LSDFi: The Future of Liquid Staking in DeFi
2024 marked a breakthrough year for the new LSDFi sector. The first major player, Lido, launched the liquid staking derivative back in 2021. Rocket Pool followed in 2022, after which a new race for the development of liquid staking began.
Liquid staking is a mechanism where tokens staked in the Ethereum network are not fully locked but are represented as derivatives. These derivatives can be used for various purposes, such as providing liquidity or participating in DeFi protocols like AAVE. This approach allows the network’s security to be maintained while earning additional rewards.
A major boost to development came from the launch of restaking protocols, such as EigenLayer. These solutions allow staked Ethereum to be reused to secure other networks and applications. This approach increases the efficiency of asset usage and opens up additional income-generating opportunities.
Now that we’ve covered the basics, what is LSDFi?
LSDFi is a concept that combines all the tools for working with LST (Liquid Staking Tokens) and LRT (Liquidity Routing Tokens) to increase farming yields through liquidity provision. In other words, LSDFi is an entire ecosystem that includes all protocols interacting with these derivatives.
Why is LSDFi gaining popularity?
Farming often confuses people because its concept can be difficult for newcomers to grasp. A simple analogy is a bank deposit. You deposit USDT into a protocol like AAVE and start farming. Farming here includes not only the basic yield (such as USDT tokens) but also additional benefits, such as partner tokens, bonuses, etc.
This is what explains the concept of farming in the context of LSDFi. It includes not only stablecoins but also derivatives representing other assets, such as Ethereum, BTC, RWA (real-world assets), and other tokens. This expands farming opportunities, increasing yield and the variety of assets that can be used in ecosystems.
What makes LSDFi farming different from farming other assets?
Unlike classic farming, where assets are usually frozen and cannot be used in other protocols, LSDFi allows working with derivatives such as LST (Liquid Staking Tokens) and LRT (Liquidity Routing Tokens). This means assets remain liquid and can be used for other purposes while still generating income through staking or farming. This gives users more flexibility and opportunities for further yield optimization.
What do I get from farming through LSDFi assets?
The primary income comes from staking assets. For example, by using LST (Liquid Staking Tokens), users earn rewards in the form of new tokens (such as ETH) for staking their assets in the Ethereum network. This is the main form of yield.
In addition to the basic staking yield, farming through LSDFi can provide additional tokens, bonuses, and points from partner protocols. These bonuses can come in the form of tokens from other projects or additional rewards, increasing the overall yield.
Points (or rewards) are a commonly used form of incentive issued to users within various protocols. For example, if you’re farming assets in a DeFi protocol or on a platform supporting LSDFi, you might receive points for participating in farming or providing liquidity. These points can be used for:
- Exchange for tokens: Points can be exchanged for tokens, which can then be used in other protocols or sold.
- Partner tokens: In addition to points, another important bonus is partner tokens. Protocols participating in the LSDFi ecosystem often enter into partnership agreements with other projects to incentivize users. Examples include:
- Partner programs: For farming in a specific protocol, users might receive not only the farming yield but also tokens issued by the protocol’s partners. This can be part of a long-term partnership program or one-time bonuses.
- Cross-protocol bonuses: Receiving tokens from partners can also mean participating in cross-protocol activities. For example, assets farmed in one protocol can be used for activities in other projects, which also provides additional benefits.
Do I receive a derivative, meaning a different token instead of my ETH? Is this safe?
Yes, when participating in liquid staking (LSDFi), you receive derivatives (such as LST, Liquid Staking Tokens) representing your staked assets. These derivatives allow you to continue using your assets in DeFi protocols for farming or liquidity provision while still earning staking rewards.
Risks of the liquid staking protocol: Liquid staking protocols (such as Lido, Rocket Pool, etc.) are widely used and considered safe, but they may expose your assets to risks due to vulnerabilities in smart contracts. Therefore, it is important to carefully research the protocol, its audits, and the community before use.
Smart contract risks: As with any other DeFi protocols, using liquid derivatives carries the risk of vulnerabilities in smart contracts. Protocols should be thoroughly tested and undergo security audits.
Liquidity risks: If there is a sudden decline in liquidity in protocols using derivatives, there may be issues with withdrawing funds or significant losses. Therefore, it is important to monitor liquidity and stability in these protocols.
Risks of derivative price changes: Derivatives, such as stETH, may trade at a price different from the nominal value of the staked asset. For example, if Ethereum drops sharply in price, the value of stETH may deviate from Ethereum’s real value. This must be taken into account when making farming and derivative usage decisions.
What are the prospects for the future?
Before concluding, it is important to note that LSDFi has enormous growth potential, especially with the inclusion of new asset categories such as RWA (real-world assets). Including RWA in the liquid staking ecosystem allows for the integration of traditional assets like real estate, bonds, and other financial instruments into the DeFi space. This opens up new opportunities for asset diversification and increased yield while reducing reliance on purely cryptocurrency assets.
In conclusion, LSDFi is a powerful tool for increasing yield through liquid staking and farming, providing more flexible and diverse opportunities for users. By obtaining derivatives such as LST and LRT, new horizons for working with assets open up, allowing users not only to earn staking rewards but also to use these assets for farming and liquidity provision in other DeFi protocols.