LSD Summer School Part 1: An Introduction To LSDs/LSTs & How Lybra Finance Can Turbocharge Your LSD/LST Strategy

This is the first 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 LSDs and explain how Lybra’s solutions can help you get the most out of them.

Welcome To The World Of LSDs

Whether you’re a casual crypto investor or a hardcore DeFi savant, you’ve probably heard a lot of recent buzz surrounding this year’s most exciting new asset class: LSDs.

LSDs (Liquid Staking Derivatives), also known as LSTs (Liquid Staking Tokens), are tokens that represent the value of a users staked ETH, providing them with a new source of liquidity and opportunities for increased yield. They have quickly become one of the biggest narratives of 2023, and everyone from the most craven Twitter influencer to blue chip companies like Coinbase are working to (quite literally) stake their claim on the cutting edge of this emerging asset class.

Beyond the hype, LSDs/LSTs offer unprecedented new opportunities in the DeFi market, which every DeFi stakeholder will need to understand to keep up.

So, for the first edition of our Lybra LSD Summer School, we’ve created an Intro Guide to everything LSDs/LSTs, as well as explaining how you can profit from them.

It all starts with the Shanghai Upgrade…

Explaining The Shanghai Upgrade

On the 1st December 2020, the Ethereum network began its transition from a Proof-of-Work to a Proof-of-Stake validation method for transactions. Under a Proof-of-Stake mechanism, transactions are processed by validators rather than miners, and ETH holders can become validators by staking a portion of their holdings. Staking means locking up the tokens on the Ethereum network for a period of time, during which the tokens become inaccessible to the holder. In return for locking their tokens up, validators receive fees for every transaction they validate, securing them a source of passive income.

The transition to Proof-Of-Stake was only complete on the 15th September 2022, and still at this point it was not possible to unstake ETH that had been staked. This was rather a big deal, as some stakers had been waiting since December 2020 to start realizing their rewards. However, this problem was solved by the Shanghai Upgrade, which took place on April 12th, 2023. The Shanghai Upgrade enabled validators to unstake their ETH at any time, providing them with increased liquidity options.

This created a dilemma for ETH validators. By keeping their ETH staked, they were forfeiting the opportunity to use it for other yield bearing activities, however by unstaking they would lose the passive income they receive from transaction fees. In an ideal world, they would be able to keep their ETH staked, whilst still having the liquidity to implement it in further revenue generating DeFi activities.

Enter LSDs/LSTs, which allow ETH stakers to live in this ideal world…

What Are LSDs/LSTs?

To become a validator in the Ethereum network, a minimum of 32ETH needs to be staked, which is beyond the scope of many retail investors. To solve this, various Ethereum staking pools were introduced, which allowed multiple smaller-scale holders to contribute to a pool that added up to the 32ETH required to become a validator. Some of these pools then introduced a new type of token called Liquid Staking Derivatives (LSDs), also known as Liquid Staking Tokens (LSTs). LSDs/LSDs serve as a receipt demonstrating how much ETH they had staked with the pool.

These LSDs/LSTs in turn solve the dilemma of whether to stake your ETH to receive staking rewards or keep it liquid so you can use it for other yield-bearing activities. Because LSDs/LSTs themselves are fully tradeable, users can keep their ETH staked to earn passive income, whilst using their LSD/LST in the full range of revenue generating DeFi applications. Suddenly, the best of both worlds had arrived and ETH stakers could have their cake and eat it. The staked ETH liquidity problem had been solved and a new era of high yield investment opportunities for one of crypto’s most trusted assets had been ushered in.

What Is The Difference Between LSDs and LSTs

You might have noticed that there are currently two competing terms being thrown around at the moment: Liquid Staking Derivatives (LSDs) and Liquid Staking Tokens (LSTs). LSD is the term most widely used right now, which is why we’ve included it in this introductory article, but the consensus is that it is not a technically correct term. The idea of LSDs as derivatives has helped many users get their head around the concept by analogy to traditional finance derivatives. One might speculate that the familiarity of the acronym due to a certain well known psychedelic substance has also contributed to giving this moniker staying power!

However, in actuality the analogy to derivatives is not a totally accurate one and the Proof Of Stake Alliance has called for a shift towards using the more technically accurate term “Liquid Staking Tokens (LSTs)”. As a leader in this emerging market, Lybra will begin to transition towards using the term LSTs. For the purposes of this introductory article, we’ve used both terms in order to be inclusive to beginners, but you can expect to see LSTs increasingly being used as the terminology as the market matures.

How Can I Get Hold Of LSDs / LSTs?

As of the time of writing this article, the top 3 providers of LSDs/LSTs by Total Value Locked (TVL) are Lido, Coinbase, and Rocket Pool.

Lido, whose LSD/LST is called stETH has a market share of 73.72% with 7,066,836 ETH staked at a TVL of $13.18bn.

Coinbase Wrapped Staked ETH, whose LSD/LST is called cbETH, has a market share of 11.86% with 1,136,715 ETH staked at a TVL of $2.2bn.

Meanwhile, Rocket Pool, whose LSD/LST is called rETH, has a market share of 7.91% with 758,205 ETH staked at a TVL of $1.41bn.

Each of these projects makes it very simple for you to stake your ETH and receive their LSD/LST in return. Using Lido as an example, you can simply visit the staking page on their website, connect your wallet, and then stake your ETH to receive your stETH at the click of a button.

Is The LSD/LST Market Delivering On Its Potential?

So, LSDs/LSTs provide one of the most exciting new opportunities for DeFi investors right now, offering the opportunity to get passive income from staking ETH, whilst simultaneously putting it to work in further yield-bearing activities through LSDs/LSTs. However, is the LSD/LST market actually delivering on its full potential?

The current stats would say no. At the time of writing only 17.9% of ETH has been staked leaving a staggering $17bn of ETH left idle. For comparison, more than 70% of Solana is staked. This suggests that despite all the hype to date, there is still room for explosive growth in the LSD/LST market.

The key to driving up the TVL of staked ETH lies in increasing the utility of LSDs/LSTs. Whilst in principle the liquidity provided by LSDs/LSTs offers unlimited potential, currently the options available for putting them to work in yield-bearing activities remain limited.

This is where Lybra Finance comes in.

What Is Lybra Finance & How Can It Unlock The Full Potential Of LSDs/LSTs?

Lybra Finance is an omnichain LSD/LST-based stablecoin solution. Lybra has been harnessing the new opportunities created by LSDs/LSTs to provide the world’s first yield-bearing stablecoin. In doing so, it is creating exactly the kind of profit-generating utility that LSDs/LSTs need to start fulfilling their vast potential. Here is how it achieves this:

Stablecoins are a type of cryptocurrency that are designed to track the value of a fiat currency such as USD on a 1:1 basis. Most DeFi users keep a certain portion of their portfolio in stablecoins as a predictable store of value and source of liquidity. However, stablecoins present holders with a big problem: none of them offer interest to their holders, leaving them prey to constant devaluation through USD inflation. In the present environment of hyperinflation, it is especially vital that stablecoin holders receive interest on their holdings to maintain their spending power. However, the current generation of stablecoins has no means of providing interest income to holders due to the way their issuance and collateralization mechanisms are structured.

Essentially, there are currently 3 types of stablecoin on the market at the moment:

1. Fiat-collateralized stablecoins: These are backed by holdings of fiat currencies e.g. USD, typically at a one-to-one ratio of collateral assets to stablecoins issued. Examples include USDT, USDC and TUSD.
2. Crypto-collateralized stablecoins: These back their value with a basket of cryptocurrencies (e.g. Bitcoin, Ethereum) etc., typically at a higher ratio of 1.5:1 to 2:1 of collateral asset value to stablecoins issued. Examples include Dai, BitUSD, and sUSD.
3. Algorithmic stablecoins: These use complex incentive mechanisms to manage supply and demand in order to maintain price stability. Examples include Basis Cash and Frax.

None of these options provides a feasible mechanism for providing significant interest income to holders because the underlying collateral assets, be they fiat or cryptocurrency, do not themselves accumulate interest whilst sitting idle as collateral.

This, of course is where LSDs/LSTs and Lybra Finance come in.

The Lybra Protocol allows users to use LSDs/LSTs as collateral to mint Lybra’s own native stablecoin, eUSD. Users can deposit either ETH or stETH (Lido’s LSD/LST) and borrow eUSD against it, paying back their debt at a later date. If they deposit ETH, then it is automatically converted into stETH through the Lido contract. Because stETH is an LSD/LST asset that inherently yields interest, using it as collateral means that the Lybra Protocol then has an ideal mechanism for delivering interest back to eUSD holders. Therefore, unlike existing stablecoins, simply holding eUSD generates a stable income with an APY of approximately 8%. This provides a perfect way to unlock the full potential of the liquidity provided by LSDs/LSTs. By capitalizing on the interest-bearing nature of LSDs/LSTs, Lybra Finance has created a totally novel asset-type that can benefit any DeFi market participant: a stablecoin that automatically delivers interest back to its holders just for holding it.

The revolutionary nature of this offering is already being backed up by the incredible stats associated with Lybra’s explosive growth. We’ve now minted over $100m eUSD, in May we touched above $200m in Total Locked Value (TVL), and we’ve converted $89m of ETH to stETH.

For a deep dive into the technical architecture behind these achievements, you can read Blocmates’ excellent introductory article, and have a browse of our docs. Or, if you are ready to dip your toe in the water and experience the joy of interest-bearing stablecoins for yourself, have a read of our how to article.

But this is just the beginning. With the arrival of the V2 version of the platform, Lybra is about to unlock a vast range of new options for generating income from your LSDs/LSTs. Let’s take a sneak peek at what we’re cooking up…

Lybra Finance V2: A Sneak Peek Into The Future Of LSTs/LSDs

Whilst the capabilities of Lybra Finance V1 already offer some of the most exciting and lucrative ways to capitalize on the opportunities offered by LSDs/LSTs, V2 is about to truly transform the LSD/LST ecosystem into a market deserving of all the hype it has received.

Whereas V1 focused primarily on the usage of Lido’s stETH, V2 will allow users to use a whole range of other LSDs/LSTs as collateral. This will include Rocket Pool’s rETH as well as assets including wBETH, wstETH and many more.

Additionally, Lybra will be introducing a new omnichain version of eUSD: an Omnichain Fungible Token (OFT) called OFT-peUSD. OFT-peUSD will bridge eUSD from the Ethereum mainnet to Layer 2s. This will allow holders to use their stablecoins on any chain they want.

Moreover, when swapping or spending for looping, users will maintain the ability to claim rebase yield when bridging back. All this adds up to a perfect fit solution for the LSD/LST ecosystem, which will inevitably move further and further towards omnichain models.

Perhaps most exciting of all though, V2 will see an explosion of different options for how users can put their eUSD/OFT-peUSD to work. We have to stay a little tight-lipped on the details as we are in advanced negotiations with various partners but expect to see V2 offer options including a DEX, perps, lending protocols, and much more.

Taken as a whole, the V2 platform will provide an unrivaled suite of opportunities for DeFi users to generate the highest possible yields from their LSDs/LSTs and help incentivize LST/LSD adoption to its full potential.

For further details on the full plans for V2, have a read of Blocmates’ inside scoop on it all and our own Medium article. Also, make sure you are following us on Twitter as we will have many exciting updates on V2 coming shortly.

Conclusion

2023 will see LSDs/LSTs go from a hype narrative to a cornerstone of the new DeFi economy.

To achieve this, new options will have to emerge to unlock the unique revenue generating opportunities that LSDs/LSTs offer. Lybra has already established itself as a trailblazer in helping holders capitalize on the full value of their LSDs/LSTs, and with V2 coming, we will be aiming to revolutionize the entire ecosystem.

Make sure you join us on this journey by staying in touch on our socials at:

Website: https://lybra.finance/
Docs: https://docs.lybra.finance/
Twitter: https://twitter.com/LybraFinanceLSD
Discord: https://discord.gg/mgyq3PhdJg