Review of Potential Early Stage LSDFi Projects
Preface:
After the LSD sector has been repeatedly hyped up, the market has gained a high level of understanding and corresponding attention. The sector’s future growth is largely expected, yet the potential for substantial change in mainstream offerings is decreasing. This high degree of certainty means that there are few opportunities left for high-reward trades based on market expectation gaps. However, given the continuous growth of the underlying LST asset, the emerging LSDFi protocols built on it could offer new opportunities, becoming the alpha in the well-trodden LSD sector.
Main text:
The LSDFi protocols introduced in this article focus on two categories. The first is the protocol of minting USD stablecoins with LST as the Collateralized Debt Position (CDP). The second is the protocol of minting WraDpETH with LST as the collateral CDP. The reasons for focusing on these two types of products are: as the ETH pledge rate continues to rise and the scale of ETH continues to decrease while the scale of LST continues to increase; based on the point of improving the efficiency of fund use, the market demand for lending protocols with LST as collateral will inevitably continue to expand, especially when the market warms up and the risk preference of funds increases.
Lending protocols are usually divided into two types. One is the deposit-lending model (such as AAVE and Compound). However, this model requires user deposits on the fund side. The network effect and brand effect built by the first-mover advantage have a clear moat, making it difficult for latecomers to compete with it. At the same time, this model also faces the problem of high interest rates on loans. The other is the CDP coinage model (such as Dai). This model does not have user funds custody on the fund side. Due to the mintage power of the protocol itself, users can be benefited from extremely low borrowing rates, and the protocol cost is subsidized by bilateral interest rates and transferred to the liquidity expenditure of collateral certificates; this model is more suitable for building a lending protocol based on LST, a revenue-generating asset, especially based on the leverage of interest rate exposure.
The following LSDFi are all early projects, and the product planning, function realization, and economic models of most targets need to be continuously tracked.
First Category: CDP US Dollar Stablecoin Protocol with LST as Collateral
1．Prisma Finance: Supported by Curve Ecosystem, Liquity Fork
Product Introduction:
The main function of Prisma Finance is to over-collateralize and mint US dollar stablecoin acUSD with LST assets as collateral. It initially supports wstETH, cbETH, rETH, sfrxETH, and WBETH as collateral. It has received support from a host of DeFi OGs such as the founders of Curve and Convex, FRAX Finance, Coingecko, OKX Ventures, etc. According to FRAX’s [FIP-227] proposal, FRAX Finance invested $100,000 in Prisma Finance at a valuation of $30 million, with token allocation to be linearly unlocked over 12 months.
Features：
Similar to most over-collateralized stablecoin protocols, the core need that Prisma Finance addresses is the enhancement of capital efficiency. Users can mint stablecoins through the CDP method while retaining the price fluctuations and yield exposure of LST to achieve leverage. In this link, the liquidity of acUSD is crucial. It is where the main protocol cost of CDP lies and also where Prisma Finance’s greatest advantage lies.
Tokenomic Model:
In terms of the token economic model, Prisma Finance introduces the ve model. veToken will obtain the governance rights of the protocol to determine the distribution of token emissions in different lending pools, protocol rates, pool parameters, and LP mining yields. This aims to attract LSD protocols (asset issuers) and LPs to lock protocol tokens, forming a binding of interests while reducing secondary market sell-off.
2. Raft: User-friendly, Censorship-resistant, Real-name Team, Liquidity Built with Balancer Ecosystem
Product Introduction:
Raft is an immutable, decentralized lending protocol that allows users to borrow US dollar stablecoin R with LST (currently supporting stETH) as collateral. It maintains the censorship resistance of the protocol through immutable smart contracts and decentralized front-end. Raft was incubated by Tempus Finance, with its Co-founder having worked at the ETH foundation, and team members who developed Nostra Finance (the first lending product on StarkNet). Raft has received support from institutions such as Lemniscap, Wintermute, and GSR. Most of its main product features have been realized, reaching a TVL of $30 million in 3 days after launch (without token incentives).
Features:
The product features are flash swaps and one-step leverage function: The principle of flash swaps is similar to AAVE’s flash loans, the difference being that R comes from protocol minting. The one-step leverage function can be developed on the basis of the flash swap feature, which combines the steps of depositing stETH by the user→ flash swapping R→ exchanging R for stETH→ depositing extra stETH→ generating R→ and repaying R flash loan debt into a single transaction, greatly enhancing user experience and saving transaction Gas. Users can get up to 11x leverage.
Tokenomics: Unannounced
3. Gravita Protocol: Liquity Fork, CDP Stablecoin Protocol with LST as Collateral
Product Introduction:
Gravita Protocol is the first stablecoin protocol that adopts Liquity fork to support LST assets. It achieved a TVL of $20 million in a month after launch without token incentives, supporting WETH, stETH, rETH, and bLUSD as collateral. Its stablecoin GRAI has good liquidity depth in Curve, Bunni, and UniV3.
Features:
Compared to Liquity, Gravita supports LST assets and offers a lower borrowing rate. Users need to pay a one-time borrowing fee of 0.5% when borrowing in Gravita. If repayment is made within 6 months, Gravita will refund the borrowing fee according to the borrowing period. Users will be charged at least one week’s borrowing fee.
Tokenomic Model: Unannounced
4. PSY: 0 Borrowing Fee Rate, Arbitrum Ecosystem, ve(3,3), Liquity Fork
Product Introduction:
PSY supports various LSTs and their LP tokens as collateral to mint US dollar stablecoins (SLSD). The product structure is the same as Liquity’s and it is set to launch on the Arbitrum chain in the future.
Features:
PSY will offer 0 rate borrowing and introduce the ve(3,3) token model. However, detailed aspects need to be tracked continuously.
Second Category: CDP WrapETH Protocols with LST as Collateral
5. ZeroLiquid: 0 Borrowing Fee, No Liquidation, Interest Automatically Repays Debt
Product Introduction:
ZeroLiquid is currently in the testnet stage. It allows users to collateralize LST to mint ZETH (when users deposit ETH, ZeroLiquid will convert it into LST, with an initial LTV of 50%). ZETH is a borrowing voucher with price anchored to ETH. Because it has price volatility in the same direction as ETH, ZeroLiquid can achieve no liquidation, hedging price volatility risk, and going long on ETH collateral’s interest rate exposure, not considering the risk of underlying LST assets coming from LSD protocols (hacker attacks, large fund penalties, etc.). ZeroLiquid initially intends to collect 8% of the LST yield as protocol revenue, which can be adjusted through governance later on.
The current issues with ZeroLiquid are low LTV, high protocol take, and how ZETH is anchored. Among them, LTV and protocol take can be adjusted through governance. The main problem at the moment focuses on how ZETH can achieve anchoring. In ZeroLiquid’s economic model, the cost of liquidity incentives accounts for 20% of the total token amount (quite low), which requires it to have a good redemption mechanism to maintain the stability of the ZETH/ETH exchange rate.
Presently, ZeroLiquid provides liquidity for secondary market discount arbitrage through the Steamer module. The liquidity of the Steamer module comes from the over-collateralized portion of the user’s collateral and the yield from the collateral. This design greatly affects the LTV of the protocol, and it remains to be seen whether this will be improved in the future.
Tokenomics Model:
The $ZERO token was launched on the Uniswap platform on March 19 with self-raised funds. The total token supply is 30.5 million (initial total of 100 million, 69.42% was later destroyed by a community proposal), of which 6 million were used to provide initial liquidity, 13.7 million belong to the community, 1 million belong to the treasury, and 700,000 belong to core contributors. The current secondary market circulation is 6.9 million, with the remainder to be gradually allocated over 3 months to 3 years. $ZERO enjoys both governance rights and dividend rights, and single token staking can capture protocol revenue.
6. Ion Protocol: 0% loan interest rate, supporting EigenLayer restaking certificates
Product Introduction:
Ion Protocol supports a variety of collaterals, including LSTs, LST LP Positions, Staked LST LP Positions, EigenLayer Validator/LST/LST LP Restaking Positions, and LST Index Products. Simultaneously, Ion Protocol plans to customize its risk model for the inherent risk-return structure of different collaterals. By adjusting the LTV or loan interest rate of different collaterals, it guides users to deposit, maximizes capital efficiency while ensuring the over-collateralization and anchoring of allETH.
Tokenomic Model: Not released yet
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