Analysis of Lybra Finance (LSDfi) Head: How Stable Is It? What Are the Risks of “Layer 2 Nesting”?

Lybra Finance (LSDfi) analysis: stability and risks of "Layer 2 Nesting".

According to Dune Analytics data, as of June 13th, LSDfi TVL reached 420 million US dollars, with Lybra Finance accounting for 41.1%. LBR achieved an increase of over 30 times in May, but in June it experienced a sharp decline from its peak, possibly due to profit-taking by early investors, panic in the market about contract issues, and macroeconomic influences. In fact, building stablecoins on LSD is the core of Lybra, and Wu Blockchain researcher nobody analyzed Lybra Finance around the eUSD stablecoin.

Lybra Finance allows users to deposit ETH or stETH on the platform as collateral to mint corresponding eUSD, with a liquidation threshold of 150%, meaning that $1 eUSD must be backed by at least $1.5 worth of stETH as collateral. By holding the minted eUSD, users can earn interest income, which is supported by the LSD income generated from the deposited ETH/stETH. As of June 13th, the interest income generated by holding eUSD is approximately 9.08% on an annualized basis.

eUSD is actually an over-collateralized stablecoin. 1) At least $1.5: $1 worth of stETH as collateral is required, and eUSD supports rigid redemption of ETH (which incurs a 0.5% redemption fee denominated in ETH); 2) Liquidation mechanism for collateral ratios below 150%: any user can become a liquidator and purchase the liquidated stETH collateral with eUSD at a discounted price (1-liquidation reward rate); 3) Based on the previous two points, there is an arbitrage opportunity when the eUSD price fluctuates; 4) Curve provides eUSD exit liquidity.

eUSD, or the entire LSDfi track, is essentially a second-layer nesting. After depositing ETH/stETH into Lybra, they are all converted into stETH, which can be seen as nesting on top of ETH; eUSD is a stablecoin minted on top of stETH collateral, which is the second-layer nesting. Through double-layer nesting, users can obtain two types of income, which increases the returns on holding ETH. High returns and high risks often go hand in hand, which is a major challenge for the platform, and the liquidation mechanism is an important guarantee for the platform to prevent and contain the spread of risks.