Take a look at the six representative agreements to understand the mechanisms involved. Compiled by: flowie, ChainCatcher. The LSD stablecoin protocol is expected to trigger a new round of battles in LSDFi. Recently, Lybra Finance, a protocol that mints interest-bearing stablecoins using LST as collateral, has gained momentum and was officially launched after opening its IDO on April 22. In just over a month, its native token LRB has skyrocketed up to 40 times. Its TVL once exceeded $200 million, with a market share of nearly 50%.
Lybra Finance is not the first protocol to eat crab, and many protocols that support LSD stablecoins are emerging. The TVL of Gravita, an LSD interest-free lending stablecoin protocol, is also rapidly rising to $21 million. On June 1, the LSD stablecoin protocol Prisma Finance announced the completion of a new round of financing, in which well-known project parties or founders such as Curve Finance founder Michael Egorov, CoinGecko founder, OKX Ventures, The Block’s Eden research director Adam Cochran, and Ankr founder participated in the investment.
In addition, Curve recently launched a community vote to support the minting of crvUSD, a super-collateralized stablecoin with wstETH as collateral. Liquidity pledge Layer1 blockchain Tenet Protocol, LSD protocol Agility, Raft and other protocols have successively launched LSD-supported stablecoins. Stablecoins supported by LSD are becoming a new trend in DeFi that cannot be ignored. This article takes stock of the DeFi protocols represented here, trying to understand the mechanisms and driving reasons behind the trend.
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How can protocols that support LSD stablecoins get a slice of the pie in LSDFi?
Before understanding the DeFi protocols that support LSD stablecoins, let’s briefly review the major types of stablecoins.
The first is centralized stablecoins collateralized by legal currencies such as the US dollar, such as USDT and USDC. These stablecoins are usually issued and managed by central institutions and generally maintain a 1:1 collateralization ratio. The second is decentralized over-collateralized stablecoins collateralized by Bitcoin, Ethereum and other cryptocurrencies, such as DAI, BitUSD, and sUSD. The collateralization ratio is usually 1:1.5 or 1:2, which means that to issue $1 stablecoin, cryptocurrencies worth $1.5 or $2 corresponding to value are required as collateral. The third is algorithmic stablecoins that use algorithms to maintain stablecoin prices, such as Frax and the collapsed UST. These stablecoins usually introduce elastic supply and incentive mechanisms to adjust supply and demand and maintain price stability, and their mechanisms are more complex.
These stablecoins that we are familiar with serve as a medium of exchange between fiat currency and mainstream digital currency, as well as avoiding the risk of price fluctuations in mainstream digital currency.
Currently, a new form of stablecoin has emerged in the cryptocurrency market, which is a decentralized stablecoin that uses liquidity-pledged derivatives (LSDs) such as stETH, cbETH, Sfrx ETH, and rETH as collateral. These are issued by decentralized protocols mainly through over-collateralization. Compared with traditional stablecoins, their more obvious utility lies in releasing LSD token liquidity and providing LSD token appreciation scenarios, such as pledging, borrowing, and earning interest.
After the Ethereum upgrade, the LSD market has grown rapidly and its TVL market value has exceeded 19 billion US dollars, ranking first among all protocol categories in DeFi. The huge LSD assets have become one of the most important battlefields in DeFi, and stablecoin protocols supported by LSD are trying to get a share through a combination of stablecoins, over-collateralization, arbitrage, and liquidation mechanisms. From representative projects, one focuses on LSD stablecoin earnings and the other focuses more on interest-free borrowing of LSD stablecoins.
1. Lybra Finance-LSD Earning Stablecoin Protocol
Lybra Finance has launched an interest-bearing stablecoin eUSD, which is pegged to the US dollar at a 1:1 ratio and can earn an APY (annual yield) of 7.2% by holding eUSD. There are two ways to obtain this eUSD: one is to exchange mainstream stablecoins such as USDT, USDC, or FRAX for eUSD through decentralized exchanges. The other is to deposit ETH or stETH into the Lybra Finance protocol as collateral to mint eUSD at zero cost, with a minimum collateralization rate of 150% (forced liquidation below this level) and ideally ensuring above 200%.
Lybra Finance pays interest to users and earns revenue through a mechanism in which when users deposit ETH into Lybra, Lybra automatically pledges it in Lido and converts it into stETH to earn revenue. Lybra takes a cut of this revenue as a fee, with the remaining revenue used to pay interest to eUSD holders. The fee is a 1.5% annual fee based on the total circulation of eUSD.
Lybra gave an example on how to calculate the account. Assuming Alice deposited 135,000,000 USD worth of ETH and minted 80,000,000 eUSD, and Bob deposited 15,000,000 USD worth of ETH and minted 7,500,000 eUSD, the current eUSD circulation is 80,000,000 + 7,500,000 = 87,500,000, and the current collateral is 135,000,000 + 15,000,000 = 150,000,000 stETH.
After 1 year, Lybra generates 150,000,000 USD * 5% = 7,500,000 USD of stETH.
Assuming Bob uses his 7,500,000 eUSD to purchase the additional stETH, the transaction fee for almost a year is the eUSD circulation (i.e., 87,500,000) * 1.5% = 1,312,500 eUSD. The dividend is 7,500,000 eUSD – 1,312,500 eUSD = 6,187,500 eUSD, which is then distributed to all eUSD holders. The annualized interest rate is around 7.2%. Moreover, for eUSD holders, stablecoin deposits are safer than staking ETH assets in terms of volatility over the year.
Aside from the profit mechanism, how eUSD maintains its link to the US dollar is a critical factor. Overall, Lybra Finance ensures the stability of eUSD through over-collateralization, liquidation mechanism, and arbitrage opportunities.
First, every eUSD needs to be backed by at least 1.5 USD worth of stETH, and over-collateralization is used to reduce the risk of insolvency. Second, the Lybra protocol combines liquidation mechanisms to protect the system from the impact of insufficient collateral. If a user’s collateral rate is lower than the safety collateral rate, any user can voluntarily become a liquidator and buy the liquidated part of the collateral stETH, paying the corresponding eUSD. This mechanism ensures the stability of eUSD with upward pressure. Recently, Lybra Finance has also launched a collateral ratio monitoring function to resist liquidation risk in volatile markets. When a user’s collateral rate falls below a specific threshold, it will automatically repay part of the user’s debt. Once the collateral rate returns to the predetermined level, this automatic repayment function will stop.
In addition, Lybra ensures that the price of eUSD does not deviate from the anchor by providing arbitrage opportunities to users. If 1 eUSD > 1 USD, users can mint new eUSD by depositing ETH as collateral and then sell the newly minted eUSD on DEX. As more eUSDs are sold, the market supply increases, pushing the price back to 1 USD. For users, buying back eUSD at a lower price or using it to repay a loan can profit from the price difference.
When eUSD is less than 1USD, users can purchase eUSD at a discount on the market and then exchange it for ETH/stETH worth 1 USD within the Lybra protocol. As the demand for eUSD increases, it will push the price back up to 1 USD. Users can hold or sell the redeemed ETH/stETH and profit from the difference.
In addition to issuing interest-bearing stablecoin eUSD, Lybra Protocol has also issued its native token LBR and launched an IDO on April 22, distributing 5 million tokens (5% of the total supply) of LBR tokens.
As mentioned earlier, Lybra Protocol obtains all revenue through pledging, part of which is used to pay interest to eUSD holders, and the other part is used as a handling fee, which Lybra will distribute to LBR holders. If a user holds 1% of LBR in the pledge pool, they will receive a corresponding 1% return on the total handling fee.
All in all, users can choose to hold interest-bearing stablecoin eUSD to earn interest, pledge to mint eUSD to earn LRB rewards, or pledge LRB as LP to provide liquidity to earn income through Lybra Protocol.
Currently, the yield of Lybra pool 1 (eUSD mint pool) is 27.82%, pool 2 (LBR/ETH LP) is 133.72%, pool 3 (eUSD/USDC LP) is 9.52%, and the yield of single LBR pledge is 74.56%. Due to the large fluctuation in LBR price growth and protocol revenue, the yield fluctuates greatly as well.
Currently, Lybra Finance’s TVL has fallen back to USD 182 million (highest exceeding USD 200 million), and LRB price has also dropped significantly to USD 1.22 (highest exceeding USD 4).
The innovative model of interest-bearing stablecoin and zero interest rate lending provided by Lybra Finance does provide a solution to the group that needs stability and certain pledge income. However, for users, this also means taking on an additional layer of security risk and losing a portion of the pledge income due to the protocol’s commission. Although Lybra Finance has experienced a short-term surge in TVL and coin price, its ability to ensure long-term sustainability is worth paying attention to.
Recently, Lybra Finance announced plans to launch its v2 testnet in mid-June to address current TVL growth bottlenecks and eUSD’s lack of use cases through the following measures: First, it plans to expand the entire chain through LayerZero. According to crypto KOL @qiaoyunzi1’s analysis, the team has started discussions with protocols on Arbitrum, and Layer2 is the preferred cross-chain direction. In the future, Lybra Finance may cross eUSD to other alt-layer1s to expand its applications. Second, it plans to add more types of LST assets; third, it updates LBR’s Tokenomics and introduces VC investors to the Lybra protocol. In addition, it changes the revenue and fee mechanism of the protocol, allowing LBR to introduce deflationary elements and increase the ownership period of esLBR (increased to 60 days), as well as allowing longer locking time. In addition, LBR liquidity-staked derivatives esLBR are introduced into DAO governance, allowing the community to participate in the protocol’s decision-making power.
Lybra Finance’s team is currently anonymous, and its rapid data growth has sparked a lot of discussion. It was speculated to be a project under Lido, but Lido later clarified that the two were unrelated and reminded users to do project background checks before interacting.
2. Gravita – LSD Zero-Interest Loan Stablecoin Protocol
Gravita Protocol is a decentralized lending protocol built on Ethereum that supports users to deposit wstETH (Lido), rETH (rocketpool), blusd (ChickenBonds) to obtain Gravita’s native stablecoin GRAI as a reward, and also supports the use of GRAI as collateral for loans, for consumption, or for depositing in a stable pool to purchase liquidated LST collateral at a discounted price. As a forked project of Liquity, Gravita’s native stablecoin GRAI is a token with a similar volatility suppression mechanism to Liquity’s native stablecoin LUSD.
Gravita has set up independent lending pools for each collateral type, isolating their respective risks. Different collaterals have different liquidation lines, and the highest LTV can reach 90%. For example, when the ETH price is $2,000, users can borrow up to 2000*0.9=1800GRAI, and if the Ethereum price is below $2,000, it will be liquidated. Considering the higher risk of LST, the LTV of LST collateral is lower.
Compared with Lybra Finance, which encourages users to hold interest-bearing stablecoin eusd to reduce LST yield risk (excluding the risk of an additional contract layer), Gravita focuses more on increasing users’ capital turnover. It meets users’ capital turnover needs, especially short-term borrowing needs, with low-fee mechanisms and liquidation mechanisms.
On the one hand, when users’ LST is used as collateral, their pledging APR should not be affected, but when users use GRAI obtained from pledging loans in other DeFi to earn income, LTV will decrease over time if the price of ETH remains stable or increases, and the risk of user liquidation or redemption will also decrease.
On the other hand, Gravita has lower fee mechanisms and lower liquidation thresholds compared to MakerDao. Currently, when using the Gravita protocol, for positions exceeding 6 months, the one-time maximum fee is only 0.5%. When users repay their debts before the expiration of six months (about 182 days), the fixed borrowing fee of 0.5% will be proportionally refunded based on the time used, but at least one week’s interest must be paid. MakerDao has varying annual fees. In addition, Gravita’s LTV is about 85%, which translates to a liquidation threshold of about 116%, while MakerDao has a liquidation threshold of at least 160%.
As for how GRAI ensures its peg to the US dollar, the upper limit of the GRAI price is 1.1 US dollars, and the lower limit is 0.97 US dollars. A maximum of 90% LTV creates an upper limit. When the GRAI market price is 1.2 US dollars, ETH holders can mint GRAI by pledging ETH according to a 90% LTV and sell it in the market for arbitrage, making a profit of nearly 8% per arbitrage (0.9*1.2). The protocol can redeem GRAI at a price of 0.97 US dollars in exchange for collateral (that is, 1 GRAI is exchanged for collateral worth 0.97 US dollars), forming the lower limit of the GRAI stablecoin price.
Currently, Gravita’s TVL is steadily increasing to over 21 million US dollars.
Recommended reading: “LSD Interest-Free Loan Stablecoin Protocol Gravita-The Birth of the New God Stablecoin GRAI”
3. Agility-LSD Liquidity Distribution Platform + aUSD Trading Platform
According to the official description, Agility is positioned as an LSD liquidity distribution platform + aUSD trading platform, aiming to allow LSD holders to obtain higher returns and release the liquidity of LSD. However, both the LSD liquidity distribution system and the aUSD trading platform have not yet been officially launched.
Currently, Agility supports ETH collateral to generate aETH; it also supports multiple LSD collaterals, including stETH, rETH, and frxETH, which will generate aLSD. After obtaining aETH and aLSD, users can choose to hold aLSD to obtain corresponding LSD collateral income; or use aLSD or aETH to participate in the LSD liquidity distribution system, provide liquidity to the selected vault, and receive returns. In addition, you can also collateralize aLSD or aETH to mint Agility’s native stablecoin aUSD for trading or hedging risks.
Here, let’s focus on Agility’s aUSD trading system. Similar to eUSD and other stablecoins mentioned earlier, aUSD is also a type of over-collateralized stablecoin. Users can mint aUSD by collateralizing aLSD or aETH. Its initial collateralization ratio is 130%, and the minimum cannot be lower than 110%, otherwise it will be liquidated.
After obtaining aUSD, users can trade or hedge, for example, long/short ETH, GMX, GNS, Pendle, Gear and other assets, long/short LSD yield, engage in options trading and gambling games, etc. In its roadmap, Agility plans to attract external developers to build more aUSD trading scenarios, including external application scenarios of aUSD.
Agility also issued its native token AGI, which was officially launched on 1inch/airswap on April 7. On April 10, Agility launched the “Fair Launch” and opened five mining pools for liquidity mining, including four single coin mining pools of ETH, stETH, rETH, and frxETH, as well as the AGI-WETH LP mining pool and the ankrETH mining pool.
The initially high yield rate once pushed Agility’s TVL to a peak of nearly $500 million ($487 million) in the first two weeks after its launch, and the governance token AGI price rose from its initial issuance price of $0.04 to a high of $0.79. However, it quickly fell back, and the current TVL is only $2.25 million, and the price of AGI is only $0.015.
Recommended reading: “Interpretation of LSDFi protocol Agility: 20-fold increase in token price in two weeks after launch”
4, Prisma Finance – LSD Stabilized Coin Protocol
Prisma Finance is a very early project, with its official Twitter account launched in May, and its website is just a single-page introduction that has yet to release its application. The team is also anonymous.
However, Prisma Finance has announced that it has completed a round of financing, with the specific amount undisclosed. Investors include Michael Egorov, founder of Curve Finance, C2tP, founder of Convex Finance, FRAX Finance, Conic Finance, Tetranode, Llama Airforce, CoinGecko founder, OKX Ventures, DeFiDad, MrBlock, Impossible Finance, 0xMaki, GBV, Agnostic Fund, Swell Network founder, Eden research director Adam Cochran of The Block, Ankr Founders, MCEG, and Eric Chen.
According to the only introduction article from Prisma Finance, compared with Lybra Finance, Prisma Finance will support more LSD assets, such as wstETH (Lido), cbETH (Coinbase), rETH (Rocket Pool), sfrxETH (Frax Ether), and WBETH (Binance) as collateral, to mint acUSD, a stablecoin with excess collateral. Prisma’s excess collateral model supports automatic repayment and allows the use of Ethereum staking revenue to automatically repay debt.
In addition, users can stake their stablecoins in the Curve pool to obtain rewards in the form of PRISMA, the native token of Prisma Finance, in addition to Ethereum staking revenue in the form of CRV (Curve) and CVX (Convex Finance). Prisma mentioned that its codebase is based on the decentralized lending protocol Liquity. Liquity launched a stablecoin LUSD pegged to the US dollar, and ETH holders can zero-collateralize LUSD by staking ETH on Liquity.
Recently, the data growth of LSD stablecoin model Lybra Finance has received a lot of attention. Prisma Finance, an early project, not only has a similar model, but has also received financing from many well-known institutions. Many users are interested in Prisma Finance’s further plans, especially its IDO time, but the Chinese community of Prisma stated that there is no IDO schedule at the moment.
5, Raft – LSD Zero-Interest Loan Stabilized Coin Protocol
Gravita Protocol supports users to deposit wstETH (Lido), rETH (Rocketpool), blusd (ChickenBonds) to obtain GRAI, the native stablecoin of Gravita, and also supports using GRAI as collateral for loans, for consumption, or depositing into the stable pool to purchase liquidated LST collateral at a discounted price.
Raft is a decentralized lending protocol built on Ethereum, similar to Gravita Protocol. It has issued a stablecoin R and supports users to deposit R or borrow R by pledging stETH or wstETH to earn staking rewards. Users can also use R in other protocols in the ecosystem to increase capital utilization. Currently, the minimum collateralization ratio is 110%, and users must borrow at least 3000 R. Raft currently charges a fee of 00.1%.
Raft allows users to obtain up to 11x leverage on stETH and provides users with a very simple operation process. Users only need to set the amount of stETH deposited, target leverage, and slippage, and the system will execute the operation automatically. The maximum leverage of Raft is calculated based on the stETH collateral coefficient in Aave v3 and Maker, and the annual fee is calculated based on the difference between the stETH supply APY and the USDC borrowing APY on Aave v3, as well as the DAI stability fee.
According to the Raft website, Wintermute, Jump, GSR, and other well-known investors in the market makers have invested in Raft.
Raft went live on June 5th and the TVL has reached $16.43 million in less than a day.
6. Tenet Protocol – Layer1+ liquidity staking and interest-free stablecoin lending protocol
Tenet Protocol is an EVM-compatible Layer 1 blockchain based on Cosmos and is an interest-free stablecoin lending protocol that provides multiple income opportunities for LSD holders.
First, users can stake LSD to Tenet network validators and earn staking rewards. Users can borrow LSDC collateral assets at zero interest rates and deploy and consume LSDC in the DeFi ecosystem while ensuring the original LSD asset returns. This will unlock additional liquidity and utility with LSDC.
In addition, users can provide liquidity to LSDC on the stability module, receive additional rewards through liquidation in the Lucidity system, and obtain Tenet token rewards from the local reward pool. The minimum collateralization ratio for LSDC is 125%, and users must borrow at least 500 LSDC. The stablecoin module of Tenet Protocol is also a fork of Liquity. Recently, Tenet Protocol stated that it is building full-chain expansion on LayerZero.
Tenet Protocol’s project team has extensive experience in product and marketing. Tenet Protocol’s CEO Greg Gopman is the former CMO of Ankr, Growth Manager of Kadena, and Co-founder of Akash. COO Dan Peterson is the former Revenue Operations Expert of Blockdaemon. CPO Alex Cheng is the former Senior Product Manager of Tendermint-Cosmos and Composable Finance. CTO Dan Lashin is the former CTO of Minter.
Tenet Protocol has currently launched its testnet and will soon launch its mainnet on Ethereum. Tenet Protocol opened its IDO in May with a price of $0.02, raising a total of 3.36 million US dollars.
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