LSDFi Warfare Intensifies: Analysis of 5 Excess Return Strategies

LSDFi is a DeFi product based on LSD. Through LSD, stakers can convert their staked ETH into tradable assets, unlocking liquidity. LSD lowers the threshold for ETH staking, allowing any amount to be staked, and stakers can obtain LSD after staking, while also leveraging LSD for multiple benefits.

LSDFi is backed by DeFi Legos, and the composability of DeFi is backed by yield Legos. New entrants attract users to stake ETH/LSD through incentives or by utilizing their own tokens to gain market share and control over LSD. Some LSDFi projects use dynamic incentives to encourage users to stake on small decentralized platforms, promoting the decentralization of validators.

The following are the five forms of LSDFi:

1. LP( yields 10% + )

Before the Shanghai upgrade, LSD could not be directly exchanged for ETH, and many DeFi projects established LSD-ETH liquidity pools. Taking stETH as an example, the base yield is less than 5%, mainly increased APY through token subsidies. Stakers not only receive ETH staking rewards but also LP fee rewards. As the scale of LSD grows, the LP scale may continue to expand after the Shanghai upgrade.

2. Circular Lending ( yield 10% + )

Leverage operations on the Ethereum mainnet after the merger using AAVE and LIDO's STETH:

• Stake ETH in LIDO to obtain STETH
• Deposit STETH into AAVE and borrow ETH
• Repeat the above operation

The liquidation risk is relatively high, and the returns depend on the number of cycles. In theory, all lending protocols can be implemented, and there may be automated cycle lending products in the future.

3. Yield(10%+)

Yearn Finance created a liquidity pool on Curve, raising the LSD APY to 5.89%. Users can directly stake stETH, and the current pool value is $16.4 million. Similar to established projects, it increases yields by aggregating returns from multiple platforms and providing subsidies.

The involvement of established DeFi projects like Yearn in the LSD sector reflects the importance of this track.

4. EigenLayer( earnings unknown)

EigenLayer offers various staking methods, including liquid staking and ultra-liquid staking. Ultra-liquid staking allows LPs to stake:

• LSD Staking: Assets that are already staked in Lido or Rocket Pool are restaked to EigenLayer.
• LSD LP Staking: Like Curve's stETH-ETH LP Token being staked again to EigenLayer

5. Incentive LSDFi Projects

Improve capital efficiency through leverage, structured strategies, options, bond derivatives, etc., or attract savings or achieve other goals using high APY.

The representative projects include:

• Pendle: A DeFi yield protocol that offers staking services for ETH and other assets, as well as liquidity pools.
• Ion Protocol: Tokenizes LSD tokens and collateral assets into allETH and vaETH.
• unshETH: Increase the decentralization of validators through dynamic incentive distribution
• LSDx Finance: Committed to becoming a high-barrier DEX in the LSD asset segmentation market.
• Liquid Staking Derivatives: LSD aggregator, maximizing asset leverage through tokenization and derivatives.
• Stader Ethereum: The upcoming ETHx will collaborate with 30+ DeFi protocols to unleash composability.
• Hord: Achieve higher APR through ETH staking, MEV rewards, and HORD subsidies.
• Parallax Finance: Provides liquidity infrastructure on L2
• bestLSD: Real Yield aggregator, utilizing aggregated returns to subsidize its own LSD
• 0xAcid DAO: A management protocol for maximizing LSD asset returns
• EigenLayer: Provides potential DeFi Lego possibilities such as Re-staking
• Index Coop: Issuing LSDFi related index products such as dsETH and icETH
• Gitcoin: Launched gtcETH in collaboration with Index Coop, with part of the proceeds used for public goods donations.

Overall, the LSDFi project is highly competitive, and in the future, only a few players may remain. The contradiction faced by LSDFi projects is the stability of strategies versus high yields. Different strategies cater to users with varying risk preferences, with corresponding choices ranging from purely pursuing high returns to maintaining value steadily. The impact of LSDFi on the decentralization of validators remains to be observed, but it may promote the decentralization of validation in the long term. There is vast room for collaboration between projects, and a multi-tiered yield product system may form in the future.