The LSDFi craze is heating up, five strategies to boost excess returns

LSDFi, as a DeFi product based on the liquid staking derivative (LSD), transforms staked ETH into tradable assets through LSD, unlocking liquidity and lowering the staking threshold. Users can stake any amount of ETH to receive LSD and also leverage LSD to obtain multiple yields.

LSDFi is backed by DeFi composability, where new projects attract users to stake ETH/LSD through token incentives, competing for market share and control of LSD. Some projects leverage dynamic incentive mechanisms to encourage users to choose smaller decentralized staking platforms, thereby enhancing the degree of decentralization among validators.

The following are the five main strategies of LSDFi:

1. Liquidity Provision ( LP )

The LSD-ETH liquidity pool allows users to earn staking rewards and LP fees. After the Shanghai upgrade, the LP scale may actually increase. Currently, the base yield is less than 5%, mainly relying on token subsidies to increase APY.

2. Circular Lending

By using platforms like AAVE for circular borrowing of LSD and ETH, yields of over 10% can be achieved. However, the liquidation risk is relatively high, and the returns depend on the number of cycles. Automated circular borrowing products are expected to emerge in the future.

3. Yield Aggregation

If Yearn Finance invests LSD assets into liquidity pools on platforms like Curve, aggregates yields from multiple platforms, and provides subsidies, it can increase the APY to around 5-6%.

4. EigenLayer

Support for LSD and LSD-LP staking, allowing staked assets to be staked again. For example, stETH or stETH-ETH LP can be staked to EigenLayer for additional yields.

5. Incentive Projects

Improve capital efficiency through leverage, structured strategies, options, etc., or attract savings with high APY. For example, Pendle offers ETH discount purchases and high APY liquidity pools; unshETH incentivizes small LSD platforms through dynamic allocation; LSDx Finance establishes a unified liquidity pool ETHx; Stader is about to launch ETHx in collaboration with more than 30 DeFi protocols.

Overall, the LSDFi project is vying for market share and influence in the LSD space. High-yield strategies may become the norm, but they also pose sustainability challenges. In the future, there could be multi-tiered yield products ranging from 4% to 500%+. This battle for LSD is expected to continue until the Ethereum staking rate stabilizes above 25%.