LSDFi: The Status Quo and Future Prospects

By Bing Ventures

The essence of LSDFi is to combine liquid staking with DeFi to provide users with more novel staking and lending opportunities. Building upon LSD, LSDFi constantly innovates and explores niche application areas.

The current staking ratio of ETH is relatively low, significantly below the average level of other PoS chains. This indicates that the LSDFi (Liquidity Staking Derivative Finance) market still has tremendous growth potential, especially as the staking ratio increases and more institutional funds enter the market. The inflow of institutional funds not only enhances the market depth but also brings more confidence to the sector. It presents more opportunities for LSDFi projects and is set to drive market expansion and product innovation.

Offering competitive yields is one of the key appeals of the LSDFi market. As a result, a yield war is constantly brewing among LSDFi protocols that aim to attract users with higher yield rates. Protocols like Pendle Finance and Lybra Finance have garnered widespread attention through their unique yield models and strategies. This competition drives continuous innovation in the LSDFi space, bringing new yield opportunities that are more efficient and sustainable.

The Essence of LSDFi

The essence of LSDFi is to combine liquid staking with DeFi to provide users with niche staking and lending opportunities. The development of LSDFi is driven by various factors, including staking ratio growth, infrastructure upgrades, re-staking mechanisms, institutional fund inflow, and yield competition. As LSDFi continues to evolve, we can expect the emergence of more attractive LSDFi products and protocols.

Specifically, the current staking ratio of ETH is relatively low, indicating significant growth potential compared to other chains. As the staking ratio increases, the LSD market's size will continue to expand, creating more opportunities for LSDFi's development. Additionally, infrastructure upgrades will also have a positive influence on LSDFi. With technological advancements and improved infrastructure, LSDFi can efficiently facilitate staking and lending operations, providing a better user experience.

Re-staking mechanisms are another crucial factor driving LSDFi's development. By innovating re-staking mechanisms, LSDFi can incentivize more participants to reinvest their staked assets in the market, increasing liquidity and market activity. These mechanisms lower the barrier to staking while providing more yield opportunities, which will ultimately attract more users and funds into the LSDFi market.

Competitive Landscape in the LSDFi Space

The competition in the LSD market revolves around vying for ETH held by borrowers. Both centralized and decentralized market players are joining this competition with various staking and lending schemes to attract users and gain market shares.

On the centralized side, LSD services provided by exchanges like Coinbase, Binance, and Kraken enjoy high visibility. These institutions have established market shares and attracted a large number of users. They typically offer convenient interfaces and processes, appealing to less crypto-native users who prefer using centralized services.

Decentralized players are also competitive. Projects such as Lido, Rocket Pool, Ankr, Frax Finance, Stader Labs, and StakeWise offer decentralized LSDFi solutions. These projects are decentralized in design and run on smart contacts, enabling them to offer enhanced security and trustworthiness while helping users achieve better returns.

The LSDFi ecosystem also encompasses various projects in terms of business models, from protocols that use LSDs as collateral to mint stablecoins (such as Curve, Lybra Finance, Raft, and Prisma) to index protocols that issue tokens representing a basket of LSDs (such as Index Coop and unshETH), and protocols that offer automated yield strategies (such as Instadapp, Pendle, Flashstake, Swell, and Asymetrix).

To quantify this competition, market shares and the Total Value Locked (TVL) are important metrics for assessing the competitiveness of various solutions. At present, the LSDFi market is pretty concentrated, with the top five players occupying over 80% of the overall TVL, meaning that a few projects hold significant influence. But, as time goes on and the sector further develops, new projects and innovative solutions are expected to continue to emerge, reshaping the competitive landscape.

Prospects of the LSDFi Sector

Regarding the prospects of LSDFi, there are several questions worth exploring, such as how the competitive landscape will evolve and how LSDFi should change to make fuller use of the staking mechanism to contribute to the long-term health of public blockchains while preventing systemic risks.

To achieve the sustainable development of the LSDFi sector, the first step should be to design more simplified staking processes that could reduce the barriers to user participation and optimize user experience. Simple and friendly staking processes will attract more participants to the market, increasing overall liquidity.

Meanwhile, it is also crucial to introduce security measures such as validator deposits, liquidity restrictions, and self-guarantees to effectively prevent malicious behavior and systemic risks. These security mechanisms will instill confidence in users, enhancing market stability and reliability.

Furthermore, improving governance and consensus mechanisms is also key to the long-term healthy development of LSDFi. With robust governance and consensus mechanisms that properly balance the interests of all parties involved, the rights of stakers and validators can be protected, minimizing potential disputes. Thus, these mechanisms help provide a stable operating environment necessary for the LSDFi sector to grow in the long term.

Based on the above understanding, we believe that future competition will focus on two areas: safe and reliable yield aggregators and innovative LSDFi reinvesting services. With advances in these areas, better safety, improved efficiency, and more value-adds will be on the table.

We believe there will emerge aggregator protocols that can aggregate the best staking protocols and provide users with safer and more diversified yield options with the selection, aggregation, and coordination of various yield opportunities while lowering the potential systemic risks. They will become vital portals drawing more users and diversified sources of funds into the LSDFi space.

More innovative reinvesting options will emerge to provide users with extra returns. With innovative SDKs, staked native coins can be converted to liquid staking derivatives without being unstaked first. Building on this, more reinvesting options will emerge, for example, venture DAOs or actively managed funds that employ quant investing strategies or provide exposure to pre-listing opportunities to LSDFi investors. These innovations will support the LSDFi market’s further growth.

In summary, as an integral part of the public chain ecosystem, the LSDFi sector requires simplified staking processes, the introduction of security measures, and improved governance and consensus mechanisms to enable long-term health. Meanwhile, the sector will likely see reduced market concentration, thriving innovation, and attempts to achieve cross-chain interoperability. These trends will drive the continuous prosperity of the sector and bring a more friendly experience to users. Amid these trends, new opportunities will arise for all market participants as the competitive landscape changes.

About Bing Ventures

With a team of veteran financial professionals, researchers and technologists, Bing Ventures is a pioneering venture capital firm that backs startups and entrepreneurs driving the next waves of Web3 and blockchain innovations.