LSDFi War continues to heat up, detailed explanation of 5 strategies to generate excess returns

LSDFi is a DeFi product based on the liquid staking derivative (LSD). Through LSD, stakers can convert their staked ETH into tradable assets, unlock liquidity, and lower the staking threshold. Users can stake any amount of ETH, obtain LSD, and leverage LSD for multiple benefits.

LSDFi is built on DeFi Lego, and new projects attract users to stake ETH/LSD on their platform through incentives to gain market share and control over LSD. Some projects utilize dynamic yield rates to encourage users to choose small decentralized staking platforms to enhance the decentralization of validators.

LSDFi has five main forms:

1. LP( return 10%+)

Before the Shanghai upgrade, LSD could not be directly exchanged for ETH, and many DeFi projects established LSD-ETH liquidity pools. The basic yield does not exceed 5%, and the APY is mainly increased through token subsidies. Stakers not only receive network rewards but also LP fee rewards. After the Shanghai upgrade, the scale of LP may increase.

2. Circular borrowing ( profit 10% + )

Leverage betting on the Ethereum post-merge mainnet through AAVE and LIDO's STETH:

• Stake ETH in LIDO to receive STETH
• Deposit STETH into AAVE and borrow ETH
• Repeat the above operation

The liquidation risk is relatively high, and the returns depend on the number of cycles. Various lending protocols can be operated, and automatic cycle lending products may emerge in the future.

3. Yield(10%+)

Yearn Finance has established a liquidity pool on Curve, increasing the LSD APY to 5.89%. Users can directly stake stETH, and the current value of the pool is 16.4 million USD. There are many similar established DeFi projects that enhance returns by aggregating yields from multiple platforms and providing subsidies.

4. EigenLayer( yield unknown)

EigenLayer offers various staking methods, including liquid staking and ultra-liquid staking. Ultra-liquid staking allows LP to stake:

• LSD Staking: Assets already staked in Lido or Rocket Pool can be restaked to EigenLayer.
• LSD LP Staking: For example, re-staking Curve's stETH-ETH LP Token into EigenLayer.

5. Incentive LSDFi Project

Improve capital efficiency through leverage, structured strategies, options, bond derivatives, etc., or attract savings with high APY or achieve other purposes.

Pendle: DeFi yield protocol, providing staking services and liquidity pools. Users can purchase ETH at a discounted price, with the price difference being the yield ( that requires a lock-up period of ). Users can also earn yields by adding liquidity.

Ion Protocol: Tokenizes LSD tokens and collateral assets into allETH and vaETH. allETH is an ERC-20 token, 1 ETH = 1 allETH. vaETH tracks the yield of allETH positions. Plans to borrow from EigenLayer, etc., for LSD yield aggregation.

unshETH: Improve the decentralization of validators through dynamic allocation of incentives. Provide higher rewards for LSD with lower market share, encouraging users to choose platforms with smaller share to stake ETH. Currently, only some LSD are supported.

LSDx Finance: The goal is to become a high-barrier DEX in the LSD asset sub-market. It adopts a GLP architecture similar to GMX, establishing a unified liquidity pool ETHx, and plans to launch the stablecoin UM.

Liquid Staking Derivatives: LSD Aggregator, solves liquidity issues and maximizes asset leverage through tokenization and the issuance of derivative tokens. Users stake ETH or LSD to receive token rewards, which can be used for governance or liquidity DeFi investments.

Stader Ethereum: ETHx is coming soon. Users deposit ETH to receive ETHx, with ETH deposited in three different pools ( personal operation, DVT technology support, and partner operators ). ETHx plans to collaborate with multiple DeFi protocols.

Hord: Stake ETH to earn LSD hETH. Rewards accumulate in the staking pool, increasing the value of hETH over time. Achieve higher APR through various means: ETH staking, MEV rewards, HORD subsidies.

Parallax Finance: Provides liquidity infrastructure, enabling individuals, DAOs, and other protocols to generate yields on L2. The Supernova product not only offers staking rewards but also provides leverage and lending services for staked assets.

bestLSD: Real Yield Aggregator, utilizing aggregated yield to subsidize its own LSD bestETH. The consideration range includes strong actual yield assets such as GMX, GLP, veCRV, veVELO, etc.

0xAcid DAO: A management protocol for maximizing LSD asset returns. The strategy includes placing most assets in stable nodes, with some allocated to high-yield strategies such as Frax, Aura LP Pool. Collaborating with Pendle for yield leverage, providing lending, LP, and other services.

EigenLayer: The potential DeFi Lego possibilities include: obtaining LP or LSD of LSDs after LSD staking to continue staking LP with ETH/LSD; re-staking leveraged returns; automated leveraged re-staking strategies.

Index Coop: Issued two LSDFi related products: dsETH( diversified staking ETH index ) and icETH( leveraged liquidity staking strategy product ).

Gitcoin: Collaborating with Index Coop to launch the Gitcoin Staked ETH Index ( gtcETH ), with returns coming from the yield of users' staked ETH/LSD/USDC in various strategy pools.

Summary:

1. Most incentive LSDFi projects compete for LSD discourse power, affecting the number of future collaboration projects and the construction of DeFi Legos.

2. The stability of the strategy is a contradiction in the LSDFi project; high returns may affect sustainability, but in the short term, it may become the norm.

3. Preferred Strategy: Stake with liquidity staking providers outside the Top 3, such as frxETH, to earn a 10% yield through yield subsidies, and then look for high APY projects like unshETH and LSDx to mine.

4. The impact of LSDFi on validators is still small, with LP + token subsidies being mainstream, but the degree of decentralization in validation may increase in the later stages.

5. There is room for collaboration between LSDFi projects, and in the future, various yield tier products may be formed, ranging from 4% to 500%+.

6. LSD War has begun, or will continue until the Ethereum staking rate stabilizes at 25%+. Ethereum staking is not cost-effective for most people, even with LSDFi incentives.