Ether’s (ETH) DeFi activity has been reduced in the bear market, and further competition from Ethereum’s yearly staking reward of 4% is expected, as per Glassnode analysts. Nevertheless, a narrative is forming around liquid staking derivative (LSD) tokens, which could reinvigorate Ethereum’s network activity.
A recent report from Glassnode revealed that the proportion of gas used by DeFi protocols has decreased from 34% in 2020 to between 8% and 16% currently, with NFTs accounting for the greatest share at 25-30%.
Glassnode’s supply-weighted price index for DeFi, denominated in both USD and ETH, has seen a 90% drop since the beginning of 2021.
The market capitalization of the DeFi “blue chips” – a collection of governance tokens from popular DeFi protocols such as Uniswap (UNI), MakerDAO (MKR), Aave (AAVE), Compound (COMP), Balancer (BAL) and SushiSwap (SUSHI) – has plummeted by 88% from its peak of $45 billion in May 2021.
Analysts predict that the 4% yield from staking ETH will act as a “new hurdle rate” that DeFi blue chip tokens must surpass in order to outperform ETH during bullish market rallies. Furthermore, these tokens experienced a more significant drop than ETH during bear markets. This yield serves as the benchmark for Ether investors.
Lending protocols such as Aave and Compound offer yields ranging from 2-3% on lending stablecoins and Ether. Additionally, the risk of smart contracts associated with DeFi protocols is eliminated with the use of proof-of-stake validators.
Staking has become a highly sought-after activity among Ethereum investors, particularly since the Shapella upgrade in April 2023, which allowed for withdrawals from the staking contract.
By the end of May, staking of Ethereum had reached 21.63 million ETH, valued at $40.021 billion, which is equivalent to 18% of the entire Ethereum supply.
Platforms such as Lido and Rocket Pool, which are based on the LSD protocol, make up one-third of the large market. These applications provide tokenized versions of ETH that has been staked, allowing investors to benefit from the staking yields without diminishing their liquidity.
An increasing number of Ethereum investors are engaging with LSD financialization (LSDfi), which seeks to employ the liquidity provided by LSD tokens in DeFi applications.
Tenet and LayerZero have joined forces to promote the use of cross-chain liquid staking through LSD for DeFi.
Is LSDfi the solution?
LSDfi taps into the liquidity of LSD tokens to create DeFi-like lending protocols and liquidity on exchanges that offer higher yields. With a substantial amount of ETH locked in LSD platforms, LSDfi could potentially reinvigorate DeFi activity.
An analytics dashboard created by data analyst Defimochi reveals that the total value locked (TVL) in LSDfi protocols has skyrocketed to $411 million, with the surge beginning in mid-May. A few of the most prominent players in the space are Pendle Finance, Lybra Finance, Curve Finance and Alchemix Protocol.
The liquidity of LSD tokens on Curve Finance, the largest stablecoin exchange in the market, has surpassed $1.5 billion. Additionally, Curve enabled the creation of its overcollateralized stablecoin crvUSD (CRVUSD) by utilizing Frax Protocol’s staked Frax Ether (SFRXETH) as collateral.
Recently, Lybra Finance and Pendle Finance, which are seeking to take advantage of the liquidity provided by LSD tokens, have become increasingly popular.
As has happened in the past with DeFi, it is likely that newer applications will take advantage of the liquidity of LSD tokens by providing liquidity mining of their governance tokens for early depositors.
While these strategies may offer attractive returns for some users, they could also present smart contract risks and the possibility of getting rug pulled, thus introducing the potential hazards associated with the higher profits that LSDfi offers.
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