LSDFi, OpFi: A Look Into The New DeFi Narratives
In this short article, I want to discuss OpFi and LSDfi, two narratives with their own set of solutions
In this short article, I want to discuss OpFi and LSDfi, two narratives with their own set of solutions.
One thing I discussed in Cointelegraph’s DeFi Q3 report was the need for a tokenomic model that can incentivize user participation instead of the typical monopolizer token holder capitalism.
In short, more participation should translate into more liquidity as participants are more eager to deposit and spend their capital within a protocol or ecosystem.
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The New DeFi Narratives
Let’s add some context first: The lack of liquidity and proper incentive models is why many services and features in DeFi have not taken off or can’t sustain themselves in the long run, particularly options trading, despite being at the top of the derivatives market with protocols like dYdX.
Many DeFi protocols have tried to come up with narratives and solutions to address the liquidity problem. While there are hundreds of ideas, only a few models have proven to be somewhat of a viable solution, temporarily or partially.
What is OpFi? Using Complex Products To Simplify DeFi
OpFi, short for Options Finance, is a new DeFi narrative in which options power DeFi protocols by bringing new products to enhance liquidity, capital management, and new incentive models.
This narrative has been mainly pushed by Dopex, a decentralized options exchange building and offering OpFi products like Atlantic Options (OP), Single Staking Options Vaults (SSOVs), and call options as incentives.
It seems to me that one of the objectives of OpFi is to bring specific TradFi tools on-chain that can be somehow useful, so you’ll see certain similarities with TradFi in many DeFi narratives today.
Let’s take the options-backed incentive model as an example. Dopex is introducing the call options as an incentive mechanism, which resembles the typical option incentives model used in TradFi to promote stakeholder participation:
- A protocol distributes purchased call options to its community instead of fixed token emissions that can be dumped immediately. This means users are incentivized to deposit the protocol’s token into the liquidity pools/products to generate profits.
- Deposited assets generate yield in a structured manner; call option issuers can customize the strike prices and expiration dates.
- When the value of the protocol’s native token surges, users can sell the call option and generate profits while the protocol benefits from the accrued liquidity.
In theory, this model reduces sell pressure and incentivizes token participation while potentially generating liquidity in the long term for sustainability. But DeFi degens might shy away as the dumping/easy-money part is eliminated.
The Complexity Of Liquidity Management
This incentive model somewhat reminds me of Solana’s Kamino Finance, a relatively new protocol offering automated market-making vaults for CLMM optimization. Its vault strategies chase and compound the best yields with optimal price ranges on a liquidity DEX, resulting in capital efficiency and reduced volatility.
The problem with the CLMM model, while great for liquidity optimization, was the time-consuming manual work, so automated management has so far been a viable solution. In the same way, options trading, which is far more complicated than stock trading, is usually cumbersome due to option greeks management.
Going back to OpFi, the main idea behind this narrative is not to educate users but to make options trading — and other features in DeFi — easier by putting the complex infrastructure in the background. We’ll have to see how this rolls out as more protocols try to integrate this incentive mechanism.
But this is particularly challenging since they’re using complex derivatives products in order to reshape the DeFi landscape, which is already complicated as it is.
LSDfi: Speculating With Yield Protocols
In my opinion, LSDfi is just pure greed. It’s about an ecosystem of protocols that seek to generate as much yield from an ecosystem built to unlock the yield from staked assets that are already generating yield. In other words, this is just a derivative on top of a derivative product.
It all started with the Shapella Upgrade.
- When Ethereum transitioned to PoS, a considerable amount of ETH was locked until the Shapella upgrade, which created a liquidity crunch for ETH-based projects and put stakers at a potential loss due to market conditions.
- The solution? Create a tokenized version of those staked assets, like Coinbase’s Wrapped Staked ETH, and then leverage those for various DeFi activities. This allows stakers to generate yield alongside their staked assets.
This caused a boom in the liquid staking ecosystem, now north of $20 billion in TVL, with Lido Finance being the dominant player.
Is LSDfi Playing an Old Financial Playbook?
Put simply, LSDfi refers to protocols that seek profits by speculating with liquid staking derivatives. For me, it’s reminiscent of the secondary markets built 15 years ago when banks got greedy and started buying a bunch of worthless loans and packed them up in CDOs and over-leveraged their positions after the Fed cut them loose with lighter lending standards, speculating on payers and defaulters.
Similarly, in LSDfi you’re speculating with LSD and its products. You can borrow against your LST (Liquid Staking Tokens) to create additional yield, or you can even speculate or hedge against other LSD tokens, LSD indexes, and more. We are creating a secondary market with huge pumps of money, profiting from a growing trend and consequently creating another growing trend.
While LSD offers an innovative solution to unlocking staked liquidity, LSDfi — with its layers of speculation atop existing systems — seems to me that we’re just mindlessly emulating and repeating an old and flawed financial playbook, raising critical questions about the objectives of certain DeFi communities.
Final Thoughts
DeFi can be funny. You can create tokenized versions of tokens, build on top of derivatives, and many things that can either serve a useful purpose or just become the next speculative pool. That said, LSDFi is injecting a tremendous amount of liquidity into the DeFi ecosystem, but beware of explosive growth and exponential surges, particularly with over-leveraged systems built on top of multiple layers.
OpFi, on the other hand, is a nascent ecosystem with certain perks, but it seems to lack certain foundational concepts. The very idea of using complex products to facilitate the DeFi structure by putting it in the background is quite appealing, however.
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