Cryptocurrency markets are ever-evolving, and one of the most intriguing developments in recent years has been the emergence of Liquid Staking Derivatives (LSDs).

These financial instruments have gained prominence, particularly within the Ethereum ecosystem. In this report we delve into the birth and evolution of LSDs, their vital role in Ethereum's staking landscape, the key players, recent developments, and thoughts on their future.

What the experts say… 💬

Insights from Twitter Space on crypto LSDs hosted by Symbiote 

We recently hosted Gareth from Tenet Protocol and Tote from Magicsquare for a super insightful discussion on the state of LSDs in crypto…here are some of the takeaways (we dive deep into LSDs after this Space recap…)

🌐 Global User Base: Significant user adoption in regions like Korea, Southeast Asia, Turkey, and the USA.

💻 Regulatory Challenges: Difficulty in regulating LSD-Fi due to its intricate nature, with comparisons to challenges faced by decentralized exchanges (DEX) and KYC rules.

⛓️ Chain Maturity: Discussion on whether new blockchain chains should be LSD-Fi ready from the start or wait until the chain matures.

🤝 Major Players: Mention of key LSD-Fi projects such as Lido, Rocket Pool, Fracks, Stakewise, and EigenLair, highlighting differences in rewards and unique features.

🔄 Liquidity Trade-Offs: Consideration of liquidity depth as a crucial factor for large stakeholders in LSD-Fi projects.

🚀 Accelerating Growth: Introduction of a new accelerator program designed as an engine for faster project development and streamlined investor tracking.

🧑‍🤝‍🧑 Ecosystem Collaboration: Emphasis on the importance of building a killer app for mainstream adoption, comparing blockchain to the plumbing in a house.

🔄 Iterative Progress: Acknowledgment of ongoing challenges and risks, urging the community to study and apply risk management strategies.

🏛️ Blockchain Perception: Drawing parallels to online banking, emphasizing the need for users to interact seamlessly with blockchain without delving into its technical complexities.

And now let’s dive into world of LSDs! Read on 🍿 👇️ 

The Birth of LSDs ✨

Liquid staking derivatives (LSDs) came into being after the launch of the Ethereum beacon chain in 2020. The beacon chain is the proof-of-stake (PoS) consensus mechanism that will eventually replace Ethereum's current proof-of-work (PoW) mechanism.

Ethereum Beacon Chain | Source: Kerala Blockchain Academy ¹

To become a validator on the Ethereum PoS network, users must stake 32 ETH. This is a significant barrier to entry for many users, as it represents a large amount of capital. LSDs were created to solve this problem.

LSDs are tokens that represent staked assets. When a user stakes their ETH through an LSD provider, they receive an LSD token in return. This LSD token can then be used to interact with other DeFi protocols, such as decentralized exchanges (DEXs) and lending protocols.

The LSDFi Space: Quick Facts 📊

Source: Coingecko Ethereum Liquid Staking Report 2023 ²

• The Total Value Locked (TVL) across LSDFi protocols has grown 5,870% (58.7x) since January 2023 & reached $919.0M on August 31, 2023 ²

• This boom is being driven by the increasing popularity of ETH staking and the growing awareness of the benefits of LSDs

• The average annual percentage yield (APY) for LSDs has been around 4.4% since January 2022. However, the APY can vary depending on the LSD provider and the current market conditions.

• The highest APY for LSDs is currently being offered by Frax's sfrxETH, which is yielding around 5.5%.

The Huge Role of LSDs in ETH Staking 💱

LSDs have quickly become a major player in the Ethereum staking ecosystem. As of October 2023, LSDs account for 44% of all staked ETH.

This is due to the many benefits that LSDs offer to stakers.

👉 First, LSDs provide liquidity to staked assets. This means that stakers can sell their LSD tokens on DEXs or use them as collateral in lending protocols. This is not possible with traditional staking, where staked assets are locked for a period of time.

👉 Second, LSDs make it easier for users to participate in staking. With traditional staking, users must set up their own validator node or join a staking pool. This can be a complex and time-consuming process. With LSDs, users can simply stake their ETH through an LSD provider and receive an LSD token in return.

Big Players in the LSD Space 🏦

"Lido has daily rebates to the holders. Rocket Pool has token rewards. EigenLair offers LP restaking." - quote from Space

Latest Liquid Staking TVL Rankings | Source: DefiLlama ³

LIDO 🌟 

Lido is the largest LSD provider, with over $6 billion in total value locked (TVL). It is a centralized LSD protocol that allows users to stake their ETH without having to run their own validator node. Lido also offers a number of other benefits, including:

• Liquidity: Lido stETH tokens are liquid, meaning that they can be traded on DEXs or used as collateral in lending protocols.

• Transparency: Lido is a transparent protocol that uses a public audit and rewards distribution system.

• Security: Lido is backed by a team of experienced security experts.

Liquid Staking on Lido | Source : Lido

ROCKETPOOL 🚀 

RocketPool is a decentralized LSD protocol that is designed to be more secure and decentralized than centralized LSD protocols like Lido. RocketPool also offers a number of other benefits, including:

• Non-custodial: RocketPool is a non-custodial protocol, meaning that users do not have to give up custody of their ETH.

• Minimum stake: RocketPool has a minimum stake of 16 ETH, which is lower than the 32 ETH minimum required for traditional staking.

• Decentralization: RocketPool is a decentralized protocol that is governed by its community.

How Rocket Pool’s Liquid Staking Works | Source: Messari, RocketPool

Other notable LSD providers include:

• Frax: Frax is a decentralized stablecoin protocol that also offers LSD services. Frax's sfrxETH LSD token is currently offering the highest APY.

• StakeWise: StakeWise is a decentralized LSD protocol that is focused on security and transparency.

• Eigenlayer: Eigenlayer is a decentralized LSD protocol that is still under development. It is designed to be more efficient and scalable than other LSD protocols.

Conclusion & Thoughts for the Future ❇️

"We really need that killer app. If we want to have billions of users using the blockchain, we should give them easier boxes to play with." - quote from Space

LSDs are a rapidly growing sector of the DeFi ecosystem. They offer a number of benefits to stakers, including liquidity, ease of use, and the potential for higher yields.

As the Ethereum PoS ecosystem continues to mature, LSDs are expected to play an even more important role.

The LSDFi boom is likely to continue in the coming months and years. This is due to a number of factors, including:

• The increasing popularity of ETH staking: As more users stake their ETH, the demand for LSDs will increase.

• The growing awareness of the benefits of LSDs: More and more users are becoming aware of the benefits of LSDs, such as liquidity and ease of use.

• The launch of new LSD protocols: A number of new LSD protocols are being launched, which will increase the competition and innovation in the sector.

Overall, the LSDFi sector is a very exciting one with a lot of potential for growth.

References

1) Ethereum 2.0: The Beacon Chain, Kerala Blockchain Academy

https://medium.com/blockchain-stories/ethereum-2-0-the-beacon-chain-d669fa65e50d

2) Ethereum Liquid Staking Report 2023, Coingecko

https://www.coingecko.com/research/publications/ethereum-liquid-staking-report-2023

3) Liquid Staking TVL Rankings, DefiLlama

https://defillama.com/protocols/Liquid%20Staking