Integrating DeFi strategies, LSTFi leverages the tens of billions of dollars in liquidity staking market

While LSTFi brings high liquidity to Ethereum, they also bring new challenges to the network.

Source: The Defiant

Compiler: Mary Liu, compared to push BitpushNews Mary Liu

Liquid staking tokens (LST) are rapidly making waves in DeFi. The liquidity staking industry has exploded in value in recent months, with market leader Lido boasting a total value locked (TVL) of $13 billion — double that of MakerDAO, the second-largest DeFi protocol. According to Staking Rewards data, more than 19 million ETH are currently pledged, equivalent to 15.7% of the supply, of which LSTFi accounts for 47% of pledged Ethereum, which is equivalent to $17 billion at current prices.

While LSTFi brings high liquidity to Ethereum, they also bring new challenges to the network.

Liquidity Staking

LST is the representative of pledged Ethereum in the Beacon chain. They are tokens that generate income, allowing users to obtain pledge rewards without running nodes themselves, and also allow pledgers to enter and exit pledges by simply buying and selling LST tokens position.

Since staking ETH withdrawals were enabled in April, many innovative protocols are looking to further integrate LST tokens into DeFi and offer new strategies to earn additional yield on top of staking rewards.

Basic LST strategy

Many leading DeFi protocols already support LST, among which Lido's stETH has the most extensive support, and Rocket Pool's rETH is also rapidly occupying market share.

LST holders can deposit their tokens into money market protocols like Aave, the third largest DeFi protocol, to earn yield as well as staking rewards. They can also borrow other assets with LST collateral, with a combined return and yield that exceeds accrued interest - this unlocks a recursive lending strategy.

“There is a lot of interest in using stETH for additional yield without taking undue risk,” said Stani Kulechov, founder and CEO of Aave.

MakerDAO users can mint their DAI stablecoins against stETH or rETH collateral, providing an easy way to acquire stablecoins against LST liquidity.

Curve recently launched crvUSD, a stablecoin that users can mint with Frax’s frxETH token, and Curve says it will expand support for other LSTs soon.

Users can also provide LST liquidity paired with ETH on decentralized exchanges like Uniswap to earn transaction fees with negligible differential losses.

LST Gold Rush

New protocols are also cashing in on the LST craze, with many offering inflationary tokens as rewards.

Lybra Finance’s total value locked (TVL) soared to $183 million just five weeks after launching its collateralized debt protocol, which allows users to mint their eUSD stablecoin with stETH. Lybra pays eUSD holders using ETH staking rewards.

Origin OETH, a yield-aggregating LST, also amassed $15 million in TVL within two weeks of its launch.

However, while newer protocols may sometimes offer higher APYs, less-tested protocols may be more vulnerable than more mature protocols. Earlier this week, UnshETH, an emerging marketplace for LST liquidity with a $32 million TVL, froze withdrawals after it was hacked.

Leverage strategy

Some protocols combine multiple DeFi plays to create complex LST strategies.

MakerDAO’s frontend, Oasis.app, launched a service in October that allows users to leverage their exposure to stETH. The product allows Aave users to borrow ETH against stETH and then use the borrowed funds to purchase additional stETH in a single transaction.

Gearbox Protocol offers up to 10x leverage on stETH.

Pendle allows users to deposit LST assets and then mint new tokens representing accrued earnings (YT tokens) and underlying principal collateral positions (PT tokens), respectively. This means users can choose to keep their yield tokens and sell the underlying collateral. Additionally, traders who purchase PT tokens can purchase ETH at a discounted price from the market price, but will not be able to spend ETH until a predetermined period of time has elapsed.

OwnLayer

Many users in the Ethereum community are still awaiting the launch of EigenLayer, an innovative “re-staking” protocol that will debut on mainnet in Q3.

In addition to validating the Ethereum blockchain, EigenLayer will allow Ethereum stakeholders to secure other services, giving them additional rewards. It is also building support for stETH and rETH, enabling LST holders to participate in restaking as well.

Centralization concerns

However, some industry figures warn against over-financializing ethereum's underlying security mechanisms.

Superphiz, co-founder of the EthStaker community, said: "The purpose of staking is not to promote DeFi, the purpose is to promote the safety and health of the Ethereum network. You have to separate these two goals."

Some researchers worry that the financialization of LST could turn the dominance of Lido Finance, which currently controls 36% of all staked Ethereum, into a monopoly, and attracts 32% of validators. Ethereum co-founder Vitalik Buterin recently stipulated that no one staking pool should control more than 15% of all staked ETH.

While many in the community are working to raise awareness of the issue, others believe more action is needed. The Daily Gwei podcast host and Rocket Pool oDAO member Anthony Sassano urged the LST platform to use economic incentives to divert users away from Lido.

Sassano said: "We all know that the most powerful force in encryption is economic incentives, but too many people are still taking it for granted, hoping that there will be some simple way to cause change on this issue... Now is the time to go full speed ahead. The market is more decentralized.”