The LSDFi craze is heating up: A detailed explanation of five excess return strategies

LSDFi is a DeFi product based on the liquid staking derivative (LSD). Through LSD, stakers can convert their staked ETH into a tradable asset, thus unlocking liquidity. At the same time, LSD lowers the threshold for ETH staking, allowing any amount to be staked, and stakers can receive LSD tokens after staking, which can be used to generate multiple yields.

LSDFi is built on DeFi Legos, and the composability of DeFi is essentially a yield Lego. New entrants often attract users to stake ETH/LSD on their platforms by providing incentives, thereby gaining market share and control over LSD. Some LSDFi projects also utilize dynamic yield rates to encourage users to choose smaller decentralized staking platforms, promoting the decentralization of validators.

The following are the five main forms of LSDFi:

1. LP Trading Pair ( Yield 10% + )

Before the Shanghai upgrade, LSD could not be directly exchanged for ETH, leading to the creation of many LSD-ETH liquidity pools. Taking stETH as an example, the base yield does not exceed 5%, and most of it is enhanced through token subsidies to increase APY. In addition to receiving ETH network rewards, stakers can also earn LP fee rewards. It is expected that after the Shanghai upgrade, due to the increase in the scale of LSD, the scale of LP may further expand.

2. Circular Lending ( Yield 10% + )

A leveraged betting strategy for the Ethereum mainnet after the merge using AAVE and LIDO's STETH:

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

Although the clearing risk is high, the APR depends on the number of cycles. In theory, all lending protocols can be implemented, and automatic cycle lending products may emerge in the future.

3. Yield Aggregation (10%+)

Taking Yearn Finance as an example, it has established a liquidity pool in Curve, raising the LSD APY to 5.89%. Users can choose to stake stETH directly, and the current value of the pool is 16.4 million USD. There are many similar veteran DeFi projects that increase total returns by aggregating yields from multiple platforms and providing subsidies.

4. EigenLayer(收益未知)

EigenLayer offers various staking methods, including liquid staking similar to Lido and super liquid staking. The latter allows LP staking, such as:

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

5. Incentive-based LSDFi Projects

These types of projects enhance capital efficiency through leverage, structured strategies, options, bond derivatives, etc., or attract savings by utilizing high APY. Typical representatives include:

• Pendle: DeFi yield protocol, offering ETH and other staking services and liquidity pools.
• Ion Protocol: Tokenizes LSD tokens and collateralizable asset tokens into allETH and vaETH
• unshETH: Improve the decentralization of validators through dynamically allocated incentives.
• LSDx Finance: Committed to becoming a high-barrier DEX in the LSD asset segmentation market.
• Liquid Staking Derivatives: LSD aggregator, maximizing asset leverage effect
• Stader Ethereum: ETHx is coming soon, in collaboration with 30+ DeFi protocols.
• Hord: Achieve higher APR for LSD projects through various channels
• Parallax Finance: Providing LSD liquidity infrastructure on L2
• bestLSD: Real Yield Aggregator, utilizing aggregated yield to subsidize its own LSD
• 0xAcid DAO: A management protocol for maximizing LSD asset returns

In addition, projects such as EigenLayer, Index Coop, and Gitcoin have also made their mark in the LSDFi field.

As the LSD War intensifies, competition and cooperation among LSDFi projects will become even more fierce. In the future, there may be a range of products with returns from 4% to over 500%, providing users with diversified risk-return options. This war is expected to last until the Ethereum staking rate stabilizes at over 25%.