LSD Summer School Part 2: An Introduction To Rebase LSTs

This is the second 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 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. Part 3 of the LSD Summer School goes into the details on Non-Rebase (Value Accruing LSTs). In the present article, we are going to focus on Rebase LSTs. Let’s start by explaining what Rebase LSTs are and provide some examples of them on the market.

What Are Rebase LSTs

Rebase LSTs are a type of LST whereby the holder receives more and more LST tokens as their staking rewards accrue. Examples of Rebase LST include Lido’s stETH and Stakewise’s sETH2. To walk you through how this process works, let’s take Lido’s stETH as an example. An Ethereum holder can connect their wallet to the Lido protocol and stake their Ethereum. In return, they will receive a quantity of stETH LST tokens that represent the value of their staked ETH. Now, during the time that the ETH is staked, it will accrue staking rewards, which are paid in the form of ETH. To recognize the ETH value that is being accumulated, the stETH holder will receive increased quantities of stETH in proportion to the value that their staked ETH has accrued in rewards. This iterative process of receiving more stETH as staking rewards accumulate is known as rebasing, which is why this type of LST is called a Rebase LST.

In contrast, with a Non-Rebasing (Value Accruing) LSTs, each LST the holder owns increases in value as staking rewards accrue, meaning there is no need to transfer additional LSTs to them. So, for example, let’s say you hold a Non-Rebase (Value-Accruing) LST like Rocket Pool’s rETH. As your staking rewards accrue, your rETH balance will stay the same, but each rETH will increase in value.

Currently, only 2 out of the top 10 LSTs by TVL use the rebase model, namely Lido’s stETH and Stakewise’s sETH2. However, because stETH currently has a 74% share of the LST market’s entire TVL, Rebase tokens still dominate the ecosystem. Meanwhile, there are additional smaller Rebase LST players like Guarda’s GETH and Bifrost’s vETH.

Stakewise have a particularly interesting rebase model whereby they have separate tokens for deposits (sETH2) and rebase rewards (rETH2). This allows users to separate their holdings into different risk classes, avoid impermanent loss when providing liquidity, and potentially compound their returns. So, there is plenty of room for innovation in the rebase model and we can expect it to continue being a big part of the LST landscape moving forwards.

Now, let’s take a look at some of the exciting new ways you will be able to use Rebase LSTs once the forthcoming upgrade to the Lybra protocol V2 is complete.

How To Use Rebase LSTs On The Lybra Protocol

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 a base interest of 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 Rocket Pool’s rETH, Binance’s wBETH, Swell’s swETH, and many more. To achieve this, we’ve introduced two new mechanisms. The first is 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:

You can read how the process will work for Non-Rebase LSTs in our Introduction To Non-Rebase LSTs article, which serves as a companion piece to this one. In the present article, we will focus on how it all works for Rebase LSTs.

On Lybra V2, several types of LSTs can be used as collateral to mint eUSD. It will also be possible to mint a new omnichain version of eUSD called peUSD (Pegged eUSD), which will bridge eUSD from the Ethereum mainnet to Layer 2s. This will allow holders to use their interest-bearing stablecoin holdings 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.

As per the above graphic, there will be separate processes for minting with Rebase LSTs and Non-Rebase LSTs. Let’s use stETH as an example of how the minting process will work for Rebasing LSTs. It can be summarized in 5 stages:

1. Deposit: Users deposit stETH or any supported Rebase LSTs
2. Mint: Users can mint eUSD against their collateral assets. This requires a collateral ratio above 160%. 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. No minting costs are charged
3. Hold & Earn: Holding eUSD allows users to earn rebase yield on a daily basis, with a base APY of around 8%. Users can provide eUSD/3CRV liquidity and continue to earn daily rebase yield. Or they can convert eUSD to peUSD on the mainnet and still receive accrued rebase yield when converting back
4. Repay: Users repay their eUSD debt
5. Withdraw: Users have the flexibility to withdraw their collateral at any point, provided that their Collateral Ratio (CR) remains above the designated safe CR.

The ability to convert eUSD to peUSD during the Hold & Earn phase is particularly important to unpack as it carries with it some exciting possibilities. Because peUSD is an omnichain token and is compatible with most DeFi protocols, when an eUSD holder wishes to spend their holdings, they can convert it into peUSD. This can be done at a 1:1 ratio. But the most powerful feature of peUSD is that when you convert eUSD to peUSD you continue to earn yields on the underlying eUSD value. These yields can be immediately realized when you convert your peUSD back to eUSD.

So, taken in combination, eUSD and peUSD provide users with the best of both worlds. They can simultaneously receive interest on their stablecoin holdings, whilst freely deploying them in further yield-bearing applications on a wide range of DeFi protocols.

For an equivalent explanation of how the minting process will work for Non-Rebase LSTs, consult the Non-Rebase LST companion piece. But for now, we’re going to continue focusing on Rebase LSTs by explaining the mechanisms behind how the Lybra protocol is able to deliver interest back to eUSD holders.

How The Lybra Protocol Generates Interest For eUSD Holders Who Used Rebase LSTs As Collateral

The core feature of the Lybra protocol is its ability to provide eUSD holders with interest on their holdings just by holding it, making it the first interest-bearing stablecoin. So, how does it achieve this when Rebase LSTs are used as collateral? It works like this:

1. Rebase LST Accumulates Rebase Yield: Imagine a user called Bob puts down stETH as collateral to mint eUSD. Bob’s stETH will continue to accumulate rebase yield in the form of more stETH to recognize staking rewards.
2. Protocol Or Redeemer Buys Yield: There are users on the Lybra protocol who have signed up to be Redeemers. Redeemers can use eUSD to buy the rebase yields being accumulated by Bob’s stETH collateral. Or, if no Redeemer buys it, the protocol itself will buy Bob’s rebase yield, using eUSD holdings.
3. eUSD Transferred To User As Interest: Bob will then receive a share of the total protocol eUSD proceeds from rebase yields as interest. His share is calculated on the basis of a formula that takes into account factors including the APR of his LST, the total eUSD in circulation for that LST pool, the pool’s Collateral Ratio and the total current supply of eUSD.

The important part here is that Bob doesn’t need to do anything. Once he’s minted his eUSD, the above process will automatically generate interest on it for as long as he holds it. And with the introduction of peUSD it will even continue to generate interest whilst he spends it!

Now, given that on Lybra V2, users have the opportunity to use either Rebase LSTs or Non-Rebase LSTs, let’s discuss why you might choose to use Rebase LSTs as collateral.

Why Use Rebase LSTs as Collateral To Mint eUSD?

Firstly, take a look at our snazzy new dashboard showing what the process of minting eUSD will look like on V2!

So, given that you will have a range of options on which LST to use as collateral, why might a user choose to use a Rebase LST? Here are 3 main reasons:

1. Interest Continues To Accumulate When eUSD Converted To peUSD: Anyone who has used a Rebase LST to mint their eUSD can convert their eUSD to peUSD at a 1:1 ratio whenever they want to start spending it. peUSD is better suited to spending than eUSD as it has omnichain functionality and is compatible with most DeFi protocols. Most importantly, it will continue to yield interest whilst it is being spent. This yield can be redeemed as soon as it is converted back to peUSD.
2. Interest Paid As eUSD: Another advantage of minting with Rebase LSTs is that their structure allows the Lybra protocol to automatically buy the rebase yields with eUSD. This means that the eUSD is always accumulating interest. Whereas, with Non-Rebase LSTs, no eUSD interest is paid. Users who put down Non-Rebase LSTs as collateral need not fear however, as the LSTs themselves will naturally be accumulating value via a separate mechanism explained in our Non-Rebase LST article.

Conclusion

So, with the arrival of Lybra V2 there will be opportunities to use a wide range of different LSTs as collateral to mint eUSD. This includes both Rebase LSTs and Non-Rebase LSTs. Additionally, the introduction of peUSD will unlock omnichain functionality, making it easier for users to put their stablecoin holdings to work across multiple DeFi protocols. We’re excited to see how users will take advantage of all this new functionality when V2 goes live.

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