Ethereum’s Shanghai upgrade has triggered a veritable staking boom on the blockchain. Associated projects such as Lido-Finance or Rocket-Pool are recording strong price gains. The queue for deposits on the beacon chain is meanwhile 44 days long. And right in the middle, a new industry is burgeoning: the Ethereum liquid staking token (LSTs) business, led by Lido’s stETH. A new DeFi primitive is formed around this: LSTfi. The nascent staking finance already has $400 million in Total Value Locked (TVL) and is on track to usher in DeFi Summer 2.0.
LSTs: Return with real value
Liquid staking tokens represent underlying ETH staked on the beacon chain. It’s no secret that they’re extremely popular. Nearly the half of staked ETH goes to LST protocols like Lido and Rocket Pool. One of the reasons for this is to avoid opportunity costs. Investors earn staking returns on them and can continue to use their ETH derivatives for other investments. In addition, the underlying return is based on Ethereum’s staking rewards, rather than the particularly inflationary and often worthless utility or governance tokens of smaller DeFi projects. Since the unlocking of staking payouts on ETH caused massive de-risking, a number of new, innovative protocols have been building on the asset, which is increasingly becoming a kind of blockchain bond.
One of you is Lybra Finance. On Lybra, users can deposit ETH or stETH and receive the stablecoin eUSD in return. This one stands out from the others in that it currently generates around 8 percent returns by converting the staking rewards earned via stETH. One US dollar of the stablecoin is said to be secured by 1.5 times the equivalent value to prevent depegging. Lybra generated more than 180 million US dollars TVL within a few weeks. Lybra’s token, LBR, has gained 600 percent in the last three days. So demand for the passive income stablecoin is already high and driving crazy growth.
No risk, no fun
Another reason for the growing LSTfi sector is probably the demand for leveraged products with the staking token. More risk means more return. This market is served by projects like MakerDAO or Asymmetrix. Last year Maker made it possible to deposit stETH and take out a loan in ETH in order to buy more stETH. Using this strategy, the return can be generated in a continuous loop, but it is exposed to possible fluctuations in the ETH price. In the worst case, users will then be liquidated and lose their entire position.
Asymetrix, on the other hand, is more like a lottery. All users first pay in their staking tokens, the staking rewards generated subsequently come into a common pool. After a draw, one lucky staker then wins the entire return while the others get nothing. This potentially enables smaller users to skim off larger profits. Instead of generating a constant four to six percent, returns of between 0 and 999 percent are possible for individual stakers. The example of shows that the stakes should be kept small in all of this unshETH. The trading floor for LSTs with a TVL of more than $30 million was launched last week victim of a hack and had to freeze the assets on the platform. The “trial and error” motto of the innovative platforms often involves a risk for the assets of users.
New, innovative and complex
The pinnacle of complexity is protocols like Pendulum Finance Pendle allows users to deposit LSTs and in return receive two new tokens that split the value of the LST. The PT tokens represent the base value of the ETH being staked, while the YT tokens tokenize the generated return. For example, users could keep their ETH and only resell the staking return. Buyers, in turn, have the chance to buy ETH cheaper than the prevailing market price and can make profits if they hold on to the discounted coin for a certain period of time. For those who prefer to participate in LSTfi in a more conservative way, proven DeFi protocols also offer numerous instruments. Most recently Curve Finance, which in addition to frxETH will soon also be using stETH deposits to collateralize their new stablecoin. Or users give their LSTs in a classic way in a liquidity pool on Uniswap to earn from the trading fees.
Either way: since Ethereum became a full proof-of-stake blockchain at the beginning of the year, the dams seem to have been broken. The new, innovative earning opportunities are bringing a breath of fresh air to the DeFi sector, which seems to have firmer ground under its feet compared to the DeFi summer of 2020. If the crypto courses remain sluggish, more users are likely to stream into the new space to fill the upcoming summer slump and provide the necessary heat.
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