LSD Summer School Part 3: An Introduction To Non-Rebase LSTs

This is the third article in Lybra’s LSD Summer School series. The LSD Summer School will be a collection of longform content pieces, Twitter Spaces and community engagement programs. It is designed to educate DeFi users on the fundamentals of the LSDfi world and explain how Lybra’s solutions can help you get the most out of it. Part 1 of the LSD Summer School provided an introduction to LSTs. Today’s article will build on that by going on a deep-dive into a particular category of LSTs called Non-Rebase LSTs.

Getting To Grips With The Different Types Of LSTs

As discussed in Part 1 of Lybra’s LSD Summer School, LSTs (Liquid Staking Tokens) are tokens that represent the value of a user’s staked ETH, providing them with a new source of liquidity and opportunities for increased yield. But to navigate the world of LSTs successfully, it is useful to know that there is more than one different type of LST out there on the market.

The two broad categories of LSTs are Rebase LSTs and Non-Rebase (Value Accruing) LSTs. We talked about Rebase LSTs and how they will work in Lybra V2 in Part 2 of the LSD Summer School. In the present article, we are going to focus on Non-Rebase LSTs. To start with, let’s dive into what exactly Non-Rebase LSTs are and review some examples of them.

What Are Non-Rebase LSTs

Non-Rebase LSTs are also known as Value-Accruing LSTs or Reward-Bearing LSTs. They are a type of LST whereby the value of the LST itself automatically increases as staking rewards accumulate. This means that as the LST holder accrues staking rewards, the quantity of their LST holdings does not change, because the increase in value is already accounted for by the increase in the value of the LSTs themselves. Examples of Non-Rebase LSTs include Binance’s WBETH, Rocket Pool’s rETH, and Swell’s swETH.

To paint a simple picture of how Non-Rebase LSTs work, let’s use Binance’s WBETH as an example. An Ethereum holder can simply stake their ETH to obtain WBETH, using one of 2 options: either by interacting with the token smart contract, or accessing the Binance ETH Staking page. As staking rewards accumulate, each of the holder’s WBETH tokens will increase in value automatically, thereby recognizing the rewards without any need to change the quantity of WBETH tokens they hold.

This contrasts with Rebasing LSTs, where the ETH value of each LST remains constant and staking rewards are recognized by transferring more LSTs to the holder.

Non-Rebasing LSTs are an increasingly popular model. Whilst Rebase LSTs account for over 75% of TVL in the LST market, this is almost exclusively accounted for by Lido’s stETH, which has a 74% market share. In fact, the vast majority of the different available LST assets are now non-Rebase LSTs, with 8 out of the top 10 LSTs by TVL now using a Non-Rebase model.

The proliferation of Non-Rebase LSTs may be down to the fact that they offer some valuable advantages over Rebase LSTs. Firstly, they can be argued to be more tax efficient as they cut out rebasing payments, which are potentially taxable events. The lack of rebasing also makes them compatible with a wider range of DeFi protocols. Because of this, we can expect to see more and more LST projects emerge using this model.

This is why for the forthcoming V2 edition of the Lybra protocol, we’ve built out functionality to support Non-Rebasing LSTs as well as Rebasing LSTs.

To do this we not only needed to build out a new minting process tailored to the mechanics of Non-Rebasing LSTs, but we have also introduced a brand new stablecoin called peUSD (Pegged eUSD) into the ecosystem.

Here’s how it all works…

How Non-Rebase LSTs Function On Lybra V2

The Lybra protocol allows users to mint an interest-bearing stablecoin called eUSD by depositing either ETH or LSTs as collateral. Unlike other stablecoins, simply by holding eUSD, holders can yield an interest of around 8%. In Lybra V1, it was only possible to use Lido’s stETH as collateral. However, Lybra V2 will be going beyond stETH to support an expanded range of LSTs, including multiple Non-Rebase LSTs such as Rocket Pool’s rETH, Binance’s WBETH, Swell’s swETH.

To do this, we’ve had to restructure the protocol to create a dedicated process for Non-Rebasing LSTs. The first step was to create separate vaults for Rebase LSTs and Non-Rebase LSTs, as well as separate pools for each individual LST asset within those vaults. You can consult our in-depth guide to the new vault and pool mechanisms to get into the details. But for now, here is a simple graphic summarizing the key workflows:

As you can see, in Lybra V2 there will be a dedicated vault for Non-Rebase LSTs, which accounts for the different way in which they recognize value. In addition, there will be a new type of stablecoin in the Lybra ecosystem called peUSD. peUSD will bridge eUSD from the Ethereum mainnet to Layer 2s. This will allow holders to use it on any chain they want. It also offers a wide range of new functionality on the Lybra protocol, as peUSD can be utilized for various DeFi purposes, including swapping, trading pairs, perpetual contracts, lending, or borrowing.

Whereas holders of Rebase LSTs will mint eUSD (which they can convert to peUSD at a 1:1 ratio), holders of Non-Rebase LSTs will directly mint peUSD. You’ll notice that peUSD does not bear interest like eUSD. Also, peUSD directly minted from Non-Rebase LSTs cannot be converted to eUSD. However, users who mint with Non-Rebase LSTs need not fear. This is because whilst they hold their peUSD, the underlying LSTs put up as collateral will automatically increase in value, due to the value accruing nature of Non-Rebase LST outlined earlier in this article. Meanwhile, there is no need to convert to eUSD as peUSD has wider utility than eUSD for usage in DeFi protocols.

So, holders of both types of LST end up receiving similar value via different mechanisms. Those who mint with Rebase LSTs get interest on their eUSD holdings paid in eUSD. They can also convert their eUSD to peUSD whilst continuing to generate interest as they spend it. Meanwhile, those who mint peUSD with Non-Rebase LSTs can spend their peUSD whilst their underlying LST collateral continues to accumulate value. The end result is that both types of user access all the benefits that a stablecoin offers, whilst continuing to accumulate value as they hold or spend it.

So, with the distinction between the value accrual mechanisms for Rebase LSTs and Non-Rebase LSTs clear, we’re now going to walk you through how you can actually mint peUSD using Non-Rebase LSTs on Lybra V2.

How To Mint peUSD Using Non-Rebase LSTs On Lybra V2

The process for minting peUSD using Non-Rebase LSTs on Lybra V2 will be very simple. It can be summarized in 4 stages:

1. Mint: Users can mint peUSD against their Non-Rebase LST collateral (eg WBETH, swETh, rETh etc) on the Ethereum mainnet or on supported Layer 2s. A collateral ratio above 130% is required for minting. The Collateral Ratio is the ratio between the dollar value of the LSTs you put up as collateral in the Lybra Protocol Vault and the dollar value of the eUSD that you minted. There are no upfront mint costs involved.
2. DeFi Uses: peUSD can be utilized for various DeFi purposes, including swapping, trading pairs, perpetual contracts, lending, or borrowing.
3. Repay: Users have the flexibility to repay their peUSD debt at any time they wish. A 1.5% borrow fee, based on the debt amount, is charged for repayment.
4. Withdraw: Prior to withdrawing the total amount of their collateral asset, users must settle the borrow fee in peUSD, which is calculated as the total peUSD debt multiplied by 1.5%.

Here’s a sneak peek at how the dashboard for this process will look on V2:

This streamlined user journey will make it easy for Lybra users to mint peUSD using Non-Rebase LSTs. But why might you choose to use a Non-Rebase LST as collateral instead of a Non-Rebase LST? Here’s a breakdown…

Why Use Non-Rebase LSTs As Collateral On Lybra V2

Whether you choose to use Rebase LSTs or Non-Rebase LSTs as collateral on Lybra V2 will depend on your priorities and strategies. We’ve outlined what kind of strategies might benefit from using Rebase LSTs in our companion piece on Rebase LSTs. Here are some of the key reasons why you might use Non-Rebase LSTs instead:

1. You Want To Receive Your Yield In LSTs Rather Than eUSD: Because any Non-Rebase LSTs put down as collateral automatically increase in value, this means that you will continue to accumulate value in terms of LSTs whilst you spend your peUSD. For those who wish to realize their value increase in LSTs rather than eUSD therefore, minting with Non-Rebase LSTs offer them this option.
2. Tax Efficiency: Because the value increase is reflected automatically in the value of the LST collateral itself, no additional transactions are necessary. This means there are no potentially taxable events such as interest payment transactions.
3. Wider Functionality Of Non-Rebase LSTs In DeFi Ecosystem: The lack of rebasing makes Non-Rebasing LSTs compatible with a wider range of DeFi protocols. This is not an issue once deployed on the Lybra platform itself as eUSD can be converted to peUSD, delivering the same functionality. However, it is a reason why a user may decide to hold Non-Rebase LSTs in the first place. The Lybra V2 functionality means that those holding Non-Rebase LSTs for these reasons can directly use them on the protocol without having to trade them for Rebase LSTs elsewhere.

So, there are good reasons for using both Rebase LSTs or Non-Rebase LSTs as collateral, depending on your strategy. That’s why we’ve built V2 to accommodate both and let our users choose the option that works best for them.

A Spotlight On Some Non-Rebase LSTs Lybra V2 Will Support & Why These Projects Are Excited To Be Integrated Into The Protocol

You now know how the process for minting peUSD works and what advantages it offer. So, we’d like to wrap up this guide by showcasing some of the Non-Rebase LSTs that Lybra V2 will support. We’ve also gathered some quotes from the projects themselves on why they are excited to be integrated. Here are 3 of the Non-Rebase LSTs that we are thrilled to start supporting on V2:

Rocket Pool’s rETH: Rocket Pool is Ethereum’s most decentralized liquid staking protocol. Its 2,800+ worldwide node operators are responsible for over 725,000 ETH representing over 3% of all Ethereum staked. Liquid stakers can participate on mainnet and multiple L2’s simply by holding any amount of the rETH liquid staking token in their wallet, which automatically accrues staking rewards via price appreciation in a tax-optimized way. A growing list of DeFi integrations also provides additional opportunities to liquid stakers. Rocket Pool is a fully non-custodial solution, and its node operators are economically aligned to ensure good performance. Joining as a node operator is fully permissionless and requires just 8 ETH (instead of 32), plus RPL tokens as additional collateral. A boosted ROI for node operators is provided from both ETH staking commission plus RPL rewards. The Rocket Pool team have been building in the staking space in full alignment with Ethereum’s core values since 2016, which gives them a pedigree and track record without peer.

Here are some words from the Rocket Pool team on the benefits they see to being integrated into the Lybra platform:

“It’s great to see an increasing list of integrations for our rETH liquid staking token, such as being accepted as collateral for Lybra’s eUSD stablecoin. An ever-growing range of options for liquid stakers further reinforces rETH’s status as a leading foundational money lego within the emerging world of LSDfi. But because Rocket Pool is Ethereum’s decentralised liquid staking protocol, this also helps to contribute towards ensuring the entire ecosystem remains healthy & secure.”

Binance’s WBETH: WBETH revolutionizes the staking experience as an innovative Liquid Staking Token (LST) by offering instant liquidity and seamless participation in DeFi projects while ensuring access to valuable ETH staking rewards. Binance demonstrates its unwavering commitment to the staking ecosystem by staking an impressive 1.1 million ETH, which represents over 8% of all Ethereum staked. With WBETH, you can unlock the dual yield potential that comes from ETH staking rewards and the limitless opportunities in DeFi and decentralized applications on-chain. A user-friendly interface and seamless token interactions streamline your staking journey. You can take advantage of the staking revolution through two convenient options: on-chain users can stake their ETH to obtain WBETH by interacting with the token smart contract, and Binance users can easily stake and unstake ETH to WBETH on the Binance ETH Staking page with zero fees. WBETH is now supported on Ethereum and BNB Smart Chain. Seize the exceptional potential of WBETH and stay at the forefront of staking advancements.

Here’s what a spokesperson from a WBETH Project team had to say about why they’re excited to see WBETH supported on Lybra V2:

“We are thrilled to see WBETH supported on more protocols like Lybra V2. By enabling users to collateralize WBETH to mint a stablecoin, we expect to foster increased adoption and utility across multiple ecosystems. We are convinced that a stronger LSDfi ecosystem will help us grow together while enhancing the overall DeFi experience for all users.”

Swell’s swETH: swETH is the liquid staking token of Swell, a non-custodial ETH liquid staking protocol that helps you optimize yield in DeFi. As a reward-bearing ERC-20 token, the value of swETH is a reflection of the value of ETH, plus accrued staking rewards. Since launching in late April, Swell has rapidly risen through the ranks to break into the top ten largest liquid staking protocols. This fast growth is matched by steadily deepening liquidity. Numerous integrations increase swETH utility, providing opportunities to trade and earn yield across DeFi. In terms of liquidity efficiency, swETH is gaining on some of the most established liquid staking protocols, and a high proportion of swETH is deposited in liquidity pools. Finally, swETH is secured by some of the best names in the business. Sigma Prime, the same auditor used by the Ethereum Foundation, has audited Swell, and more audits are being scheduled. Chainlink’s Proof of Reserve helps ensure that swETH tokens are fully backed by staked ETH on a 1:1 basis, and there is an Immunefi bug bounty program that incentivizes the community to identify and share potential bugs.

This is what Swell’s Founder and CEO, Daniel Dizon has said about swETH being supported on Lybra V2:

“Decentralized stablecoins are of critical importance to DeFi, and backing them with staked ETH is a promising option. Swell is keen to help Lybra forge ahead in this mission. We look forward to increasing Lybra’s resilience by diversifying the liquid staking collateral backing eUSD, and are glad to offer swETH holders the ability to interact with one of the hottest projects in LSDfi.”

We can’t wait to start supporting all of these tokens on Lybra V2 and allowing our users to take advantage of the diverse functionality they offer. We’re in discussions with several more LST projects, including both Rebase and Non-Rebase LSTs, so stay tuned for some more announcements shortly.

Conclusion

It’s been an incredible journey finding the right technical solutions to be able to support a full range of both Rebase and Non-Rebase LSTs on Lybra V2. The omnichain functionality offered by peUSD also offers a step change in how Lybra users can put their stablecoins to work. With the technicals in place, we can’t wait to release the new protocol to the public and let our users play around with it themselves. In the meantime, make sure you stay in touch with us for all the latest updates on:

Twitter: https://twitter.com/LybraFinanceLSD
Discord: https://discord.gg/mgyq3PhdJg

Website: https://lybra.finance/
Docs: https://docs.lybra.finance/