DeFi is paying more attention to the surge in liquid staking derivatives, with protocols like Lido Finance (up 114%), RocketPool (up 89%) and Stakewise (up 128%) exploding in value in recent weeks.
The rising value of LSDs can only mean one thing: they are attracting a significant amount of cash as DeFi investors chase the lucrative rewards on offer. But what exactly are LSDs and how do you use them?
In short, LSDs offer investors a way to earn higher returns on their staked Ethereum assets by retaining liquidity that can be used as collateral in multiple DeFi protocols. Compared to native Ethereum staking, they are far superior. Staking is something that can be done by ETH token holders to participate in network validation and receive rewards for doing so. Traditionally, users are required to stake at least 32 ETH (around $49,000) and lock that deposit for a few weeks, meaning these tokens cannot be used anywhere else. LSDs are therefore incredibly attractive as they allow users to stake any amount of ETH, lowering the barrier to entry for staking.
However, that is not the main advantage. What is unique about LSDs is that they allow users to maintain their liquidity by providing them with what are known as “LSD tokens”. So, someone depositing 1 ETH into Lido would receive 1 stETH, while a user depositing 3 ETH into RocketPool would receive 3 rETH in return. These LSD tokens can then be used as collateral in a range of DeFi yield farming protocols.
So what exactly can we do with our LSD tokens? What follows are a few different LSD strategies for some of the most popular LSD protocols.
One of the safest strategies for Lido Finance is to stake an amount of ETH and then swap the stETH tokens you receive on Curve Finance and deposit into its DAI x USDC – USDT pool, which is held at a constant rate of 2% APR pays out. This is one of the safest strategies as Curves DAI x USDC – USDT currently holds a total locked value of $565 million. More adventurous investors can bring their stETH to Alluo and deposit it into its stETH ETH pool, which pays 7.3% APR and currently has $37,000 in TVL. Alternatively, the riskiest strategy is to take this stETH to Beethoven X, trade it and deposit it into his wstETH – LIDO pool, which offers a sky-high 32% APR with $32,000 TVL.
It is important to note that a higher TVL indicates a liquidity pool is healthy and in high demand. TVL growth signals that many investors have assets tied up in the minutes, which in turn signals a positive outlook for the market. On the other hand, a lower TVL clearly indicates a lack of capital, leading to higher risk for depositors.
Moving forward, LSD investors can potentially earn even greater rewards through RocketPool. For the safest returns, investors can take their rETH from RocketPool and deposit it into Aave’s USDT stablecoin pool, which generates an annual interest rate of 2.4% and has a reassuring TVL of $351 million. The medium-risk strategy involves injecting rETH into Beethoven X’s rETH – wETH pool, which currently has $4.8 million in TVL and is paying out a whopping 15.5% APR. However, for the Megabucks rewards, there is no better place to take a chance than Aura Finance’s rETH – BADGER pool. There, investors can generate an impressive 39% APR from a pool that currently has around $10.5 million in TVL.
Keep in mind that many of these strategies could become increasingly rewarding in a few months as Ethereum implements a major upgrade called “Shanghai”.
Shanghai is a crucial update for the network as it will finally allow users who have staked ETH to access their rewards. As a result, native staking on Ethereum is expected to become much more lucrative. LSDs could struggle to maintain liquidity as a result — and when that happens, the only way for them to remain competitive is to bribe protocols like Curve and Aura Finance to increase their incentives even further. To learn more about how this might play out, read Ice v3’s thesis on Twitter and remember to keep a close eye on these pools to maximize your staking rewards.
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