Tokens known as liquid staking derivatives (LSD) may increase Ethereum network activity and fuel the current bull market.
- DeFi protocols’ gas usage has dropped from 34% in 2020 to between 8% and 16% right now, with NFTs now controlling the majority of the market.
- Staking has gained popularity among Ethereum investors; by the end of May, there were 21.63 million ETH worth $40.021 billion staked, or 18% of the total supply of the cryptocurrency.
During the bear market, activity in the decentralized finance (DeFi) industry has decreased, and Ethereum’s 4% yearly staking return has added to the rivalry. However, a brand-new story centered on liquid staking derivative (LSD) tokens is taking shape in the DeFi ecosystem. These coins could increase Ethereum network activity and function as a driver of the bull market.
The Decline in DeFi Activity
Glassnode researchers claim that the amount of gas used by DeFi protocols has considerably lowered from 34% in 2020 to between 8% and 16%. With a 25% to 30% market share, NFTs now account for most gas use. DeFi’s supply-weighted price index on Glassnode, which is priced in US dollars and ETH, has likewise experienced a 90% drop since the beginning of 2021, suggesting a decline in DeFi’s performance as a whole.
Underperformance of DeFi “Blue Chip” Tokens
Market capitalization has significantly decreased for the so-called DeFi “blue chip” tokens, which comprise governance tokens from well-known DeFi protocols, including Uniswap (UNI), MakerDAO (MKR), Aave (AAVE), and SushiSwap (SUSHI). Since reaching all-time highs of $45 billion in May 2021, these tokens have lost 88% of their value. Notably, DeFi tokens have underperformed relative to ETH during positive market rallies, and they have also seen more significant losses during imperfect markets. According to Glassnode researchers, the 4% ETH staking yield now serves as a new standard that DeFi token returns must achieve.
The Rise of Staking and Liquid Staking Derivatives
Investors in Ethereum have become more interested in staking, especially since the Shapella upgrade in April 2023 allowed for redemptions from the staking contract. 18% of Ethereum’s total supply, or 21.63 million ETH worth $40.021 billion, has been staked by the end of May. One-third of the market for staked ETH comprises liquid staking derivatives (LSD) platforms like Lido and Rocket Pool, which hold a sizable amount. These systems provide tokenized representations of staked ETH, enabling investors to obtain staking profits without sacrificing liquidity.
LSDfi: Leveraging Liquidity for DeFi
Engaging in LSD financialization (LSDfi), which intends to use the liquidity offered by LSD tokens in DeFi applications, is a growing trend among Ethereum investors. LSDfi platforms increase yields by integrating lending protocols and exchange liquidity with LSD token liquidity. According to a Dune analytics dashboard by data analyst Defimochi, the total value locked (TVL) in LSDfi protocols has experienced exponential growth since mid-May and has reached $411 million. Pendle Finance, Lybra Finance, Curve Finance, and Alchemix Protocol are some of the well-known brands in the industry.
LSD Tokens and Curve Finance
On Curve Finance, the biggest stablecoin exchange in the world, the liquidity of LSD tokens has surpassed $1.5 billion. Curve Finance has made it possible to mint its overcollateralized stablecoin crvUSD (CRVUSD) using staked Frax Ether (SFRXETH) from the Frax Protocol as collateral. Additionally, other protocols have evolved to use the liquidity offered by LSD tokens, such as Lybra Finance and Pendle Finance.
Risks
LSDfi poses risks in addition to opportunities for more significant gains and increasing DeFi engagement. These dangers include the potential for rug pulls, frauds that cause substantial user losses, and smart contract weaknesses. Users should employ caution and complete due diligence when interacting with LSDfi protocols, as with any newly developing industry.
Conclusion
The market has noticed the quick rise of DeFi-focused Ethereum liquid staking derivatives platforms. Despite the drop in DeFi activity, the emergence of LSD tokens presents a fresh perspective and the opportunity to resurrect Ethereum’s network activity. However, users must be mindful of the dangers posed by LSDfi procedures and take caution when engaging in this developing industry.
