Liquid (LSD) derivatives are tokens that represent marked cryptocurrency assets and can be used in decentralized financing activities (DEFI). These tokens allow users to keep liquidity while earning stalement rewards. The LSDs gain ground in cryptographic space, in particular in the Ethereum ecosystem, with a total locking combined value (TVL) of $ 21.6 billion, and the Lido representing only more than $ 14 billion on TVL (1).
The transition from Ethereum to a model of evidence of proof of implementation (POS) through the users of “fusion” allowed the users to put ETH in exchange for awards of jealous, which should produce between 3 and 6% per year (1). However, the marked ETH is locked and not economical in capital. The liquid milestone resolves this by emitting LSD – liquid tokens that represent the marked ETH. These tokens can be used in DEFI protocols to obtain additional yields, for example through loans, liquidity or negotiation supplies (1).
Shanghai’s upgrade has further improved the attraction of LSDs by allowing the withdrawal of the ETH marked by a fixture of withdrawal, thus reducing liquidity constraints (1). After upgrading, platforms offering LSDs began to see increased adoption. These platforms generally charge commission fees of 5 to 10% on features of features, which contributes to their income and supports continuous development (1).
Lido Finance is the main LSD supplier, with more than 4.64 million Ethmons, equivalent to around $ 7.19 billion at current prices. Lido emits Steth (ETH ETH), a token that accumulates rewards over time. An enveloped version, Wsteth, was then presented to simplify integration with the DEFI protocols (1). The domination of Lido over the market is significant, with 72.9% of the market share of ETH formerly and 31% of all ETH on Ethereum. However, its risk of centralization has raised concerns, in particular the approach of a potential threshold of 33%, beyond which network security could be compromised (1).
Rocket Pool is another major player in the LSD space, focusing on decentralization. It allows users to mark ETH with lower entry barriers compared to Lido, requiring only 16 ETH ETHRL (Rocket Pool governance token). Rocket Pool offers a commission structure of 5 to 20% and rewards node operators with additional RPL tokens (1). Despite its decentralized approach, the platform faces risks linked to inflation and the potential devaluation of the RPL if market conditions become unfavorable (1).
Frax Finance quickly emerged as a competitive option in the LSD space, which has increased its ETH marked by 40% at the beginning of 2023 (1). Frax offers FRXTH, a derivative of liquid that provides higher yields compared to other platforms. The SFRXTH variant, which accumulates value over time, offers an annual yield of around 6.63%, outperforming the Lido and the rocket basin. The integration of Frax with the financing of the curve and the convex finance allows users to generate additional yields by the supply of liquidity and the incentives to implement (1). However, as the FRXTH TVL develops, the APR may decrease due to the distribution of incentives in a larger user base (1).
Stafi and Stade are more recent entrants in the LSD space. Stafi, one of the first liquid ignition protocols, makes it possible to punctuate with low ETH requirements, but its afterlife is relatively modest at 3.4% (1). Stade, which previously operated on the terra chain, developed in the multiple milestone and plans to launch ethx at the beginning of 2023. The two projects are faced with challenges linked to liquidity, the offer of tokens and competition on the market (1).
The growing popularity of the LSD transforms the DEFI landscape by allowing users to generate several income flows from their marked assets. Platforms such that the financial finances also exploit LSD for Tokensize and exchange the yield, further expanding the utility of the marked assets (1). As the market evolves, investors are advised to assess factors such as rates of return, liquidity, decentralization and risk profiles of individual platforms.
Shanghai’s upgrade has catalyzed this trend by unlocking the marked ETH and improving the effectiveness of capital. While the LSDs continue to gain adoption, the ecosystem should see new innovations and competition, in particular in the fields of the generation of elements, tokenomics and decentralization (1).
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(1) Title: What are liquid (LSD) derivatives and how do they unlock liquidity?
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