Quick Look at 6 Early LSDFi Potential Projects

6 Potential LSDFi Projects

Author: Yuuki, LD Capital

The LSD track has been repeatedly hyped, and the market has a high level of understanding and corresponding attention to this track. The certainty of future development of the LSD track is beyond doubt, but mainstream targets face weak marginal changes. The high certainty means that there are almost no effective expectation differences in the market to provide high odds trading opportunities. At this time, due to the continuous expansion of the scale of the underlying LST asset, the LSDFi new protocol constructed on this asset will become the alpha of the entire LSD track.

The LSDFi protocol mainly focuses on two types: the first type is a protocol for minting USD stablecoins with LST as collateral in a CDP, and the second type is a protocol for minting WrapETH with LST as collateral in a CDP. The reason for focusing on these two types of products is that as the ETH pledge rate continues to rise and the scale of ETH continues to decrease, the scale of LST continues to expand. Based on the point of improving the efficiency of fund use, the market demand for lending protocols based on LST collateral will inevitably continue to expand, especially when the market rebounds and the risk appetite for funds increases.

Lending protocols are usually divided into two types. One is the mode of deposit and lending (such as AAVE and Compound), but this mode requires users to deposit funds on the capital side, and the network effect and brand effect constructed by the first-mover advantage have obvious moats, making it difficult for latecomers to compete with it. At the same time, this mode also faces the problem of high borrowing interest rates. The other is the mode of CDP minting (such as Dai), which does not involve user fund custody on the capital side. Due to the minting right of the protocol itself, users can enjoy extremely low borrowing rates, and the protocol cost is converted from bilateral interest rate subsidies to the liquidity expenditure of collateral certificates. This mode is more suitable for lending protocols based on LST, a living asset, especially when adding leverage based on interest rate exposure.

Source: LD Capital

The following LSDFi are early-stage projects, and most of the product planning, function implementation and economic models of the targets need to be continuously tracked.

The first type: LST-backed CDP USD stablecoin protocol

1. Prisma Finance: Curve Ecosystem Support, Liquity Fork

Product introduction:

The main function of Prisma Finance is to use LST assets as collateral to mint the USD stablecoin acUSD with overcollateralization. The first batch of collateralized assets supported by the platform includes wstETH, cbETH, rETH, sfrxETH, and WBETH. It is currently supported by a number of DeFi OGs, such as the founder of Curve, the founder of Convex, FRAX Finance, Coingecko, and OKX Ventures. According to the [FIP-227] proposal by FRAX, FRAX Finance has invested $100,000 in Prisma Finance at a valuation of $30 million, and token distribution will be linearly unlocked over 12 months.

Features:

Like most overcollateralized stablecoin protocols, the core demand that Prisma Finance addresses is the improvement of fund efficiency. Users can mint stablecoins through CDPs to achieve leverage while retaining the price fluctuations and yield exposure of LST. In this process, the liquidity of acUSD is crucial, as it is the main cost of the CDP protocol and the biggest advantage of Prisma Finance.

Economic model:

In terms of the token economic model, Prisma Finance introduces the ve model. VeToken will have governance rights to determine the distribution of token emissions in different lending pools, protocol fees, pool parameters, and LP mining yields, aiming to attract LSD protocols (asset issuers) and LP locking protocols tokens to form bound interests while reducing secondary market selling pressure.

2. Raft: User-Friendly, Anti-Censorship, Real-Name Team, Supported by Balancer Ecosystem to Build Liquidity

Product introduction:

Raft is an immutable, decentralized lending protocol that allows users to borrow the USD stablecoin R with LST (currently supporting stETH) as collateral. The protocol maintains its anti-censorship nature through immutable smart contracts and decentralized front ends. Raft is incubated by TempusFinance, and the co-founder previously worked for the ETH Foundation. The team has also developed Nostrafinance (the first lending product on StarkNet). Raft is supported by institutions such as Lemniscap, Wintermute, and GSR. Its main product functions have been implemented, and its TVL reached $30 million (without token incentives) within three days of launch.

Source: https://www.raft.fi/, LD Capital

Features:

The product features flash exchange and one-step leverage functions. The principle of flash exchange is similar to AAVE’s flash loan, with the difference being that R is sourced from protocol minting. On the basis of the flash exchange function, a one-step leverage function can be developed, in which the user deposits stETH → flash exchanges R → exchanges R for stETH → deposits additional stETH → generates R → clears R flash exchange debt, all in one transaction, improving the user experience while greatly saving transaction gas. Users can get up to 11x leverage.

Source: https://www.raft.fi/, LD Capital

Economic model: undisclosed

3. Gravita Protocol: Liquity Fork, LST-backed CDP stablecoin protocol

Product introduction:

Gravita Protocol is the first stablecoin protocol that supports LST assets with a Liquity fork. In the absence of token incentives, it achieved a TVL of $20 million within a month of launch, supporting WETH, stETH, rETH, and bLUSD as collateral, with its stablecoin GRAI having good liquidity depth in Curve, Bunni, and UniV3.

Features:

Compared to Liquity, Gravita has a lower borrowing rate in addition to supporting LST assets. Users need to pay a one-time borrowing fee of 0.5% to borrow in Gravita, and if they repay within 6 months, Gravita will refund the borrowing fee according to the borrowing term, with users being charged a minimum of 1 week’s borrowing fee.

Source: Defillama, LD Capital

Economic model: undisclosed

4. PSY: 0 borrowing fee, Arbitrum ecosystem, ve(3,3), Liquity Fork

Product introduction:

PSY supports multiple LST and LP token collateral for minting dollar stablecoins (SLSD), with a product structure similar to Liquity. It will be launched on the Arbitrum chain in the future.

Features:

PSY will provide 0 interest rate borrowing and introduce the ve(3,3) token model, the specific details of which need to be tracked continuously.

Category 2: CDP WrapETH Protocol with LST as Collateral

5. ZeroLiquid: 0 borrowing fee, no liquidation, interest automatically repays debt

Product Introduction:

ZeroLiquid is currently in the testing phase, allowing users to collateralize LST to mint ZETH (when users deposit ETH, ZeroLiquid converts it to LST, with an initial LTV of 50%). ZETH is a borrowing certificate anchored to the price of ETH and has the same price fluctuations as ETH. Therefore, except for the risk that the underlying LST assets come from the LSD protocol (hacker attacks, large amounts of fund confiscation, etc.), ZeroLiquid can achieve no liquidation, hedge against price fluctuations, and have a long ETH pledge interest rate exposure. ZeroLiquid initially plans to charge an 8% LST yield as protocol revenue, and the subsequent ratio can be adjusted through governance.

 Source: zeroliquid.gitbook.io, LD Capital 

The current issues with ZeroLiquid are low LTV, high protocol fees, and how to anchor ZETH. LTV and protocol fees can be adjusted through governance, and the main problem currently is how to anchor ZETH. In the economic model of ZeroLiquid, the cost of liquidity incentive accounts for 20% of the total token supply (relatively low), which requires a good redemption mechanism to maintain the stability of the ZETH/ETH exchange rate.

Currently, ZeroLiquid provides liquidity for secondary market discounted arbitrage through the Steamer module. The liquidity of the Steamer module comes from the excess collateralized part of the user and the income generated by the collateral. This design largely affects the LTV of the protocol, and it remains to be seen whether it will be improved in the future.

 Source: zeroliquid.gitbook.io, LD Capital 

Economic model:

The $ZERO token was launched in the form of self-raised funds on the Uniswap platform on March 19, with a total of 30.5 million tokens (an initial total of 100 million tokens, of which 69.42% were destroyed by community proposals), of which 6 million were used to provide initial liquidity, 13.7 million belonged to the community, 1 million belonged to the treasury, and 700,000 belonged to core contributors. Currently, 6.9 million tokens are circulating in the secondary market, and the rest will gradually belong in 3 months to 3 years. $ZERO has governance rights and dividend rights, and single-token collateral can capture protocol revenue.

Source: zeroliquid.gitbook.io, LD Capital

6. Ion Protocol: 0 borrowing rate, supports EigenLayer re-staking certificates

Product introduction:

Ion Protocol supports multiple collateral types, including LSTs, LST LP Positions, Staked LST LP Positions, EigenLayer Validator/LST/LST LP Restaking Positions, and LST Index Products. At the same time, Ion Protocol intends to customize the risk model of this agreement for the inherent risk-return structure of different collateral types, and guide users to make deposits by adjusting the LTV or borrowing rate of different collateral types, while ensuring the excess collateralization and anchoring of allETH as much as possible.

Source: ionprotocol.medium, LD Capital

Economic model: Unpublished