LSDFi Liquid staking derivatives (LSDs) have been one of the biggest narratives of 2023, against the backdrop of the Shapella upgrade for Ethereum. Put simply, LSDFi are financial instruments that represent receipts of a staked token within a DeFi protocol. They allow users to stake their token, while granting them the flexibility to continue utilizing these LSDs in other decentralized applications (DApps).
In the context of Ethereum, this was important as staked ETH was locked up on the beacon chain until the Shapella upgrade. As such, LSDs provided stakers with the much needed liquidity while their ETH tokens secured the blockchain.
After Shapella was successfully completed, this enabled the highly anticipated withdrawals for Ethereum. This made staking a much more attractive opportunity for ETH bulls and in turn, greatly increased the popularity of LSD protocols as well. In fact, LSD protocols as a category has surpassed decentralized exchanges (DEXs) in total value locked (TVL), to take the top position at around $19.5 billion.
As LSDs surge in popularity, another sub-sector of DeFi has also risen to capitalize on this trend. Combining LSDs and DeFi, the LSDFi vertical builds on top of LSD tokens — increasing the utility and opening up yield opportunities to LSD token holders. These opportunities come in the form of borrowing against these LSD tokens, speculation on or hedging against the yield of LSD tokens, indexes of LSD tokens, and more.
In this article, we will be diving into a few of the most popular LSDFi protocols and how DeFi users can make the best of them.
LSDFi, or Lido Staked DeFi, refers to a collection of DeFi (Decentralized Finance) protocols built on top of liquid staking derivatives (LSDs).
Here’s a breakdown of LSDFi and its components:
Liquid Staking Derivatives (LSDs):
- Traditional staking involves locking up your cryptocurrency to support a blockchain network, but you lose access to it while it’s staked.
- LSDs are tokens that represent staked assets. They allow you to participate in staking while keeping a tradable representation of your stake. For example, Lido Staked ETH (stETH) is an LSD that represents staked Ethereum (ETH).
LSDFi Protocols:
- These protocols leverage LSDs to unlock new financial opportunities and enhance the utility of staked assets.
- Here are some common ways LSDFi protocols work:
- Unlocking Liquidity: You can use LSDs as collateral to borrow other cryptocurrencies or stablecoins in DeFi lending protocols. This allows you to access liquidity without unstaking your original asset.
- Yield Generation: Some LSDFi protocols offer additional yield opportunities on top of the staking rewards you earn from the underlying asset. This can involve strategies like liquidity mining or leveraged yield farming.
- Improved Capital Efficiency: By utilizing LSDs in various DeFi applications, you can maximize the return on your staked assets.
Benefits of LSDFi:
- Increased capital efficiency for crypto holders.
- Improved liquidity for staked assets.
- Access to a wider range of DeFi applications with staked assets.
- Potential for higher returns through yield generation strategies.
Things to Consider:
- LSDFi is a relatively new and evolving space.
- There can be added complexity involved in using LSDFi protocols compared to traditional staking.
- It’s important to research individual LSDFi protocols and understand their associated risks before using them.
Here are some resources you might find helpful for further exploration:
- What Is LSDs? Overview of LSDs Protocols and How To Use Them [CoinDataCap]
- LSDfi: When Liquid Staking Meets DeFi [Binance Research]
The term “overview protocol” can have a couple of interpretations depending on the context. Here are the two most likely meanings:
- Protocol Overview Document: In the realm of networking and software development, an overview protocol document is a high-level explanation of a specific protocol. This document outlines the purpose, functionality, and key features of the protocol. It typically includes:
- Introduction: Briefly describes the protocol and its intended use.
- Architecture: Explains the overall structure and components of the protocol.
- Message Flow: Illustrates how data is exchanged between participants using the protocol.
- Security Considerations: Addresses security measures implemented in the protocol.
- General Protocol Overview: This refers to a broad understanding of the core principles that govern communication protocols. These principles are generally applicable to various protocols used for data transmission and interaction between devices or applications. Here are some common aspects covered in a general protocol overview:
- Standardization: Protocols are often defined by standard organizations to ensure compatibility between different systems.
- Data Formatting: Protocols specify how data is structured for transmission, including elements like headers, data payloads, and error correction mechanisms.
- Communication Flow: Protocols define the order and sequence of messages exchanged between participants.
- Error Handling: Protocols establish methods for detecting and correcting errors that might occur during data transmission.
Without additional context, it’s difficult to pinpoint the exact meaning of “overview protocol.” If you can provide more information about where you encountered this term, I might be able to give you a more specific explanation.
