LSDFi Summer?
What is LSDFi?
LSDFi is the development of DeFi protocols built on top of Liquid Staking Derivatives. They are protocols that offer a use case for Liquid Staked ETH. They are mostly lending and re-staking protocols that allow users to deposit stETH, for example, and borrow other assets against it, improving capital efficiency in the process. Or, in some cases, the user can earn additional yield on their stETH by depositing into liquidity pools and other yield-generating mechanisms. Without these protocols, there is no benefit to having liquid-staked ETH, other than the ability to quickly exit an ETH position.
Protocols Covered
This article will discuss stand-out protocols that are building their services on top of liquid-staked ETH and enable users to do more than just LP. Protocols covered in this article include ZeroLiquid, EigenLayer, UnshETH, and Agility, so buckle up for the next leg of our trip to discover some of DeFi’s innovative applications built on top of liquid-staked ETH and are establishing the LSDFi sector.
Zero Liquid ($ZERO)
Market Cap: $3,617,695 | Fully Diluted Valuation: $52,430,365
Circulating Supply: 6,900,000 ZERO | Max Supply: 30,500,000 ZERO
Zero Liquid is a lending protocol that allows users to take self-repaying loans. This works by depositing stETH into the protocol and taking a loan against it with no liquidation risk. The stETH rewards are directed to the protocol to repay the borrowed capital slowly. In turn, the user earns yield on their ETH while holding another token, and that yield goes towards paying off the loan. Once the loan has been paid off, users may unstake their collateral. Alternatively, borrowers may unstake early if they return the tokens they borrowed. Zero Liquid takes 10% of the yield earned from deposited stETH, and this revenue is distributed as follows.
The 10% revenue to the Zero Fund will be held in yield-bearing tokens, so the treasury will grow by 5–10% yearly before even considering continued protocol revenue. The fund is to be used for protocol growth and peg protection as the DAO sees fit.
ZERO
The ZERO governance and utility token can be staked to earn a share of 55% of the fees earned by the protocol. The token was generated for a fair launch, meaning there was no private sale. The max supply was 100,000,000, but a DAO vote was just passed agreeing to burn 69.420% (lol), decreasing the max supply to 30,500,000. So all of a sudden, 22.6% of the max supply is circulating, 6.9% previously. The updated token distribution and emissions are as follows.
The circulating supply will inflate from 22.6% to 43.9% this year, though 6.6% is allocated to the governance and community pool. This trend continues throughout the emissions schedule: inflation will occur for three years, but some of the negative effects are offset by allowing holders to control a large portion of the emitted supply.
ZERO Chart
EigenLayer
Founder: Sreeram Kannan
*The EigenLayer token has not launched yet
Protocol Description
EigenLayer is a network of Address Verification Services (AVSs) that use a proof of stake consensus mechanism. It allows these applications to be secured using ETH instead of their own native token. This benefits the AVSs as they no longer compete with ETH for its validators. Instead, ETH can be staked on the beacon chain for validation of the Ethereum Network through LSDs and then restaked to secure these EigenLayer AVSs.
We have discussed how this benefits builders on EigenLayer, but what about ETH stakers? They can restake their ETH to earn additional yield in a Free Market Governance system. This means they are able to choose which Dapps they validate based on their own risk appetite. Each Dapp comes with its own risk and reward: they may set their own slashing parameters with security standards that, if not met by validators, will cost them some ETH.
Cat-in-a-Box Finance (boxFEE)
Market Cap: $2.87mm
Circulating Supply: 20,074 boxFEE | Maximum Supply: infinite boxFEE
Founders: Pseudonymous — Double Bro Seven | Snape
Protocol Description
Cat-in-a-Box is a lending protocol initially built on top of stETH, with plans to support more assets in the future. It enables users to deposit yield-bearing tokens like stETH and borrow against their collateral by minting and borrowing Cat-in-a-Box’s synthetic asset, boxETH, at a 1:1 ratio. The yield from stETH can be used to pay back the loan or compound their collateral. 1% of the yield a user would normally earn through stETH is redirected to the Cat-in-a-Box protocol, but the yield is boosted by a proportional share of all collateralized stETH in the protocol. Cat-in-a-Box users can participate in the protocol in three different roles: as a borrower, resolver, or boxFEE token user. These roles are discussed below.
Borrowers
Borrowers deposit stETH used to mint and borrow boxETH issued by the protocol. Borrowers can then swap boxETH for other assets, resolve another user’s unhealthy debt to earn a profit, mint fee tokens, or provide liquidity to the boxETH-stETH liquidity pool.
Resolvers
Resolvers are protocol participants that purchase boxETH from the stETH-boxETH LP when there is a liquidity imbalance and boxETH falls below the peg. Resolvers can use this discounted boxETH to liquidate up to 25% of another user’s debt position per transaction. The price at which resolvers can buy users’ collateral depends on their LTV/debt position health rate. After each time a resolver resolves unhealthy debt, the loan LTV will improve, making it less likely to be resolved. The resolver receives the borrower’s collateral at the resolve price determined by the borrower’s CDP health factor. This system financially incentivizes resolvers to stabilize the stETH-boxETH peg.
boxFEE Token Users
boxFee was initially distributed to users that participated in the boxFEE liquidity generation event (LGE). boxFEE can be staked to receive protocol fees. boxFEE can now only be minted from the protocol at a rate of 1:1 with boxETH. boxFEE tokens can be burned to redeem their real-time value.
Closing Thoughts
Cat-in-a-Box Finance is one of the protocols building on top of stETH and other LSDs, which should help this sector grow in the coming months and years. It is unfortunate that Cat-in-a-Box does not have a governance token that can be speculated on, but it is understandable considering the team’s reasoning to avoid its potential classification as a security. To gain exposure to the Cat-in-a-Box protocol, market participants must be users in the borrower, resolver, or boxFEE token user, which is probably better for the protocol as it aligns the users’ goals with that of the protocol. However, the possibility of being resolved makes Cat-in-a-Box less attractive than other lending protocols built on LSDs mentioned in this article that have zero liquidation risk. On the other hand, Cat-in-a-Box’s system appears to be a good opportunity for users seeking arbitrage opportunities in the resolver role.
UnshETH (USH)
Market Cap: $16,478,199mm | Fully Diluted Valuation: $58,887,761mm
Circulating Supply: 40,154,720 USH | Max: 143,500,000 USH
Founder:
Protocol Description
UnshETH is an ETH validator decentralization incentive protocol. The goal here is to aggregate many LSD services in one place and incentivize dispersed staking amongst them. The associated user actionable is called Validator Decentralization Mining (VDM). VDM is the act of staking ETH with providers in proportions agreed upon by the DAO. For example: let’s say the DAO declares it optimal to have 50% of the ETH staked with Lido, 30% with RocketPool, and 20% with Frax. The optimal way to stake 10 ETH would be to put 5 in Lido, 3 in Rocket Pool, and 2 in Frax to yield the highest reward multiplier.
UnshETH also offers Validator Dominance Options (VDOs) as a service. This gives users the option to bet on LSD providers losing or gaining dominance as a percentage of the validator network. LSD stakers can use this to hedge out their staked positions vs. other staked ETH possibilities.
USH & vdUSH
USH can be locked or provided as liquidity in the USH-unshETH 80/20 pool to receive Validator Decentralization USH (vdUSH). vdUSH is used to govern the protocol, most frequently deciding what the dominance ratios will be for optimal staking. This works kind of like a solidly fork in the sense that the token lockers decide where to direct emissions. Only in this case are they incentivizing ETH staking instead of providing liquidity. vdUSH holders also benefit from increased rewards in co-incentivized liquidity mining farms. Users can lock for a maximum of 1 year to get 1:1 vdUSH for USH; locking for less time will decrease the amount of vdUSH received.
The tokenomics and distribution specifics are unknown to the public. Although, According to CoinGecko the current distribution is as follows.
- Circulating: 40,597,956
- UnshETH V2 Contract: 2,561,414
- Treasury: 84,369,068
- Team Multi-sig: 10,457,454
- USH-ETH LP: 5,514,105
USH Chart
USH already went on a significant run and is looking pretty tired here. It is at a local level in between the 0.382 and 0.5 but we don’t feel confident in this level holding and would be looking for an entry close to support at $0.185.
Agility (AGI)
Market Cap: $2.8mm | Fully Diluted Valuation: $95.50mm
Circulating Supply: 16,287,208 AGI | Max: 500,000,000 AGI
Founder: Anonymous
Protocol Description
Agility claims to be a LSD liquidity distribution platform that aims to provide liquidity for LSD/ETH pairs for these protocols boosting their initial liquidity. Agility does this through the use of esAGI and bribes. Protocols using Agility bribe to attract esAGI holders to vote for their vaults, emitting more esAGI and attracting more liquidity for a variety of staked ETH derivatives.
Agility also claims to feature aUSD, an over-collateralized native LSD stablecoin that uses LSD assets and stablecoins as collateral. aUSd uses USDC, stETH, and ETH as collateral. aUSD is scheduled to launch between July and November 2023, but through its launch, Agility plans on enabling low-liquidity LSD holders to use their LSDs as collateral to borrow aUSD to improve capital efficiency and release that liquidity.
Agility also claims to have plans on creating a trading platform where aUSD will be the base pair for assets such as ETH, BTC, GMX, GNS, PENDLE, GEAR, and more. As part of the aUSD trading platform, Agility also plans to build a yield exchange where users can hedge exposure risk or leverage yield. The aUSD trading platform and yield exchange is currently scheduled to launch sometime after November 2023. Beyond the development of these features, Agility also plans to build a DEX, options, gambling, and other features that allow users to access the capital trapped within various LSDs.
AGI & esAGI
AGI is Agility’s governance and utility token used to vote in governance proposals, distribute rewards, and direct liquidity. AGI can be staked to obtain esAGI or be rewarded to LPs. However, esAGI can be converted back into AGI through a redemption process that takes between 3 days and 14 days to complete. Users that redeem their esAGI for AGI with a vesting schedule of 14 days receive AGI at a 1:1 ratio with their esAGI. Users that choose the minimum 3-day vesting period receive AGI at a 0.5:1 ratio of AGI to esAGI. The AGI distribution and vesting schedule are included below.
AGI will experience significant inflation due to liquidity incentives over the first three years of the protocol’s existence.
AGI Chart
AGI is currently at an attractive level but has yet to develop bullish market structure. Furthermore, the economics of the AGI token are not attractive, as 88% of the supply is allocated to liquidity incentives over the first 3 years, which will be a major source of inflationary pressure on the token.
Risks
The security concerns around Agility and the AGI token will likely appear again in the emerging LSDFi sector as projects look to capitalize on narrative buzzwords. The existence of Agility’s contracts makes it easy for other malicious actors to copy and replicate these same security concerns. Emerging sectors typically experience growing pains as flash loan attacks plagued the DeFi sector during DeFi summer. Agility’s contracts can serve as a reminder that many of these protocols are experimental and exploitable by malicious actors. However, the emerging LSDFi sector will continue to develop, and we are excited to see what other use cases and applications will be developed.
Investment Thesis
Ethereum’s Shanghai and Capella upgrades have brought LSDs to the forefront of the crypto space. They are essential to improve capital efficiency throughout the Ethereum ecosystem. Still, hodlers have been left wondering what they can do with their liquid-staked ETH other than provide liquidity to a staked ETH-ETH LP. EigenLayer is positioned to revolutionize the applications of staked ETH by enabling restaking. EigenLayer has also been the subject of much hype leading into Ethereum’s upgrades and is likely to draw attention closer to its launch. Zero Liquid is another protocol that is developing a useful product in the LSDFi sector as it enables non-liquidatable, self-repaying loans.
UnshETH has been an LSDFi darling as it was one of the most successful LSDFi protocols in the hype cycle leading into Shanghai/Capella. UnshETH is a unique protocol that presents potential Curve Wars-esque token demand for USH. USH may still be undervalued when considering its potential, but the USH chart has us looking for bullish structure before considering entries.
Due to the security concerns related to Agility's token contract, we are not considering it a viable investment opportunity.
Disclaimer
This commentary is provided as general information only and is in no way intended as investment advice, investment research, a research report or a recommendation. Any decision to invest or take any other action with respect to any digital assets and/or securities discussed in this commentary may involve risks not discussed herein and such decisions should not be based solely on the information contained in this article. Past performance is not indicative of future results. Please note that products, platforms, or other items mentioned in this article may be prohibited in the US and other restricted jurisdictions.
Authors:
SmeetyBoop — Developer/Analyst at Magnus Capital.
Twitter: @SmeetyB
0xBoomz — Research Analyst at Magnus Capital and former Research Analyst at The Block.
Twitter: @0xBoomz
