Binance Research | Analysis of LSDFi Research Report: Ecosystem Size, Niche, and Risks

Binance Research recently released a report on LSDFi, a financial derivative product on liquid staking, highlighting the following key points: report link.

Quick Overview of Binance Research - LSDfi Report

• What is LSDfi?
  LSDfi refers to a DeFi protocol built on top of Liquid Staking Derivatives (LSD) that aims to maximize asset yields for LSD holders by providing additional earning opportunities.
• Scale of LSDfi Protocol
  Over the past few months, driven by active participation in liquid staking, the Total Value Locked (TVL) of the LSDfi protocol has grown rapidly. The cumulative TVL of major LSDfi protocols has exceeded $400 million, doubling from a month ago.
• Niche of LSDfi
  Factors contributing to the growth of LSDfi include the increase in ETH staking and the early stage of LSDfi. The current TVL in the LSDfi protocol accounts for less than 3% of the potential market.
• Risks of LSDfi
  While LSDfi provides attractive opportunities for LSD holders, users should be aware of associated risks, including slashing risk in the Ethereum PoS mechanism for misbehaving validators, LSD price risk, smart contract risk, and third-party risk.

What is LSD? What is LSDfi?

Ethereum PoS

With Ethereum transitioning to Proof of Stake (PoS), users can participate in validating nodes by staking ETH. According to data from Dune Analytics @hildobby, the amount of staked ETH has reached 22.8 million and continues to rise.

What is LSD

Due to the technical complexity and barriers of running independent validation nodes, many service providers or protocols offer ETH staking services that allow users to participate in Ethereum staking with low entry barriers. Users receive staking certificates, known as Liquid Staking Derivatives (LSD), such as stETH, rETH, WBETH, etc. LSD provides liquidity that can be utilized within the crypto ecosystem.

Among Ethereum staking service providers, Lido holds the largest market share, followed by centralized exchanges Coinbase at 10.5% and Binance at 5.8%:

Details of LSD service providers, including token names, mechanisms, fees, and APY:

What is LSDfi

LSDfi is a DeFi protocol built on top of Liquid Staking Derivatives, providing additional earning opportunities. The aim of the LSDfi protocol is to enable LSD holders to maximize their yields.

LSDfi Ecosystem

Binance Research explains that the LSDfi ecosystem consists of a range of mature DeFi protocols that integrate LSD as part of their diverse product offerings. Additionally, there are newer protocols primarily based on LSD.

• DeFi Liquid Staking Service Providers: DeFi protocol users can participate in staking and earn LSD rewards
• CEX Liquid Staking Service Providers: Centralized exchanges (CEX) offering liquid staking services
• CDP Stablecoins: Collateralized debt position (CDP) protocols allowing users to mint stablecoins using LSD as collateral
• Index LSD: Tokens representing different LSD combinations
• Yield Strategies: Protocols enabling users to earn additional yields
• Money Markets: Protocols utilizing LSD to facilitate lending activities

LSDfi Market Relatively Concentrated, Led by Lybra

According to Binance Research, among LSDfi operators, Lybra holds the highest LSD capital at 39.2%, followed by Instadapp at 13.2% and Pendle at 11.4%. The top five operators account for over 81% of the market share.

The LSD capital acquired by these protocols is as follows, with Lybra acquiring a capital of $161.6 million, while others are below $50 million:

• Lybra primarily allows users to deposit LSD stETH and generate interest-bearing stablecoin eUSD
• Instadapp offers DeFi strategies for stETH, earning annualized returns
• Pendle is an interest rate trading protocol that allows users to separate principal and interest rates of LSD for better or stable staking APY
• Raft enables users to deposit stETH to create decentralized stablecoin R
• unshETH is a diversified LSD investment portfolio that can earn staking rewards and exchange fees, all integrated into an ERC-20 token
• Asymetrix provides asymmetric income distribution generated by staking

Opportunities of LSDfi

According to Binance Research, the capital of LSDfi operators has grown rapidly since May this year, surpassing $400 million. However, compared to the volume of LSD, only $4 billion of the total $169 billion LSD has entered the LSDfi market. Hence, there is believed to be significant room for growth.

Room for Growth in the LSD Market

As per Binance Research, the current staking ratio on Ethereum is 16.1%, which was 19.24% at the time of writing, significantly lower than the average staking ratio of the top 20 PoS chains at 58.1%. Therefore, there is ample room for growth in LSD, further catalyzing the LSDfi market.

Early Stage of LSDfi Innovation

Binance Research believes that many protocols in the LSDfi space are still in their early stages and relatively small industries, indicating potential for more innovation to attract LSD holders.

Risks of LSDfi

Binance Research also highlights potential risks of LSDfi:

• Slashing Risk: Validators failing to meet specific staking parameters (e.g., offline) may face penalties, and LSD holders may bear these risks
• LSD Price Risk: Market fluctuations may affect the price of liquid staking derivative tokens, which could differ from the underlying token. Using them as collateral may expose users to price volatility and potential liquidation risks
• Smart Contract Risk: Interactions with smart contracts may pose risks
• Third-Party Risk: Some projects may utilize other dApps (e.g., yield strategies) in their normal operations. In such cases, users face additional counterparty risks