Don’t Do Drugs, But Check Out LSD

Moonrock Capital
5 min readJan 12, 2023

Now seriously, don’t do drugs but you should check out LSD and by that we don’t mean Lysergic acid diethylamide but Liquid Staking Derivates. With this article we want to explain you the brewing narrative, how it works and how you can position yourself in this market.

Liquid Staking Derivates

In the past, the process of staking required individuals to forfeit the ability to transfer or trade their digital assets for a specific duration. As a result, individuals had to make a trade-off between earning staking rewards and retaining the liquidity of their holdings. Liquid staking derivatives, also known as LSD, is a mechanism that enables investors to gain additional benefits from their staked assets. These assets are now liquid and can be used as collateral in popular decentralized finance protocols, potentially generating extra returns.

So how does this work?

When you utilize a liquid staking protocol, you receive a tokenized representation of your deposited assets, which can be utilized within the decentralized finance ecosystem. As an example, if you choose to stake 10 ETH in a liquid staking protocol, the protocol will mint 10 stETH, equivalent to the 10 ETH deposited. You receive staking rewards from the deposited 10 ETH, while also retaining the ability to use the stETH tokens for other purposes. In order to redeem the initial 10 ETH, you need to possess an equal amount of stETH tokens. Note that the specific terms and conditions may vary depending on the particular protocol being used.

How can i benefit from this?

  • Liquid staking provides you the opportunity to diversify your portfolio while still earning staking rewards by retaining the liquidity of your crypto assets, allowing you to take advantage of market fluctuations to increase your profits.
  • With liquid staking, you can continue to earn yield in DeFi. Therefore you can stack yield onto your stacking yield.
  • Liquid staking enables fast access to funds, allowing you to unstake your assets immediately by swapping your staked tokens for normal tokens without incurring in lengthy “un-staking” processes or penalties for early withdrawal.
  • By enabling users to earn rewards on their holdings without having to lock them up, liquid staking helps to maintain and increase the overall liquidity of the cryptocurrency market. This increased liquidity can help reduce volatility and improve market stability by encouraging more people to hold on to their cryptocurrencies for longer periods of time.

LSD Narrative And It’s Outlook

Source: DefiLlama

The DeFi Llama website’s rankings of Total Locked Value for LSDs have been garnering attention lately, with projects such as Rocketpool and cbETH experiencing significant gains over the past month. Data from Dune shows, that this isn’t only because the ETH price has risen, but also because liquid staking balances have increased over the year.

How did this narrative emerge?

The Ethereum network recently underwent a significant upgrade, transitioning from a proof-of-work to a proof-of-stake system with the introduction of ETH 2.0. This allows investors and validators to stake their Ethereum in order to support and secure the network, and earn rewards in return. However, the upgrade did not allow for the withdrawal of staked Ethereum from the Beacon chain. The tentative date for the Shanghai upgrade to go live is Q1 — Q2 2023, with a focus on allowing withdrawals before implementing further improvements to scalability. Over the year more and more ETH was staked and people choose to work with their staked assets, rather than just locking it away.

There are a few potential outcomes that could arise following the Shanghai upgrade. These include:

  • Increased selling pressure from early holders and those looking to dispose of their assets
  • No change in the actions of current stakers
  • A shift towards liquid staking derivatives for improved returns and decentralized finance functionality.

An interesting fact to consider is that, according to Dune, only 20% of all staked Ethereum is currently showing a positive return. It is important to keep this in mind when evaluating the potential impact of the Shanghai upgrade on the market and the behavior of stakeholders.

Potential Positioning

It is possible that 2023, specifically in the first quarter, could be remembered as a period of intense competition among liquidity providers within the LSD market. Investors seeking to revive their potentially underperforming portfolios with the help of LSDs and chances are high, that they may seek to use their staked Ethereum as collateral in the protocols with the deepest liquidity. This could result in competition among decentralized exchanges to provide ample liquidity in order to attract investors. Why decentralized exchanges? This has different reasons, such as, that their staking derivative is trustless and they have fewer restrictions around MEV Extraction. These benefits are so large, that the leader in pooled staking will likely be a decentralized / non-custodial staking pool. Paradigm explained this in a great research article. Protocols such as Curve or Balancer may play a notable role here and protocols like Aura and Convex should be on your radar through their liquidity provision and incentives.

As stated earlier the LSD narrative is brewing. This is not only shown by the fact that there is a separate LSD category on coingecko since a short time, but also by the price increase of almost every Liquid Staking governance token. The biggest winner until now are Stader Labs, StaFi and of course Lido DAO and if you are looking for LSD exposure they should be on your watchlist.

Another good potential play could be frxETH, as it may offer a higher annual percentage yield (APR) compared to Lido. Frax has a significant portion of CVX that is directed towards rewards in their pools on Convex. Additionally, frxETH can also be utilized in Frax’s lending market to create FRAX tokens which have demonstrated a stronger ability to maintain a 1:1 dollar peg compared to other stablecoins.

The BTRFLY token offered by Redacted Cartel could be a noteworthy narrative, particularly with the upcoming launch of the DINERO stablecoin which is collateralized by staked Ethereum. At this time, it is uncertain what impact DINERO will have on the market, but it is worth noting that the team behind Redacted Cartel is highly experienced, and DINERO will be implemented as a gas token.

Closing Thoughts

In general, liquid staking represents a novel and advanced approach that has the potential to offer significant advantages for investors, such as diversification, versatility and higher returns on their investments. It’s expected that LSD will become increasingly common in the near future as investors seek to capitalize on the possibilities in the market.

And as always, play it smart, take profits and always do your own research.

Who We Are

Moonrock Capital is a Blockchain Advisory and Investment Firm, incubating and accelerating early stage startups since 2019.



Disclaimer: None of the information contained here constitutes an offer (or solicitation of an offer) to buy or sell any currency, product or financial instrument, to make any investment, or to participate in any particular trading strategy.



Moonrock Capital

Moonrock Capital is a Blockchain Advisory and Investment Firm, incubating and accelerating early stage startups since 2019.