LSDFi Ecosystem Overview: From Liquidity Mining to Innovations and Competition of EigenLayer

LSDFi is a DeFi product based on liquid staking derivation ( LSD ). Through LSD, stakers can convert their staked ETH into tradable assets, unlocking liquidity while dropping the staking threshold. Users can stake any amount of ETH, receive LSD tokens, and utilize LSD to gain multiple returns.

The core of LSDFi is the composability of DeFi. New projects often attract users to stake ETH/LSD through token incentives, thereby capturing market share and control over LSD. Some projects also utilize dynamic yield to encourage users to choose smaller decentralized staking platforms in order to enhance the decentralization of validators.

LSDFi mainly has the following forms:

1. Liquidity Mining ( LP )

Before the Shanghai upgrade, LSD could not be directly exchanged for ETH, so many DeFi projects established LSD-ETH liquidity pools. The base yield generally does not exceed 5%, mainly enhanced through token subsidies to increase APY. Stakers not only receive ETH staking rewards but also earn LP fees. After the Shanghai upgrade, the scale of LP may further increase.

2. Circular Lending

By staking ETH to obtain stETH through Lido, and then depositing stETH into Aave to borrow ETH, the cycle can achieve leveraged returns. The liquidation risk is relatively high, and the actual returns depend on the number of cycles. Automated cycle lending products may emerge in the future.

3. Yield Aggregation

Projects similar to Yearn Finance enhance the APY of LSD by aggregating yields and subsidies from multiple platforms. For example, Yearn established a liquidity pool on Curve, increasing the APY of stETH to 5.89%. This reflects the importance that traditional DeFi projects place on the LSD track.

4. EigenLayer

EigenLayer supports multiple staking methods, including liquid staking and super liquid staking. Users can stake Lido or Rocket Pool's LSD assets again to EigenLayer, or stake LSD-ETH LP tokens.

5. Incentive Projects

Some projects enhance capital efficiency through leverage, structured strategies, options, bond derivations, etc., or offer extremely high APY to attract funds.

Pendle allows users to purchase ETH futures at a discounted price, earning approximately 10% in locked returns. Its liquidity pool offers an annualized return of up to 95.7%, but mainly relies on PENDLE token subsidies.

Ion Protocol plans to tokenize LSD into allETH and vaETH, and utilize EigenLayer and others for yield aggregation.

unshETH improves the decentralization of validators by dynamically allocating incentives, providing higher rewards for smaller LSD platforms. Currently supports sfrxETH, rETH, wstETH, cbETH, etc.

LSDx Finance is committed to becoming the main DEX for LSD assets, adopting a GMX-like architecture to establish a unified liquidity pool ETHx.

Liquid Staking Derivatives is an LSD aggregator that maximizes asset leverage through tokenization and issuance of derivations.

Stader Ethereum is about to launch ETHx, which will allocate users' deposited ETH into different types of stake pools. It is expected to collaborate with more than 30 DeFi protocols.

Hord offers hETH Token, achieving higher APR through ETH staking, MEV rewards, and token subsidies.

Parallax Finance provides liquidity infrastructure on L2, and its product Supernova offers leverage and lending services for staked assets.

bestLSD plans to become a real yield aggregator, using aggregated yields to subsidize its own LSD Token bestETH.

0xAcid DAO is an LSD asset management protocol that places most of its assets in stable nodes, with some allocated to high-yield strategies.

The emergence of EigenLayer has brought new possibilities for LSDFi, such as the re-staking of LSD and yield leveraging.

Index Coop has launched two LSDFi related products, dsETH and icETH, which provide diversified LSD combinations and leveraged liquid staking strategies.

Gitcoin has partnered with Index Coop to launch gtcETH, allocating part of the revenue for public goods donations, creating a new utility scenario.

Overall, LSDFi projects are competing for the discourse power of LSD, which will affect their future collaboration scope and DeFi ecosystem status. High-yield strategies may become the norm for a longer period, but they also bring sustainability issues. Users with different risk preferences can choose suitable products within the yield range of 4%-500%+. The LSD War has already begun and may continue until the Ethereum staking rate stabilizes above 25%. This competition will drive the decentralization of validators and promote the rapid development of the LSDFi ecosystem.