Binance LSDFi Research Report: Current Status and Outlook of LSDFi Ecosystem
Binance LSDFi Research Report: Overview of LSDFi Ecosystem
Author: Binance Research; Translator: Blocking0xxz
1. Key Points
LSDfi refers to a DeFi protocol built on top of liquidity staking derivatives (LSD). By providing additional yield opportunities, the LSDfi protocol enables LSD holders to put their assets to work and maximize returns.
Thanks to the adoption of liquidity staking, the total value locked (TVL) of the LSDfi protocol has grown rapidly over the past several months. The cumulative TVL of top LSDfi protocols has already exceeded $400 million, more than doubling in just one month.
The growth of LSDfi is fueled by the growth of ETH staked and the low penetration rate of LSDfi. Currently, the TVL of LSDfi protocols accounts for less than 3% of the total market.
While LSDfi provides attractive opportunities for LSD holders, users should be aware of associated risks, including but not limited to penalty risk, LSD price risk, smart contract risk, and third-party risk.
2. LSD Status
Ethereum successfully transitioned to proof-of-stake (PoS), followed by the implementation of stakable ETH through the Shapella upgrade, which has led to significant growth in the staking market.
At the same time, liquidity staking derivatives (LSD) have also seen significant growth. Recall that LSD tokens are issued by liquidity staking platforms (such as stETH, rETH, WBETH, etc.). Running a node independently can be quite technically challenging and capital-intensive, which may not be suitable for everyone. Therefore, liquidity staking protocols allow more users to participate in the staking process with a lower barrier to entry and maintain the liquidity of staked assets. By issuing liquidity staking tokens, users can participate in wider opportunities in the crypto ecosystem.
In terms of the overall Ethereum staking landscape, Lido is the largest participant, with a market share of 28.9%. Next are centralized exchanges such as Coinbase, Binance, and Kraken. There are also some smaller liquidity staking providers, but they have a smaller amount of staked ETH.
Liquidity staking providers issue their own LSD, providing liquidity and enabling holders to participate in other opportunities in the crypto ecosystem. LSD can be rebalanced or reward-bearing tokens. Those holding rebalanced tokens (such as stETH) will experience balance changes as staking rewards or penalties occur. Conversely, reward-bearing tokens reflect accrued earnings through changes in token value, rather than changes in balance.
Although this report mainly focuses on the flow mortgage pattern of Ethereum, it is worth noting that flow mortgage is not limited to the Ethereum ecosystem.
For example, in the BNB ecosystem, there is also a flow mortgage field, with a TVL of about 150 million US dollars. Similar to Ethereum’s flow mortgage mechanism, the pledger of BNB obtains the liquid mortgage of BNB, which provides instant liquidity and can be used for other aspects in DeFi to generate additional income.
In the BNB ecosystem, Ankr is the largest flow mortgage provider, and its protocol pledges more than 214,000 BNB. Accompanying it are several protocols such as Stader and pSTAKE, which are the main flow mortgage providers in the BNB ecosystem. The fees of each protocol are usually similar and competitive, but the availability and liquidity of flow mortgage tokens in decentralized applications (dApps) in DeFi are different.
III. Financialization of LSDs
Suppose you own LSD (flow mortgage derivatives) and receive pledge rewards during the holding period. This is great, but wouldn’t it be better if you could go further and generate additional revenue on top of the underlying pledge rate?
This is the world of LSDfi.
LSDfi refers to a DeFi protocol built on top of flow mortgage derivatives. By providing additional revenue opportunities, LSDfi protocol enables LSD holders to leverage their assets and maximize returns.
1. LSDfi Ecosystem
The LSDfi ecosystem includes a range of mature DeFi protocols that have incorporated LSD into their diversified product suites, as well as more recent projects primarily based on LSD.
For completeness, we also include major LSD protocols and providers.
DeFi liquidity mortgage provider: DeFi provider that allows users to participate in pledging and obtain LSD
CEX liquidity mortgage provider: centralized exchange (CEX) that provides liquidity mortgage services
CDP stablecoin: CDP protocol that uses LSD as collateral to allow users to mint stablecoins
LSD index: represents a basket of LSD indices
Income strategy: protocol that allows users to obtain additional revenue opportunities
Currency market: protocol that promotes lending activities using LSD
LSDfi is relatively concentrated, with the top five participants holding over 81% of the TVL. Lybra is the market leader, and its rapid rise is notable given that the project only went live on the mainnet in April.
The table above provides an overview of several LSDfi projects, from CDP stablecoins to automated yield strategies. As time goes on, more innovation is expected in this area, providing LSD holders with more options for generating returns.
2. Growth of LSDfi
Benefiting from the adoption of liquid staking, the TVL of the LSDfi protocol has grown rapidly over the past few months. With this trend gaining momentum, the cumulative TVL of top LSDfi protocols has surpassed $400 million, more than doubling in just one month.
The growth of the LSDfi protocol has been driven by the structural tailwind of staking ETH after the Shapella upgrade. As more people participate in staking, the adoption of liquid staking has also increased. Naturally, holders of LSD will also seek out the LSDfi protocol to generate additional returns. Given that there is over $1.69 billion worth of LSD on Ethereum and the TVL of LSDfi protocols is around $412 million (about 2% of the total market), such growth is not surprising.
3. Outlook for LSDfi
Favorable factor 1: Growth of staked ETH
Currently, the staking ratio of ETH is 16.1%, far below the average of the top 20 PoS chains at 58.1%. With the withdrawal function enabled after the Shapella upgrade, staking has become more attractive, as stakers can exit staking at any time.
Therefore, the staking ratio is expected to increase, with the growth of staked ETH serving as a positive catalyst and structural tailwind for LSD and LSDfi protocols.
According to on-chain data, there are already signs of enhanced demand for staked ETH. The staking ratio has slightly increased from less than 15% before the Shapella upgrade to over 16% today, with over 4.6 million ETH staked since the Shapella upgrade. In addition, the current validator queue time of 46 days also indicates demand for staking. (Any new validator who wishes to enter the network and stake their ETH must wait 46 days).
Advantage 2: Penetration of LSDfi
Although the adoption of the LSDfi protocol (measured by TVL) has increased, it is still a relatively small industry. Considering that most projects have been launched in the past few months, it is still early stage for the industry. Nevertheless, it is not surprising that more innovation and projects are being launched to meet the rising demand, as LSD continues to grow and more holders seek to generate returns.
From another perspective, the TVL in the LSDfi protocol currently accounts for less than 3% of the total market (using LSD’s market value as a proxy). Although some LSD holders may be reluctant to use the LSDfi protocol, and achieving 100% penetration is almost impossible, low single-digit penetration represents huge growth potential.
It should be noted that LSDfi is a relatively young market, and like all emerging technologies, users should be aware of the risks associated with participating in such projects. These include risks associated with general liquidation mortgages.
Punishment risk: Validators who fail to meet certain staking parameters (such as being offline) will face punishment, and LSD holders may face punishment risks.
LSD price risk: Due to market forces, price fluctuations of liquidation mortgage tokens may differ from their underlying tokens. This may expose users to price volatility and potential liquidation risks (if used as collateral).
Smart contract risk: Every interaction of a user with each smart contract introduces a new smart contract vulnerability layer.
Third-party risk: Some projects may use other dApps (such as revenue strategies) in their normal operations. In such cases, users will face additional counterparty risks.
In addition, the above factors do not include project-specific risks that differ between individual projects. Users should conduct thorough due diligence before participating.
The LSDfi protocol opens up new opportunities for LSD holders seeking returns. By providing additional use cases for liquidation mortgage tokens, LSDfi encourages staking participation and has the potential to accelerate the growth of liquidation mortgages. Considering that the field is currently in its early stages of development, we will be excited to observe further innovation in the field and monitor the adoption of LSDfi. Liquidation mortgages are a nascent ecosystem that has just begun. Please note that in the coming weeks, we will release a deep report on data-driven liquidity mortgages, so stay tuned.