Integrating DeFi strategies, LSTFi leverages a liquidity staking market worth billions of dollars.

Source: The Defiant

Translation: BlockingBitpushNews Mary Liu

Liquid staking tokens (LST) are quickly gaining popularity in DeFi. Over the past few months, the value of the liquid staking industry has increased dramatically, with market leader Lido having a total locked value (TVL) of $13 billion – twice that of the second largest DeFi protocol, MakerDAO. Staking Rewards data shows that over 19 million ETH are currently staked, equivalent to 15.7% of the supply, with LSTFi representing 47% of staked ETH, which is worth around $17 billion based on current prices.

Although LSTFi has brought high liquidity to Ethereum, it has also brought new challenges to the network.

Liquid Staking

LST represents staked Ethereum on the Beacon chain and is a token that generates revenue, allowing users to earn staking rewards without running their own node and allowing stakers to enter and exit positions by simply buying and selling LST tokens.

Since the launch of staking ETH withdrawals in April, many innovative protocols have been seeking to further integrate LST tokens into DeFi and provide new strategies to earn additional returns on top of staking rewards.

Basic LST Strategies

Many top DeFi protocols already support LST, with Lido’s stETH having the widest support, while Rocket Pool’s rETH is also rapidly gaining market share.

LST holders can deposit their tokens into currency market protocols such as Aave to earn revenue as well as staking rewards. They can also borrow other assets using LST as collateral, with their overall return and revenue exceeding accrued interest – unlocking recursive lending strategies.

Stani Kulechov, founder and CEO of Aave, said, “There is a strong interest in using stETH to earn additional returns without taking excessive risks.”

MakerDAO users can mint their DAI stablecoin with stETH or rETH as collateral, providing a simple way to obtain stablecoins to counter LST liquidity.

Curve recently launched crvUSD, a stablecoin that users can mint with Frax’s frxETH token, and Curve says it will soon expand support to other LSTs.

Users can also provide liquidity for LST paired with ETH on decentralized exchanges like Uniswap to earn trading fees, with impermanent loss being negligible.

LST gold rush

New protocols are also profiting from the LST boom, with many offering inflationary tokens as rewards.

Just five weeks after launching its mortgage debt protocol, Lybra Finance’s total locked value (TVL) skyrocketed to $183m, allowing users to mint its eUSD stablecoin with stETH. Lybra pays rewards to eUSD holders using ETH staking rewards.

Origin OETH is a yield-aggregating LST that has also accumulated $15m in TVL within two weeks of launching.

However, while new protocols may offer higher APYs at times, untested protocols may be more vulnerable to attack than more established ones. Earlier this week, the $32m TVL LST liquidity emerging market UnshETH froze withdrawals after being hacked.

Leverage strategies

Some protocols combine multiple DeFi plays to create complex LST strategies.

MakerDAO’s front-end launched a service in October that allows users to leverage their exposure to stETH. The product allows Aave users to borrow ETH against stETH collateral, then use the borrowed funds to purchase additional stETH in a single trade.

Gearbox Protocol offers up to 10x leverage on stETH.

Pendle allows users to deposit LST assets, then mint new tokens representing accrued earnings (YT tokens) and underlying principal collateral positions (PT tokens) separately. This means users can choose to hold onto their earnings tokens and sell the underlying collateral. Additionally, traders buying PT tokens can purchase ETH at a discount below market prices, but cannot use the ETH until a scheduled period has elapsed.


Many in the Ethereum community are also waiting for the launch of EigenLayer, an innovative “re-staking” protocol that will debut on the mainnet in Q3.

EigenLayer will allow Ethereum stakeholders to protect other services in addition to verifying the Ethereum blockchain, thus earning them additional rewards. It is also building support for stETH and rETH, allowing LST holders to participate in re-staking.

Centralization concerns

However, some industry insiders warn against over-financializing Ethereum’s underlying security mechanisms.

Superphiz, co-founder of the EthStaker community, said: “The purpose of staking is not to promote DeFi, but to promote the security and health of the Ethereum network. You have to separate these two goals.”

Some researchers are concerned that the financialization of LST will make Lido Finance a monopolist, which currently controls 36% of all staked Ethereum and attracts 32% of validators. Ethereum co-founder Vitalik Buterin recently stipulated that no staking pool should control more than 15% of staked Ethereum.

Although many in the community are working to raise awareness of the issue, others believe more action is needed. Anthony Sassano, host of The Daily Gwei podcast and member of Rocket Pool oDAO, urged the LST platform to use economic incentives to divert users from Lido.

Sassano said: “We all know that the most powerful force in crypto is economic incentives, but too many people are still thinking naively, hoping to trigger change in some simple way…It’s time to go full speed ahead and decentralize this market.”

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