able to use it else where in the DeFi ecosystem. Popular LSD protocols include Lido Finance (which issues stETH), RocketPool, and Stakewise.

LSDFi, an abbreviation of LSD Finance, is a new emerging sub-sector of DeFi that builds on top of LSDs. It provides additional yield opportunities for LSD holder by allowing them to leverage their assets and maximize returns. It is rapidly growing sub sector with total value locked surpassing 600 million dollars as of July 2023. The growth is primarily driven by rise of staked ETH in the recent months, leading many to speculate of LSDFi summer, reminiscent of the DeFi summer of 2020.

There are various LSDFi protocols which has gained initial traction.

Pendle allows the users to tokenize and sell future yields. Users can lock up their assets (like stETH) and receive the tokenized version of the asset in return.

For instance, when the user locks 1 stETH (in form of wrapped SY-stETH) in the pendle protocol, they receive two tokens: 1 PT-stETH and 1 YT-stETH, which represents principal component of the staked ETH and yield bearing component of the staked ETH respectively. The split gives more flexibility to the users to trade yield of their otherwise illiquid staked Ether. In this case, if the user is bullish about the yield of stETH going up, they can increase their exposure to YT-ETH and hedge against it when they believe that yield of Ether will go down. Both of these split components have maturity date, which means that the user have to convert them back to the unspilt asset before the it matures.

Pendle uses Curve protocol to provide liquidity for their token. It currently supports stETH and stAPE. Similar to the famous Curve-war, we are also seeing signs of LSDFi-war shaping up with projects like Equilibria and Penpie, which offers yield boosters for Pendle.

As of July 2023, the total value locked in the pendle protocol is 59.28 million USD.

Following Ethereum’s Shanghai upgrade, a new type of stablecoin called interest-bearing stablecoin came into the picture. These stablecoins aim to solve the issue of the current absence of decentralized interest-bearing stablecoins in the DeFi ecosystem. By leveraging the yield provided by LSDs, Lybra has built an interest-bearing and over-collateralized stablecoin called eUSD. Each 1 eUSD is backed by at least $1.5 worth of stETH as collateral.

Lybra Protocol users can earn regular stable income by holding minted (borrowed) eUSD. This income is powered by the LSD income generated from the deposited ETH and stETH. Simply holding eUSD generates a stable income with an APY of approximately 8%. Moreover, there's no borrowing interest when minting eUSD, allowing users to go leveraged long on ETH with zero loan cost.

Currently, ETH and stETH are the only collateral types accepted by Lybra. Additionally, users have to deposit 1 ETH at minimum to open a position.

As of July 2023, the total value locked in the pendle protocol is 276.68 million USD

Maverick AMM is a decentralized exchange protocol for Liquid staked tokens. Similar to Uniswap v3, Maverick offers concentrated liquidity. Maverick is a Dynamic Distribution AMM, capable of automating liquidity strategies that before now have required daily maintenance or the use of meta-protocols.

All liquidity movement in the Maverick AMM is governed by TWAP (Time-weighted average) of a given pool. Once every block, the contract updates the TWAP and checks if any liquidity needs to be moved, based on the rules of each movement mode. If it finds a bin that needs to be moved, it moves it. Users can also incentivize the any distribution of liquidity in a pool as part of the boosted position.

Maverick is currently operational on Ethereum and zkSync-Era.

As of July 2023, the total value locked in the Maverick Finance protocol is 15.7 million USD.

Similar to Lybra, Raft Finance users to generate $R stablecoin by depositing liquid staked tokens as collateral. Raft has a lower collateral requirement than Lybra. Users can borrow 1 R for every $1.2 worth of stETH deposited. User need to generate atleast 3000 R to open a position.

Apart from stETH, Raft also support rETH (rocket ETH) as collateral. Raft also differs from Lybra in that it allows frontend operators to operate independent frontend to interact with the underlying contracts. Raft encourages all operators to deploy their frontend on IPFS. This approach can effectively lead in circumventing geoblocking requirements that many DApps have to adhere to in jurisdictions like the US.

As of July 2023, the total value locked in the Raft Finance protocol is 62.92 million USD.

Similar to Pendle, Flashstakes allows for splitting yield from the principal component of the asset. But unlike pendle, user can claim the future yield immediately after staking the asset. Flashstakes has “Time vaults” that allows users to trade the future time value of the asset for upfront capital.

For instance, if a user has 10 ETH, they can stake it in Lido and earn 0.4 ETH in yield after a year. But instead, they can lock it on Flashstake for 365 days and receive 0.4 wstETH (wrapped staked ether) right away. The user's ETH will still be staked, and if they withdraw it before 365 days, they will need to return the yield for the remaining period, calculated using the staking APR rate at the time of repayment.

If a user decides to withdraw their ETH before 365 days, they will need to return the wstETH that they received. They will also need to pay a fee, which is calculated as a percentage of the yield that they earned. The fee is used to cover the costs of operating Flashstake.

As of July 2023, the total value locked in the Flashstakes protocol is 8.89 million USD, while the total value locked in Flashstakes strategy vault is 4.53 million USD.

Similar to Lybra and Raft, Gravita is a stablecoin lending protocol which brings interest bearing stablecoin to the Ethereum Ecosystem. The user deposits LSTs like stETH to mint USD pegged GRAI.

Gravita uses an interesting mechanism called Stability pool, which is the first line of defence in maintaining system solvency. It achieves that by acting as the source of liquidity to repay debt from liquidated Vessels (which are essentially Maker CDPs) — ensuring that the total GRAI supply always remains backed.

For improved user experience, Gravita Protocol employs interest-free borrowing with a low one time maximum fee of 0.5% for positions longer than 6 months, which is different from many protocols that offer variable borrowing APR which requires constant checking by the users to avoid liquidations.

Gravita is similar to Lybra and Raft in many ways - It has a minimum debt position of 2000 GRAI. It offers a similar collateralization ratio to Raft which is at 117.6% for wstETH , which means that user can borrow 1 GRAI for every 1.176 USD worth of locked wstETH. It also differs from the aforementioned protocols in some ways - Gravita smart contracts are immutable, which means that they can’t be mutated based on governance approval. Also, Gravita has a recovery mode, during which, vessels (CDPs) with an Loan-to-Value ratio 71.4% or higher can be liquidated. This is true for all collateral types supported by the protocol, with an exception of bLUSD. The goal of Recovery Mode is to incentivize borrowers to behave in ways that promptly reduce the LTV back below the Maximum System LTV and to incentivize GRAI holders to replenish the Stability Pool.

As of July 2023, the total value locked in the Gravita protocol is 15.56 million USD.

Asymetrix is a LSDFi protocol for asymmetric yield distribution generated from staking. It gives users a chance to earn a much higher APR compared to regular staking or holding of stETH.

It is similar to PoolTogether’s no-loss lottery. However there are some differences, Asymetrix uses a "winner-take-all" lottery format, while PoolTogether uses a "dividend" format. In Asymetrix, only one user wins the lottery and receives the entire prize pool. Asymetrix uses a "volatility-based" lottery, instead of “time-based” lottery mechanism used by PoolTogether. The odds of winning the Asymetrix lottery are determined by the volatility of the underlying asset. The odds of winning the PoolTogether lottery are determined by the amount of time that a user has staked their assets. Furthermore, The size of the Asymetrix prize pool is not fixed and is determined by the amount of assets that are staked in the protocol.

Users deposit stETH in a pool to participate in a weekly lottery. The prize fund is the total staking yield generated by all the stETH in the pool during the week. At the end of the week, three winners are randomly selected from among the participants. The first prize is 50% of the total yield, the second prize is 30%, and the third prize is 20%. The draw is called a "no-loss" lottery because all participants also earn ASX tokens.

As of July 2023, the total value locked in the Asymetrix protocol is 24.65 million USD.

The emergence and growth of the LSDFi ecosystem is encouraging to watch. Apart from the LSDFi protocols explained in this report, there are various early stage protocols like ZeroLiquid and LSDx that have been heads-down building during the bear market. ZeroLiquid offers interest-free, liquidation-free, and self-repaying loans for LSD tokens. LSDx is building ETHx, a basket of assets containing various types of Ethereum backed LSDs, along with UM, which is a stablecoin overcollateralized by ETHx.

Veteran protocols like Maker has also been building on top of LSDs and technically also qualify as a LSDfi protocol. Maker vaults like rETH-A provides LSD borrowing products for users through the largest DeFi lending protocol. In May 2023, Curve also launched crvUSD, which is one of the largest LSDFi stablecoin protocol now with 65.01 million USD in total value locked. crvUSD can only be currently minted with sfrxETH (a LSD from Frax Finance).

Interest-bearing overcollateralized stablecoins have emerged as the largest usecase in the LSDFi ecosystem. Apart from Lybra, Gravita, and Raft there are many yet-to-be launched LSDFi stablecoin projects that use the same mechanics. Lucid Finance, is a similar pre-launch protocol that is building DUSD, a LSD backed stablecoin built on LayerZero omnichain interoperability protocol, which will make it available on Optimism, Polygon, and Arbitrum within weeks of launch.

Apart from LSD-backed stablecoins, the other emerging protocols in the LSDFi ecosystem can be categorized as AMMs (Mavrick, Curve), Yield boosting protocols (Penpie, Equilibria), Index LSDs (Indexcoop, LSDx, unshETH, Asymmetry), and Yield strategy protocols (InstaDapp, Flashstakes, Pendle).

Furthermore, Layer1 blockchain project called Tenet employs Diversified Proof of Stake consensus algorithm using LSDs. Instead of letting validators stake just the native coin, Tenet supports PoS staking of LSDs bridged from different chains using LayerZero, such as stETH. Persistence, a blockchain in the cosmos ecosystem is optimized to LSDFi DApps. pStake Finance is one DApp built on the Persistence Core-1 Chain. It is a multi-chain liquid staking protocol for issuing LSTs that allows users to stake their assets while participating in DeFi across Ethereum, BNB, Cosmos, and the Persistence ecosystem.

ETH core developers have recently proposed raising the validator limit from 32 ether to 2,048 ether. The proposed cap will also introduce the possibility of auto-compounding validator rewards. At present, rewards earned beyond the 32 ETH cap must be redirected elsewhere to generate any staking yield. If the cap were to be lifted and raised, these rewards could immediately be compounded, providing validators with an effective means to earn more from their staked ETH. This can work as an exciting catalyst for the LSDFi app to gain breakthrough traction in future.