Rapid Growth of DeFi-Focused Ethereum Liquid Staking Derivatives Platform Raises Eyebrows

According to analysts at Glassnode, Ether (ETH) DeFi activity has declined in a bear market, and the sector is facing further competition from Ethereum’s annual staking rewards of 4%. However, a DeFi narrative is building around Liquid Staking Derivatives (LSD) tokens that could revive network activity for Ethereum.

The percentage of gas consumed by DeFi protocols has decreased from 34% in 2020 to 8% to 16% currently, with NFTs recently commanding a maximum share of 25% to 30%. reports From Glassnode.

Glassnode’s supply-weighted price index for DeFi priced in USD and ETH has recorded a 90% decline since the start of 2021.

So-called DeFi “blue-chips”, representing a basket of governance tokens from well-known DeFi protocols such as Uniswap (UNI), MakerDAO (MKR), Aave (AAVE), Compound (COMP), Balancer (BAL) and SushiSwap Is. (Sushi) has lost 88% of its market capitalization in May 2021 from an all-time high of $45 billion.

The DeFi blue chip token has increasingly underperformed ETH during bullish market rallies and experienced more severe “downsides during bears” than ETH. The analyst speculates that since ETH’s holdings now stand at 4%, this will “act as the new barrier rate to which token returns must jump.” This yield represents the benchmark rate for Ether investors.

Currently, major lending protocols such as Aave and Compound offer between 2-3% on lending stable coins and Ether. Furthermore, DeFi protocols such as Aave and Compound also come with smart contract risks that are eliminated with proof-of-stake (PoS) validators.

Staking has become popular among Ethereum investors, especially after the Shepela upgrade in April 2023, which enabled redemptions from staking contracts.

By the end of May, Ethereum users had staked 21.63 million ETH worth $40.021 billion, which was 18% of the total Ethereum supply.

LSD platforms such as Lido and Rocket Pool account for a third of this large market. These applications offer a tokenized representation of staked ETH, allowing investors to access staking yields without compromising liquidity.

A growing trend among Ethereum investors is interacting with LSD-Fi, or LSD financialization, which aims to harness the liquidity provided by the LSD token in DeFi applications.

Connected: LSD for DeFi: Tenet, LayerZero Partner to Adopt Cross-Chain Liquid Staking

Is LSDFI the solution?

Essentially, LSDfi leverages the liquidity of the LSD token in DeFi lending protocols and the liquidity on exchanges for higher yields. LSDFi has the potential to revive DeFi activity, given that there is a significant amount of ETH at stake with the LSD platform.

A Dune Analytics dashboard by data analyst defimochi shows that the total value locked (TVL) in the LSDFi protocol has reached $411 million, a rapid increase since mid-May. Some of the popular names in this sector are Pendle Finance, Libra Finance, Curve Finance and Alchemys Protocol.

Liquidity of LSD token on Curve Finance, the largest stablecoin exchange in the market, has exceeded $1.5 billion, Curve also enabled the mining of its hyper-collateralized stablecoin crvUSD using Frax Protocol’s staked-ETH token sfrxETH as collateral.

Relatively new protocols such as Lybra Finance and Pendle Finance that seek to take advantage of the liquidity provided by the LSD token have also become popular.

As has happened in the past with DeFi, new applications can exploit the liquidity of the LSD token by offering liquidity mining of its governance token to early depositors.

While these can bring in nice profits for some users, these protocols can lead to smart contract risk and rug-pulling, presenting risks that come with the high profits that LSDFI offers.