What Is LSDFi? Overview of LSDFi Protocols and How To Use Them
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What Is LSDFi? Overview of LSDFi Protocols and How To Use Them

Created 11mo ago, last updated 9mo ago

Liquid Staking Derivatives (LSDs) was all the rage in 2023 leading up to Ethereum's Shapella upgrade. Explore DeFi protocols building on top of LSDs — also termed LSDFi.

What Is LSDFi? Overview of LSDFi Protocols and How To Use Them

Table of Contents

Liquid staking derivatives (LSDs) have been one of the biggest narratives of 2023, against the backdrop of the Shapella upgrade for Ethereum. Put simply, LSDs 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.

Source: DeFiLlama (link)

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.

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Lybra Finance

Source: Lybra Finance (link)

Lybra Finance is an interest-bearing stablecoin protocol, enabling users to deposit ETH or Lido Staked ETH (stETH) as collateral, against which they can borrow Lybra’s stablecoin, eUSD, up to a collateral ratio of 170%. Lybra does not charge any fees for eUSD minting or interest on the amounts borrowed.

Source: Lybra Finance Docs (link)

Users can simply earn yield by holding the eUSD token, which is derived from yield paid out on the underlying LSDs. The yield is converted to eUSD, which saves users the hassle of swapping out of stablecoins themselves if they wish to avoid the volatility of ETH.
Beyond just holding eUSD, users can earn through liquidity provision in eUSD pools as well as engage in ETH levered long strategies by buying more ETH with eUSD. Additionally, eUSD minters also earn token incentives paid out in LBR, Lybra’s governance token. By staking LBR, users can participate in governance on Lybra and earn a portion of protocol revenues.
Lybra has been one of the best performers in the LSDFi sector, TVL skyrocketed more than 10X within the last two weeks alone. The LBR token gained over 2000% from its lows to its all-time high of $4.6352.

How Can You Try out Lybra Finance?

  1. Head to Lybra Finance dashboard
  2. Connect your wallet on Ethereum mainnet
  3. Deposit ETH or stETH
  4. Mint eUSD up to 170% of collateral ratio and hold to get an APY ~8.18%
  5. eUSD/USDC trading pairs are available on Curve and Uniswap (V3)
  6. You can redeem eUSD, repay eUSD and withdraw ETH to exit

Gravita Protocol

Source: Gravita Medium (link)

Another up and coming player in the LSD-backed stablecoin scene, Gravita Protocol looks to shake things up with their GRAI stablecoin. Users can open a “vessel” by depositing yield-generating tokens like Lido wstETH into Gravita and borrow GRAI against their deposited collateral. Gravita enables a relatively high loan-to-value (LTV) ratio of up to 99% on LSD collateral on the platform.
To ensure that the protocol manages the risk posed by the high LTV ratio, Gravita also has a stability pool to ensure that GRAI is always backed by sufficient collateral. When a position is liquidated on Gravita due to the value of collateral falling under the required threshold, a corresponding amount of GRAI from the position is burnt from the stability pool. In turn, the collateral put up will be transferred to the stability pool.

For example, if a loan of 850 GRAI was taken out against $1,000 worth of rETH and the value of the collateral fell to $999.64, the position would be liquidated, since the LTV ratio has now increased above 85.03%. In this scenario, the rETH position is transferred to the stability pool and 850 GRAI is burnt from the pool.

The GRAI in the stability pool is contributed by users, looking to profit from liquidations and simultaneously keep the protocol solvent. In the above example, stability pool depositors are essentially purchasing rETH at a discount of ~14.97% since they are acquiring $999.64 worth of rETH for only 850 GRAI. Moreover, Gravita’s documentation also hints at possible retrospective airdrop in Gravita’s governance token, GRVT, for stability pool depositors.

How Can You Try Out Gravita Protocol?

  1. Head to Gravita Protocol vessel page
  2. Connect your wallet on Ethereum mainnet
  3. Deposit Rocketpool ETH (rETH), Lido wstETH, Wrapped ETH (WETH) or LUSD Chicken Bonds (bLUSD)
  4. Borrow GRAI with LTV from 85% to 99%
  5. You can deposit GRAI into the stability pool to earn liquidation bonus of 9.99% to 14.97%

Curve Finance

Source: Curve Finance

As one of the largest and oldest DeFi protocols, Curve Finance is no stranger to the DeFi space. But despite having dominated the stablecoin automated market maker (AMM) space for the past three years, Curve Finance continues to innovate, with their latest release being their native stablecoin, crvUSD.
CrvUSD is a collateralized debt position (CDP) stablecoin designed to take ETH LSDs as collateral. At the moment, crvUSD only takes Frax Staked Ether (sfrxETH), although there are plans to expand this selection to include other collateral types like stETH.

What makes crvUSD is their unique liquidation model, known as the Lending Liquidation AMM Algorithm, or LLAMA for short. When the value of a borrower’s collateral begins to fall, LLAMA puts the position into “soft liquidation”, which liquidates a portion of the collateral into crvUSD as the collateral value declines. As the value of the collateral rises again, the crvUSD is converted back into the original collateral asset.

This mechanism reduces the losses associated with the typical full liquidation approach where the entire collateral amount is liquidated all at once. Moreover, if the value of the collateral swiftly dips and recovers, traditional lending protocols often leave borrowers holding stablecoins rather than their collateral asset, exposing them to larger than necessary losses, which are avoided with LLAMA’s gradual liquidation.

That said, LLAMA does come with its own limitations such as losses that could arise from repeatedly swapping in and out of the collateral asset. Additionally, when a position is in “soft liquidation”, addition or withdrawal of funds from the position is not permitted, which creates a risk for the user as they wait for their position to be fully liquidated, or simply liquidate it themselves.

How Can You Try Out Curve CrvUSD?

  1. Head to Curve crvUSD page
  2. Connect your wallet to Ethereum mainnet
  3. Deposit sfrxETH to borrow crvUSD
  4. Current borrow rate, the interest rate you pay to borrow crvUSD, is 4.98%


Source: Alchemix (link)

Still on the lending front, but with a twist, Alchemix also has their fingers in the LSDFi pie. Alchemix is well-known for their self-repaying loans, initially using stablecoins. The user would deposit a stablecoin such as DAI, and borrow Alchemix’s stablecoin, alUSD, against the loan. The DAI tokens deposited are then deposited into vaults or liquidity pools to earn yield, whereby a portion will go to Alchemix as protocol fees, but the remainder is used to pay down the principal on the loan, hence, self-repaying loan.

With alETH, Alchemix’s own ETH derivative token, they have taken self-repaying loans to another level, enabling self-repaying loans to be taken out on ETH LSDs too. In a similar mechanism to the stablecoin example, a user can deposit either stETH or rETH into Alchemix to take a loan of alETH tokens. Currently, all loans taken on ETH LSDs are capped at 50% LTV, which may seem low, but the Alchemix’s self-repaying function definitely helps users to sleep better at night knowing that their loan is being paid down gradually over time.

How Can You Try Out Alchemix alETH?

  1. Head to Alchemix
  2. Connect your wallet to Ethereum mainnet
  3. Head to Alchemix vaults and click on the alETH tab
  4. Deposit collateral like Lido wstETH, Rocket rETH, Aave aWETH, Vesper vaETH and Frax sfrxETH to borrow alETH.
  5. LTV is 50% for all vaults, and APR ranges from 0.33% to 4.31%
  6. Do note that some vaults reached full utilization, such as Lido, Rocket and Frax vaults.


Source: Yahoo Finance (link)

Backing away from LSD-backed borrowing, baskets of LSDs have also become more popular in the LSDFi space. Aside from diversifying LSD risk across a basket of selected LSDs, baskets of LSDs also improve the liquidity between the various LSDs in the market. And that’s exactly what Unsheth is doing.
Unsheth allows users to deposit ETH, WETH and four selected LSDs: stETH, rETH, frxETH and cbETH, to receive unshETH, representing a token representing a stake in the basket of LSDs.

Aside from the ETH staking yield, unshETH holders also benefit from swap fees obtained from users swapping between the four underlying LSDs on Unsheth’s DEX as well as fees paid for the minting and redemption of unshETH.

With unshETH, users can also stake the token on the platform for additional yield or utilize it in various DeFi protocols via liquidity provision. Since unshETH is also an omnichain token powered by Layer Zero, unshETH exists natively on both Ethereum, BNB Smart Chain and Arbitrum, opening up an even larger range of yield opportunities to unshETH holders. Unsheth is expected to continue their expansion further into future chains, including Optimism and zkSync Era in the near future.
On June 1, the deployer keys to one of the unshETH smart contracts were compromised, resulting in $375,000 to be stolen by a hacker. At the time of writing, operations have resumed and user funds are secured, but the stolen funds has yet to be recovered.

How Can You Try Out unshETH?

  1. Head to unshETH
  2. Connect your wallet to Ethereum mainnet, BSC or Arbitrum One (bridging only).
  3. For Ethereum, head to the deposit page and deposit ETH, WETH, stETH, rETH, frxETH or cbETH to receive unshETH
  4. For BSC, head to the deposit page and deposit BNB or USDT to receive unshETH
  5. Stake unshETH for base APR of 14.2% and 4X multiplier
  6. Users can provide liquidity on Sushi, Balancer, PancakeSwap and Maverick to farm APRs up to 180%

Origin DeFi

Source: Origin DeFi (link)

Launched in late 2020, Origin DeFi was designed to abstract away the hassles of lockups, compounding and swapping between assets, for users looking for the best yield opportunities on stablecoins. Since then, they have expanded their product range to include ETH LSDs with their latest product, Origin Ether (OETH).
OETH represents a basket of trusted LSDs, including stETH, rETH and frxETH, which are then utilized in DeFi strategies across a selection of battle-tested protocols, such as Curve and Convex. The yield from such strategies are consolidated and paid out to OETH holders via rebasing.

Through this strategy, OETH allows holders to diversify their risk across LSDs and at the same time outperform the base ETH staking yield from their respective LSD issuers.

How Can You Try Out Origin DeFi?

  1. Head to OETH
  2. Connect your wallet on Ethereum mainnet
  3. Swap ETH, WETH, stETH, rETH, frxETH or sfrxETH for OETH
  4. Earn a 30-day trailing APY of 11.31%


Source: Asymetrix Protocol (link)

This one is for the degens out there! Asymetrix seeks to spice up the ETH staking experience, through a no-loss lottery on ETH staking yields. Users simply deposit stETH into the protocol and every week, the rewards from ETH staking is distributed to the users.
But, the catch here is that rewards are distributed asymmetrically based on luck, with each user’s odds being computed as a function of the amount deposited and the duration in which the amount has been deposited. The reward received by each user is completely random and is determined by Chainlink’s Verifiable Random Function (VRF). As such, a depositor’s yield can vary from 0% all the way to the entire pool’s rewards. Rewards and deposits are also auto-rolled into the next draw and do not have to be redeposited, making the deposit a one-time action.
Regardless of the outcome of the draw, users have no chance of losing their deposits in Asymetrix’s draws. Moreover, Asymetrix is currently distributing native token emissions, ASX, to all participating depositors, meaning that no matter the outcome, depositors are still earning in ASX tokens. While there is no loss, there is an opportunity cost on the yield from your stETH, so take note when interacting with this protocol. Or, you know, just be a degen.

How Can You Try Out Asymetrix Protocol?

  1. Head to Asymetrix protocol
  2. Connect your wallet on Ethereum mainnet
  3. Deposit stETH
  4. Wait for the draw (currently once a week)
  5. Earn 39.65% APR in ASX regardless of the draw’s outcome


Source: Pendle (link)

Going into the deep end for the DeFi power users, we have the deepest level of LSDFi: LSD derivatives. Yes, derivatives of derivatives!
Pendle is a novel DeFi protocol built on Ethereum and Arbitrum, which enables the tokenization and trading of yield to give DeFi users maximum control over their yields as well as open the doors to advanced yield strategies such as longing yield if one expects yield to rise, longing assets at a discount, receiving fixed yield on their yield-bearing tokens, and more.
This is done through splitting every yield-bearing token into two tokens, a principal token (PT) and a yield token (YT). When yield is tokenized, its maturity must be fixed. Take an example of stETH, which is tokenized for the next 3 months. The YT allows its holder to receive the yield from ETH staking via Lido for the next 3 months. These rewards can be claimed at any time and can be forgone if the YT is sold away to another party. On the other hand, the PT allows the underlying ETH tokens to be redeemed at the end of the 3 months, but does not entitle its holder to receive the yield over the 3 months in which the ETH is staked with Lido.

With the tokenization of yield, yield traders can trade in and out of YTs to speculate on the yield of specific yield-bearing assets such as future yield on ETH staking with various ETH liquid staking services. On the flip side, long-term bulls looking to long ETH at a discount can purchase assets at a discount through purchasing PTs only, to receive ETH in the future for a small discount, essentially realizing a fixed yield which is equal to the discount they received.

All in all, Pendle enables greater flexibility and control over the strategies that are open to yield farmers, traders and long-term bulls.

How Can You Try Out Pendle?

  1. Head to Pendle, there is a simple and pro version. Let’s go simple for now.
  2. Connect your wallet on Ethereum mainnet or Arbitrum One.
  3. Buy assets like ETH, USDT or APE at a discount on Ethereum.
  4. Buy assets like GRAIL-ARB, PENDLE-ETH, ARB-ETH, GLP, DAI and USDT at a discount on Arbitrum.
  5. Provide liquidity in pools and earn boosted APY up to 88%.
  6. To boost APY, users have to lock PENDLE for vePENDLE


Source: Flashstake Dune Dashboard (link)

In a similar line of thought as Pendle, Flashstake grants users flexibility over their yield, allowing them to seemingly travel forward in time to receive their yield upfront. For example, a user could choose to flashstake 10 ETH into Lido as stETH for 365 days, and receive their yield of 0.46 wstETH immediately. But, where’s the catch then?

The catch here is that the tokens are still locked for the duration selected, meaning that in the above example, the 10 ETH tokens are locked for the selected duration of 365 days. Users can still withdraw their locked tokens though, but they will have to pay back the yield for the remaining portion of the lock duration. If a trader is anticipating a fall in yield, they could receive the yield upfront and then repay the remainder of the yield at a later date once the yield has fallen. Since the amount to repay would be less than the initial yield received upfront, the trader can pocket the difference as profit.

The yield eventually is still generated from the actual source of rewards, meaning in the above example, the rewards are still generated via Lido, just over the period in which the user’s tokens are locked. These rewards are then channeled to a reward pool for the stETH strategy, which will be used to pay out future upfront rewards.

How Can You Try Out Flashstake?

  1. Head to Flashstake DApp
  2. Connect your wallet on Ethereum, Arbitrum or Optimism
  3. On Ethereum, select staking amount in WETH, rETH, ETH, stETH or USDC
  4. On Arbitrum, select staking amount in GLP
  5. On Optimism, select staking amount in sUSD
  6. Select duration, approve and flashstake
  7. Receive upfront yield
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