LSDFi — A Simple Guide

Moonrock Capital
5 min readJun 14, 2023

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The remarkable Shapella fork has unleashed a profound paradigm shift in how users now engage with ETH and its wondrous Liquidity Staking Tokens (LSTs). The perils of uncertainty surrounding the unstaking of ETH have been entirely eradicated, granting users the boundless freedom (albeit with a modicum of restrictions) to seamlessly transition between staked ETH, which diligently accrues lucrative yields in the service of safeguarding the blockchain, and unstaked ETH. This newfound accessibility has precipitously curtailed the risk associated with staking ETH, thereby elevating staking yields to the status of the unassailable risk-free rate for preserving ETH holdings. Consequently, the risk entailed in holding LSTs has also experienced a pronounced reduction. While a few protocols are yet to implement a redemption mechanism, the resounding triumph of the fork has effectively assuaged the apprehensions of myriad users. Furthermore, the copious liquidity pools that grace numerous LSTs facilitate a seamless transition back to ETH at a favorable exchange rate, bestowing users with utmost convenience. In this article, our aim is to provide you with an insightful exploration of LSDFi and highlight key factors to consider.

Battle Of Marketshare

With the advent of enhanced user mobility across various Liquid Staking Derivative protocols, a fierce contest for staker attraction and retention is poised to ignite. This spirited competition will be fueled by three pivotal elements:

  1. Liquidity: The role of liquidity in the battle among LSTs will persist, particularly in the short term for those protocols that have yet to enable withdrawals. Moreover, as L2 chains outpace the mainnet in transactions and volume, the race to become the premier LST on L2s will intensify. Acquiring a substantial LST supply, capable of furnishing ample liquidity to incentivize protocol adoption on L2 chains, necessitates a formidable impetus to entice users to migrate away from the mainnet.
  2. Incentives: Bestowing incentives upon users to embrace an LST has always been a paramount objective for LST protocols. Previously, pre-Shapella, incentives focused on AMM protocol pools to bolster liquidity and entice ETH holders to stake in their LST protocol. Now that redeeming LSTs for underlying ETH is feasible, users possess the capacity to transition between LST protocols in search of the most appealing staking APR. Consequently, LST protocols must not only continue to provide incentives to external DeFi protocols to encourage users to supply their LSTs to the ecosystem but also ensure competitiveness in the staking APRs they offer. This may manifest in the integration of rewards bolstered by MEV and potential reductions in staking commissions.
  3. Novel Use Cases: While interconnected with the previous components, the genesis of fresh use cases for LSTs constitutes the focal point of competition within the post-Shapella ecosystem. Over the long term, holding LSTs will likely be deemed equivalent to holding ETH. Consequently, LST protocols must differentiate themselves through their usability. The sole distinction lies in the yield generated from securing the network, which can be unlocked through novel DeFi products. This transformative capacity to harness a consistent yield will serve as the catalyst propelling user adoption of a specific LST.

Yield-Bearing LSTs + Novel DeFi Products: Welcome to the realm of LSDfi, where a vibrant tapestry of opportunity awaits.

What is LSDFi?

Source: https://dune.com/eliasimos/Eth2-Liquid-Staking

By now, it should be common knowledge that LSD, an acronym denoting liquid staking derivatives, encapsulates the fluid embodiments of staked ETH. The most prominent players in this realm are stETH and wstETH from Lido. This narrative has garnered considerable attention due to the staggering amount of ETH staked, approaching nearly $17 billion.

Source: https://dune.com/eliasimos/Eth2-Liquid-Staking

Naturally, investors wielding such substantial capital seek the most effective means of amplifying the yield on their staked deposits. To comprehend LSDFi, envision it as a multi-tiered construct. At its core lies the established staked ETH players such as LDO, RPL, and FXS. Overlying this foundation is an emergent “layer,” comprising newer protocols like Lybra, Pendle, Raft, Unsheth, and Flashstake.

Source: https://dune.com/defimochi/lsdfi-summer

This year, the Total Value Locked in emerging LSDFi building blocks has soared past $400 million, signifying abundant potential compared to the $17 billion worth of total staked ETH.

Source: https://dune.com/defimochi/lsdfi-summer

Lybra, a new venture, has spearheaded this growth, amassing a TVL exceeding $160 million.

The accompanying visual depiction unveils the present LSDFi ecosystem, brimming with a profusion of novel projects emerging day by day. Pendle specializes in enabling LSD holders to trade their yields. Agility, Lybra, and Raft operate as lending protocols, empowering users to borrow against their LSD collateral and mint stablecoins in the process. LSDx, Unsheth, Asymmetry, and Index offer users the means to diversify their yield across various LSDs, optimizing their yield potential.

Source: waynezhang.eth

Among the leading newcomers in the LSDfi arena, LBR, USH, and Pendle have already introduced tokens that have demonstrated impressive performance amidst the escalating narrative. LBR, in particular, has garnered favor among astute investors, attracting approximately $550,000 in net swap inflows over the past month. Remarkably, even the market caps of the leading LSDfi “layer 2” projects remain undervalued, with LBR currently trading at a mere $6 million market cap, while USH stands at $7 million. Therefore, should the TVL continue to gain momentum, anticipate these front-runners to evolve into more substantial valuations.

Our Take

It is imperative to recognize that these developments are not fundamentally novel innovations but rather the integration of a new asset class into DeFi products. While this narrative has gained momentum (and the crypto markets thrive on narratives), it is crucial to exercise discernment regarding the sustainability of these forthcoming product launches.

Therefore, closely monitor the growth in TVL within this category to distinguish entities that are genuinely gaining traction from those that may falter (and be sure to scrutinize the tokenomics as well). With more than 40 LSDFi projects already launched or poised for launch, this arena is bound to become crowded, and the winners will unmistakably emerge based on TVL. Hence, we exercise caution and refrain from impulsive decisions, particularly given the current overall weakness in altcoin appetite this year.

Who We Are

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

Website: https://www.moonrockcapital.io

Twitter: https://twitter.com/MoonrockCapital

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.

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Moonrock Capital

Moonrock Capital is a Blockchain Advisory and Investment Firm, incubating and accelerating early stage startups since 2019. https://www.moonrockcapital.io