LSDFi War continues to escalate, a detailed explanation of 5 strategies to generate excess returns

LSDFi is a DeFi product based on the liquid-staking derivative (LSD). Through LSD, stakers can convert their staked ETH into tradable assets, thereby unlocking liquidity. At the same time, LSD also lowers the threshold for users to stake ETH, allowing any amount to be staked, and after staking, they receive LSD, which can also bring multiple benefits from LSD.

LSDFi is backed by the composability of the DeFi ecosystem, where new entrants attract users to stake ETH/LSD on their platform through incentives, thereby gaining market share and control over LSD. Some LSDFi projects utilize dynamic yield to encourage users to choose smaller decentralized staking platforms, achieving decentralization of validators.

LSDFi has the following five forms:

1. LP( income 10%+)

Before the Shanghai upgrade, LSD could not be directly exchanged for ETH, and many DeFi projects established LSD-ETH liquidity pools. The base yield generally does not exceed 5%, mainly enhanced APY through token subsidies. Stakers can receive ETH staking rewards in addition to LP fee rewards. It is expected that the LP scale may further increase after the Shanghai upgrade.

2. Circular lending ( yield 10% + )

Leverage can be achieved by looping borrow ETH and STETH on platforms like AAVE and LIDO. Specific steps:

• 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. Automatic cycle lending products are expected to emerge.

3. Yield(10%+)

Yearn Finance and other established DeFi projects improve yields by aggregating returns from multiple platforms and providing token subsidies. For example, Yearn has set up a liquidity pool on Curve, increasing the stETH yield to 5.89%.

4. EigenLayer( earnings unknown)

EigenLayer offers various staking methods, including:

• LSD Staking: Assets already staked on platforms like Lido are re-staked on EigenLayer.
• LSD LP Staking: For example, re-staking Curve's stETH-ETH LP tokens to EigenLayer.

5. Incentive LSDFi Projects

Improve capital efficiency through leverage, structured strategies, options, bond derivatives, etc., or attract savings with high APY.

Representative projects:

Pendle: A DeFi yield protocol that offers staking services and liquidity pools. Users can purchase ETH at a discount to earn approximately 10% yield. The annualized yield for the liquidity pool can be as high as 95.7%, but it is mainly due to token subsidies.

Ion Protocol: Tokenizes LSD tokens and stakable asset tokens into allETH and vaETH. Plans to leverage LSD yield aggregation through EigenLayer and others.

unshETH: Improve the decentralization of validators through dynamically allocated incentives. Offer higher rewards to small shares of the LSD platform, encouraging users to stake on smaller platforms. Currently supports sfrxETH, rETH, wstETH, cbETH, etc.

LSDx Finance: The goal is to become the leading DEX in the LSD asset segment. Adopting a GLP architecture similar to GMX, a unified liquidity pool ETHx will be established.

Liquid Staking Derivatives: LSD Aggregator, maximizing asset leverage through tokenization and issuance of derivatives. Users stake ETH or LSD to receive token rewards.

Stader Ethereum: ETHx is coming soon. Users deposit ETH to receive ETHx, and ETH is allocated to different pools. Plans to collaborate with 30+ DeFi protocols.

Hord: Stake ETH to earn hETH. Achieve higher APR through ETH staking, MEV rewards, and HORD subsidies.

Parallax Finance: Providing liquidity infrastructure on L2. Its product Supernova offers staking rewards and leveraged lending services.

bestLSD: Real Yield Aggregator, utilizing aggregated yield to subsidize its own LSD.

0xAcid DAO: A management protocol for maximizing LSD asset returns. Most assets are placed in stable nodes, with some allocated for high-yield strategies.

Index Coop: Issued two LSDFi related products, dsETH and icETH. dsETH is a diversified liquid staking index, and icETH is a leveraged liquid staking strategy.

Gitcoin: In collaboration with Index Coop, launched gtcETH, with part of the proceeds used for public goods donations.

Summary:

• Many incentive LSDFi projects are competing for market share and influence in the LSD market.
• The dilemma of strategy stability and high returns is the choice of the LSDFi project.
• Staking with small liquidity staking providers and participating in high APY mining may be a better strategy.
• The impact of LSDFi on the decentralization of validators is still small, but may increase in the future.
• There is room for collaboration between LSDFi projects, which may lead to the formation of layered yield products in the future.
• LSD competition has begun and may continue until the Ethereum staking rate stabilizes above 25%.