Source: Joseoramas30 Source: medium Translation: LianGuai, Shan Ou Ba
In this short article, I want to discuss the narratives of OpFi and LSDfi, which have their own solutions.
In Cointelegraph’s DeFi Q3 report, I mentioned the need for a token economic model that can incentivize user participation, rather than the typical monopolistic token holder capitalist model.
In short, more participation should translate into more liquidity, as participants are more willing to deposit and use their funds in protocols or ecosystems.
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The New DeFi Narrative
Let’s first provide some background information: the lack of liquidity and proper incentive models is why many DeFi services and features fail to take off or sustain themselves in the long term, especially options trading, despite protocols like dYdX leading the way in the derivatives market.
Many DeFi protocols have attempted to propose narratives and solutions to address liquidity issues. Despite hundreds of ideas, only a few models have proven to be somewhat viable solutions, even if only temporarily or partially.
What is OpFi? Simplifying DeFi with Complex Products
OpFi, short for Options Finance, is a new DeFi narrative where options provide the driving force for DeFi protocols through new products that bring enhanced liquidity, capital management, and new incentive models.
This narrative is primarily driven by Dopex, a decentralized options exchange that builds and offers OpFi products such as Oceanic Options (OP), Single-Stake Options Vaults (SSOV), and call options as incentives.
In my view, one of OpFi’s goals is to bring specific TradFi tools onto the chain, tools that might be useful to some extent, so you’ll see some similarities with TradFi in many DeFi narratives today.
Let’s take the options incentive model as an example. Dopex introduces call options as an incentive mechanism, similar to the typical options incentive models used in TradFi to promote stakeholder participation:
The protocol distributes purchased call options to its community instead of fixed token emissions that can be dumped immediately. This means users have an incentive to deposit the protocol’s tokens into liquidity pools/products to generate profits.
Assets deposited generate structured returns; call option issuers can customize exercise prices and expiration dates.
When the value of the protocol’s native token skyrockets, users can sell call options and generate profits, while the protocol benefits from accrued liquidity.
In theory, this model reduces selling pressure and incentivizes token participation, while potentially generating liquidity in the long term for sustainability. However, as the dump/loose money part is eliminated, DeFi’s losers may shy away.
The Complexity of Liquidity Management
This incentive model reminds me a bit of Kamino Finance by Solana, which is a relatively new protocol that provides automated liquidity treasury optimization for CLMM. Its treasury strategy aims for optimal yield and price range on liquidity DEXs and compounds it to improve capital efficiency and reduce volatility.
While the CLMM model is helpful for liquidity optimization, its drawback lies in the time-consuming manual work, thus automated management has been a viable solution so far. Similarly, options trading, which is far more complex than stock trading, often becomes tedious due to the management of option Greeks.
Returning to OpFi, the main idea behind this narrative is not to educate users but to make options trading and other functionalities in DeFi easier by placing complex infrastructure in the background. As more protocols try to integrate this incentive mechanism, we will have to see how it is rolled out.
But this is particularly challenging as they are using complex derivative products to reshape an already complex DeFi landscape.
LSDfi: Speculating with Yield Protocols
In my opinion, LSDfi is purely driven by greed. It is an ecosystem of protocols aimed at generating as much yield as possible from assets that have already generated yield within the ecosystem. In other words, it is derivatives on top of derivatives.
It all started with the Shapella upgrade.
When Ethereum transitioned to PoS, a significant amount of ETH was locked up until the Shapella upgrade, causing liquidity constraints for ETH-based projects and potential losses for equity holders due to market conditions.
The solution? Creating tokenized versions of these staked assets, such as Coinbase’s Wrapped Staked ETH, and using them for various DeFi activities. This allows stakers to generate yield while staking their assets.
This has sparked the thriving ecosystem of liquidity staking, with TVL currently exceeding $20 billion, with Lido Finance being a major participant.
Is LSDfi Playing the Old Financial Game?
In short, LSDfi refers to the protocol that seeks profit through speculation by leveraging liquidity staking derivatives. To me, this reminds me of the secondary market established 15 years ago, when banks became greedy, started buying a large number of worthless loans, packaged them into CDOs, and overleveraged their positions after the Federal Reserve relaxed lending standards, speculating on borrowers and defaulters.
Similarly, in LSDfi, you are speculating on LSD and its products. You can borrow LST (Liquidity Staking Token) to create additional yield, and even speculate or hedge on other LSD tokens, LSD indexes, etc. We are creating a secondary market with a significant amount of funds to profit from the growing trend, thus creating another growing trend.
Although LSD provides an innovative solution to unlock collateral liquidity, LSDfi – which is built on top of existing systems with layers of speculation – in my opinion, we are simply blindly imitating and repeating old and flawed financial scripts, raising critical questions for certain DeFi goals in the community.
DeFi can be very interesting. You can create tokenized versions of tokens, build on derivatives, and many things that can serve a useful purpose or just be the next speculative pool. That being said, LSDFi is injecting a lot of liquidity into the DeFi ecosystem, but be cautious of explosive growth and exponential spikes, especially in over-leveraged systems built on top of multiple layers.
On the other hand, OpFi is an emerging ecosystem with certain advantages, but seems to lack some fundamental concepts. However, the idea of using complex products to facilitate the DeFi structure by placing them in the background is very attractive.