POS Bonus Disappears? Analyze the dilemma and future of LSDFi from a data perspective

Written by @Yuki, PSETradingAnalyst

Since the Ethereum to PoS, LSDFi has emerged as a new eye-catching track. LSDFi has been able to become the focus of the market because of its reinvention of the Yield Bearing property based on liquid staking tokens. However, with the continuous rise of ETH pledge rate and the continuous decline of pledge yield, the market space has been continuously squeezed, and the development of LSDFi has come to a standstill.

Looking back, we have gone through three stages of development of the LSDFi track. From the competition of liquid staking protocols, to LST becoming a new circulating asset with consensus in DeFi, to the diversification and large-scale application of LST. And now, we are in a period of obvious development dilemma. This article attempts to clarify the current situation of LSDFi based on data, and explore where LSDFi will go in the future through the analysis of specific projects.

1. Looking at the current situation of the LSDFi track from the data

1.1 The growth dividend period has passed, the development of the track has stagnated, and the decline in yields has led to the flight of funds from the track

! [POS bonus disappears?] Analysis of the dilemma and future of LSDFi from the perspective of data](https://cdn-img.panewslab.com//panews/2022/11/7/images/170de3168a5cc042e9c2c663163786a2.)

According to Dune’s data, the number of net staked ETH is flattening overall, while the number of validators waiting in line to enter is also decreasing, and the period of violent staking growth has passed. Correspondingly, the total TVL of the LSDFi track (the total TVL as of now is 839M) has been in a state of significant slowdown since September 26 this year, and even negative growth. It can be expected that in the absence of paradigm innovation, the LSDFi track as a whole will not see significant growth in the coming period.

! [POS bonus disappears?] Analysis of the dilemma and future of LSDFi from the perspective of data](https://cdn-img.panewslab.com//panews/2022/11/7/images/0ff0f5f8bc64ceafda59811a05bbf572.)

There may be two reasons for this. On the one hand, due to the sluggish growth of staking within the Ethereum ecosystem, the increase in Ethereum’s staking rate has led to a decrease in staking yield (as shown in the figure below, the basic rate of return is only 3%+), and the LSDFi protocol has fallen into a yield bottleneck, and the attractiveness of the entire track to funds has declined, resulting in the phenomenon of capital outflow; On the other hand, due to the impact of the external environment, the most serious of which is the rising yield of U.S. bonds in the high-interest rate environment of the United States, which has a siphoning effect on funds in the crypto industry, and LSDFi’s funds have fled to U.S. bonds and DeFi derivatives with higher underlying returns.

! [POS bonus disappears?] Analysis of the dilemma and future of LSDFi from the perspective of data](https://cdn-img.panewslab.com//panews/2022/11/7/images/e875f1738cff82b5dd19488a867e1e92.)

! [POS bonus disappears?] Analysis of the dilemma and future of LSDFi from the perspective of data](https://cdn-img.panewslab.com//panews/2022/11/7/images/6a14f7e5d71c8894e9e2af4532f6a177.)

1.2 The project is seriously homogeneous, involuted but not innovative

There are two important parts of DeFi that still shine today, and they are the cornerstones that hold the entire DeFi system together: lending and stablecoins. Among the operating rules of LST, lending and stablecoins are also the most basic and feasible ways to operate. Based on the interest-bearing properties of LST, the project direction of the LSDFi track can be roughly divided into the following two categories:

• LST as collateral for lending protocols or stablecoin protocols (represented by Lybra, Prisma, Raft);
• LST principal and interest segregation (represented by Pendle);

! [POS bonus disappears?] Analysis of the dilemma and future of LSDFi from the perspective of data](https://cdn-img.panewslab.com//panews/2022/11/7/images/368757b2cb8af7e27ac55e05f8e2325e.)

From Dune’s data, it can be seen that 5 of the top 12 projects in the current TVL ranking of the LSDFi track are LST-based stablecoin protocols. Their basic mechanism is almost identical: users use LST as collateral to mint or lend stablecoins, and when the price of the collateral falls, the collateral is liquidated. The few differences are different stablecoins, different LTV, different supported collateral.

After the collapse of Terra and the forced delisting of BUSD due to regulatory risks, there were many gaps in the stablecoin market that needed to be filled. The emergence of LSTs with interest-bearing properties can contribute projects that are more in line with the needs of decentralization in the stablecoin market. It’s just that after the wave, the overall innovation of the track is weak, and it is just involuting each other with LTV, collateral type, and stablecoin yield (the yield mostly relies on the project token subsidy, which is essentially just air). If the latecomer does not have the differentiated highlights to challenge the first comer, the launch will mean the end of the project.

Pendle, on the other hand, is one of the more unique presences in the entire LSDFi track. Its fixed-rate product is naturally suitable for interest-bearing LST (in the case of stETH, which can be split into ETH and staking yield), which is why Pendle is back in the center of the market after Ethereum switched to PoS. At present, Pendle is firmly holding its market share with product iteration, and there is no strong competitor of its kind in the market.

! [POS bonus disappears?] Analysis of the dilemma and future of LSDFi from the perspective of data](https://cdn-img.panewslab.com//panews/2022/11/7/images/2f3f24e668ad074edfeb5cd91ecfa5ae.)

1.3 The head project has no pricing power for the time being, and there is no guarantee for long-term growth

For DeFi, we can say that Aave is the leader of lending protocols, Curve is the leader of stablecoin DEX, and Lido can be said to be the leader of Ethereum liquid staking service providers. These projects have all achieved pricing power in their respective fields. The pricing power I am talking about here refers to the barrier effect formed by “monopoly + rigid demand”, which forms a certain monopoly effect and brand effect in the market rigid demand business (the market share is far ahead).

And what does it mean to have pricing power? I think it means at least two advantages, one is that the business model is excellent, and the other is that long-term growth is guaranteed. To sum it simply, the barriers to pricing power are the real barriers.

However, on the other hand, even LybraFinance, the leading project with the largest market share, has not formed its own pricing power barriers. In the V1 stage, Lybra quickly emerged from a number of LSD stablecoin protocols with a yield (8%+) that far exceeded the basic yield of Ethereum staking, attracting a large number of TVLs, but the V2 upgrade did not bring effective growth to Lybra, but was continuously squeezed out of market share by Prisma and Eigenlayer that went online later.

The fundamental reasons for this embarrassing situation are: firstly, as a protocol layer, the project itself is not technically difficult, not to mention that many LSD stablecoin protocols are directly forked by Liquity, and the “low technical threshold” means that the competition will be fierce; The second is that the LSDFi project is not the issuer of LST, and essentially relies on the pricing power (staking rewards) of ETH for liquidity redistribution; Finally, there is little difference between each project, and the market share is often affected by the agreed rate of return, while the head project has not formed its own ecology and established absolute pricing power within the ecosystem.

The lack of pricing power effectively means that the current boom is likely to be temporary, and no one has found an insurance lifeline for long-term growth.

1.4 Token subsidy yield is unsustainable, stablecoin liquidity is sluggish

LSDFi has previously attracted a large amount of TVL in a short period of time with its high yield, but a little digging will show that behind these high yields are subsidized by project tokens, and the consequence of this is that the value of governance tokens is overdrawn in advance, and the high yield is unsustainable.

Taking Raft as an example, Raft launched the Savings Module in V2 to attract \ (R holders make deposits, but do not disclose the source of this 10% interest in detail (the official explanation is only to subsidize with protocol income). Looking at DeFi as a whole, there are only a handful of projects that can offer a low-risk interest rate of 10%, so this makes people wonder if the project party minted )R out of thin air to create such a seemingly beautiful APR myth.

It is worth noting that the current interest rate of Raft is 3.5%, which means that users can earn at least 6.5% arbitrage after minting $R and depositing it into RSM.

! [POS bonus disappears?] Analysis of the dilemma and future of LSDFi from the perspective of data](https://cdn-img.panewslab.com//panews/2022/11/7/images/dd7576e4d23c95144e08485aef5cad92.)

For decentralized stablecoins, liquidity will be the biggest factor affecting their development. The reason why Liquity failed to scale and stand out in the last bull market is because its liquidity cannot meet the needs of users. And DAI is indeed the most liquid decentralized stablecoin at present. Similarly, most of the current LSD stablecoins are also facing liquidity problems, that is, the depth of the stablecoins launched by themselves is not enough, the use scenarios are not diversified enough, and the needs of real users are not enough.

! [POS bonus disappears?] Analysis of the dilemma and future of LSDFi from the perspective of data](https://cdn-img.panewslab.com//panews/2022/11/7/images/6f46d2b287aad74549e5961d4f3ad4e2.)

Take Lybra’s eUSD as an example, which is now 108M, but its deepest liquidity pool is none other than the peUSD pool on the Arbitrum chain (peUSD is the full-chain version of eUSD). The eUSD-USDC pool depth on Curve is only 207k, which indicates that the exchange of eUSD with centralized stablecoins is extremely inconvenient, which will affect the use of users to a certain extent.

! [POS bonus disappears?] Analysis of the dilemma and future of LSDFi from a data perspective](https://cdn-img.panewslab.com//panews/2022/11/7/images/0f1fe37b82f6e6a640c98bd568cea063.)

2.From the perspective of specific projects, look for a breakthrough in the development dilemma of LSDFi

Although the LSDFi track as a whole has fallen into a bottleneck period of development, there are still some projects that are trying to change, and we may be able to get some thoughts and inspirations from them to break through the development dilemma.

2.1 Developing the Ecosystem, Making Up for the Lack of Economic Models, and Building Pricing Power: A Case Study of Pendle and LybraV2

LSDFi projects all have a common and seemingly unsolvable problem at this stage: subsidizing user income with governance tokens, resulting in the value of governance tokens being continuously diluted, and eventually reduced to worthless mining coins.

A feasible and meaningful solution is to develop your own ecology, use the power of ecological projects to improve the shortcomings of your own economic model, and establish absolute pricing power within the ecology. **

2.1.1 Pendle

Pendle is one of the most successful examples of this approach. Penpie and Equilibria are both auxiliary protocols to increase PENDLELP rewards based on the Pendle veToken economic model, and LPs do not need to stake Pendle to obtain Pendle mining boost rewards. There is not much difference between the two business models, and the main role is to absorb some of the selling pressure of governance tokens for Pendle, so that Pendle itself can develop healthier.

! [POS bonus disappears?] Analysis of the dilemma and future of LSDFi from a data perspective](https://cdn-img.panewslab.com//panews/2022/11/7/images/ef9e5b7758935b2eff606c4532fa5c5c.)

2.1.2 LybraFinance

After the launch of V2 and the lack of effective growth, Lybra also began to deliberately build its own ecological projects. On October 13, Lybra officially announced the official launch of Lybra War, which will be the starting point for the next phase.

Lybra also started LybraWar so openly because it recognized its many problems:

1. High inflation of governance token LBR caused by maintaining high APR, and excessive short-term selling pressure caused by V2 mining activities;

2. Fierce competition in the same track (such as Prisma, Gravita, Raft) leads to sluggish growth, and there are no investors behind Lybra to rely on;

3. The liquidity of eUSD is insufficient, and the promotion and use of peUSD is not as expected;

4. The consensus of the community was shaken, and during the migration from V1 to V2, the community had questions about how to deal with the “tokens that were not successfully migrated in time” (sifu decided the entire voting result by one person).

! [POS bonus disappears?] Analysis of the dilemma and future of LSDFi from a data perspective](https://cdn-img.panewslab.com//panews/2022/11/7/images/ae3209ef68121a89778cfa96d7720fbd.)

The core of Lybra War lies in the accumulation of dLP and the dynamic matching of dLP with eUSD. Because in Lybra V2, users must stake a minimum of 2.5% of the eUSD value of LBR/ETH dLP to obtain esLBR emissions, so the Layer 2 protocol of the Lybra ecosystem must obtain more esLBR through yield boosting of esLBR and dLP. In addition, Lybra War’s distribution rights lie in esLBR emissions between LSD pools, and the potential demand side is mainly LST asset issuers and large eUSD minters. Lybra’s LSD pool depth skew will be more suitable for smaller LST issuers to accumulate esLBR to increase esLBR voting power.

At present, the only deep players involved in Lybra War are Match Finance, and there is no effective competitive landscape. Match Finance mainly solves two problems (I won’t go into detail about the project machine here):

1. Users can’t get esLBR incentives without dLP when minting eUSD;

2. yield boosting of esLBR and exit liquidity issues.

! [POS bonus disappears?] Analysis of the dilemma and future of LSDFi from the perspective of data](https://cdn-img.panewslab.com//panews/2022/11/7/images/b30f15609f277b876e2030e57f6261f0.)

As the protocol layer of the LSDFi track, neither Lybra nor Pendle is a publisher of LST, so they have accumulated a lot of TVL through high APR in the early days, but also planted a negative seed. For the sake of healthy development in the future, they choose to develop ecological projects and continue to supply themselves with ecological projects. Any ambitious LSDFi head project will actually go down this path of development.

2.2 Micro-innovation to improve differentiated user experience

As a non-head project, how to keep one’s one-acre three-point field in the fiercely competitive track, finding one’s own differentiated positioning is the key. Even micro-innovation can reach some vertical users, and as long as the stickiness of these users is high enough, the project will have the bargaining chips to survive.

2.2.1 No Liquidation: Using CruiseFi as an Example

While most projects are still involuting the LTV and collateral categories, some projects have directly launched a “no liquidation mechanism” to attract traffic.

Taking CruiseFi as an example, users can stake stETH, mint the stablecoin USDx, and then exchange USDx for USDC through the USDC-USDx pool on Curve, while the Lender who provides USDC to the Curve stablecoin pool can earn the interest generated during the stETH staking period.

! [POS bonus disappears?] Analysis of the dilemma and future of LSDFi from the perspective of data](https://cdn-img.panewslab.com//panews/2022/11/7/images/8961845d6d43f18e20a13ae507dff389.)

So how do you guarantee that the Borrower will never be liquidated? When liquidation occurs:

1. The project team will lock part of the collateral (stETH), and then give part of the stETH staking income to the Borrower;

2. Positions exceeding the yield of stETH will be suspended, which can ensure that the staking yield can always cover the interest of the loan, which means that the borrower will not be liquidated, but the disadvantage of this is that the income of stETH will decrease as the overall pledge rate of ETH increases;

3. Regarding the part of the suspended positions, the corresponding Price Recovery Token will be generated, and these PRTs can be exchanged for ETH 1:1 (they can only be exchanged when they are greater than the liquidation line), and the PRTs can be freely traded in the secondary market.

The advantage of this is that the Borrower can be liquidated for a longer period of time or not liquidate, the Lender can obtain ETH staking rewards, and the PRT holder can obtain the income of ETH growth in the future. “No liquidation” will be attractive to some users with a high risk appetite in a bull market.

2.2.2 Portfolio Yield: Take Origin Ether as an Example

In the DeFi world, yield is always the most appealing narrative, and this iron rule still applies to LSDFi.

Launched in May 2023, Origin Ether uses ETH and other LST as backed collateral, with the value of 1OETH always equal to 1ETH.

! [POS bonus disappears?] Analysis of the dilemma and future of LSDFi from a data perspective](https://cdn-img.panewslab.com//panews/2022/11/7/images/81decf554b5320ee440aff1982a49a73.)

The biggest difference between Origin Ether and other LSDFi is that its source of income is a basket of LST assets such as stETH, rETH, sfrxETH, etc. In addition, OETH uses AMO strategies on Curve and Convex through the OETH-ETH liquidity pool, and supports strategies on Balancer, Morpho, and other ETH-denominated Curve pools. Through the optimization of a series of liquidity strategies, Origin Ether is able to provide users with APY that is higher than the market average. And that’s why Origin Ether has quickly amassed a lot of TVL in recent months (OETH currently ranks seventh in terms of market share).

! [POS bonus disappears?] Analysis of the dilemma and future of LSDFi from the perspective of data](https://cdn-img.panewslab.com//panews/2022/11/7/images/3ea902cd6060b29557f1b51c421d724a.)

2.2.3 Continuing Matryoshka Dolls: Taking Eigenlayer-based LRTFi as an Example

LSDFi has reached a bottleneck stage as a matryoshka doll of LSD, but the emergence of Eigenlayer will cause a new level of LRTFi nesting dolls in the future, which is not only another leverage for the entire LSDFi track, but also an opportunity to return to the center of the market and expand outward.

Although Eigenlayer is still in closed beta and has not yet been opened to all users, judging from the two previous staking openings, the market is very hot.

! [POS bonus disappears?] Analysis of the dilemma and future of LSDFi from a data perspective](https://cdn-img.panewslab.com//panews/2022/11/7/images/c4752eb0ebd64cffb41043151eaf5120.)

At the same time, many projects based on LRT (Liquid RestakingToken) have emerged, such as Astrid Finance, Inception, etc. The core logic of these projects is not innovative, but compared to LSDFi’s protocol, LRT is included in the scope of collateral, and it is expected that this kind of competition will reach a white-hot stage after the official launch of Eigenlayer, and it is still early days.

2.3 Support of capital forces, bundling other mature projects and enjoying other ecological dividends: taking Prisma as an example

If a later project wants to catch up with its competitors in a track full of uncertainties, but it can’t achieve paradigm innovation, then finding a strong backing and using the dividends of other projects as its own buff bonus will be an effective way for it to gain a foothold, we can call this kind of behavior “taking shortcuts”, or “looking for dad”.

PrismaFinance is a typical success story. Compared with grassroots projects like LybraFinance (which was launched by the community and did not have private financing), Prisma can be described as a rich second generation born with a golden spoon. When the project has not launched any products, they have already attracted the attention of the market with a gorgeous public relations draft. The most valuable information revealed in the article is not how different its project mechanism is, but its investor list includes DeFiOG such as Curve and Convex, as well as large institutions such as OKX and TheBlock.

Then, Prisma’s development path is also as advertised, bundling Curve and Convex, giving the native stablecoin mkUSD additional rewards (in the form of CRV, CVX) through their support, and achieving a flywheel effect through the veToken model (which can control protocol parameters).

In the third month of its official launch, Prisma was backed by JustinSun’s $100 million worth of wstETH, TVL achieved alltimehigh and surpassed Lybra to become the new track leader.

! [POS bonus disappears?] Analysis of the dilemma and future of LSDFi from a data perspective](https://cdn-img.panewslab.com//panews/2022/11/7/images/4c86a6afa499d58e694ce56801e19e91.)

2.4 Real Paradigm Innovation

From the industry to the track, after experiencing savage growth, it will always fall into the bottleneck of development, and the fundamental way to solve this dilemma is undoubtedly the word “paradigm innovation”. Although there has been no innovation with the ability to change the development of LSDFi, I firmly believe that as long as the value of Ethereum continues to exist as a strong consensus, then there will eventually be a game-breaking paradigm innovation that will ignite the fire of LSDFi again.

Reference