Ether ETH DeFi activity has slowed in the bear market and the sector faces increased competition from Ethereum’s 4% annual staking reward, according to Glassnode analysts. However, a DeFi narrative is building around liquid staking derivative (LSD) tokens that could revive Ethereum network activity.
According to a recent Glassnode report, the percentage of gas consumed by DeFi protocols has fallen from 34% in 2020 to 8% to 16% today, with NFTs hogging the top 25% to 30% share; this is shown in a graphic published by glassnode. Glassnode’s bid-weighted price index for DeFi, priced in USD and ETH, recorded a 90% loss since early 2021.
DeFi’s Blue-Chips
DeFi’s so-called “Blue-Chips”, representing a basket of well-known DeFi protocol governance tokens such as Uniswap UNI, MakerDAO MKR, Aave AAVE, Compound COMP, Balancer (BAL) and SushiSwap SUSHI, have lost 88% of their market capitalization since the all-time highs of USD 45 billion in May 2021.
DeFi blue chip tokens have underperformed ETH during bullish market rallies and have experienced a more severe drop than ETH “on the downside during bearish ones.” Various analysts predict that since ETH staking now yields 4%, it will act as a “new hurdle rate over which token yields should jump.” This yield represents the benchmark rate for Ether investors.
Currently, major lending protocols such as Aave and Compound offer between 2 and 3% yields on stablecoins and ether lending. In addition, DeFi protocols such as Aave and Compound also carry smart contract risk that is eliminated with proof-of-stake (PoS) validators.
Staking has become popular among Ethereum investors, especially after the Shapella update in April 2023, which enabled staking contract refunds.
By the end of May, Ethereum users had staked 21.63 million ETH worth USD 40.021 million, representing 18% of Ethereum’s total supply.
Liquid staking derivative platforms such as Lido and Rocket Pool account for one-third of this massive market. These applications offer tokenized representation of locked-in ETH, allowing investors to access staking returns without compromising liquidity.
A growing trend among Ethereum investors is to interact with LSD-fi or LSD financialization, which aims to put the liquidity offered by LSD tokens at the service of DeFi applications.
Is LSD-fi the Solution?
Essentially, LSDfi leverages the liquidity of LSD tokens in DeFi-like lending protocols and liquidity on exchanges for higher returns. Given that a considerable amount of ETH is staked with LSD platforms, LSDfi has the potential to revive DeFi activity.
A Dune analytics dashboard produced by data analyst Defimochi shows that the total value locked (TVL) in LSDfi protocols has reached USD 411 million, increasing exponentially since mid-May. Some of the most popular names in the sector include Pendle Finance, Lybra Finance, Curve Finance and Alchemix Protocol.
Liquidity of LSD tokens on Curve Finance, the market’s stablecoin exchange, has exceeded USD 1.5 billion. Curve has also enabled the minting of its overcollateralized stablecoin crvUSD using Frax Protocol’s sfrxETH token as collateral.
Relatively new protocols such as Lybra Finance and Pendle Finance, which seek to leverage the liquidity provided by LSD tokens, have also become popular.
As has happened before with DeFi, new applications are likely to leverage the liquidity of LSD tokens by facilitating the extraction of liquidity from their governance tokens for early depositors.
While they may bring decent returns for some users, these protocols could carry smart contract risks and the possibility of falling victim to a rug pull, introducing the risks that come with the higher returns provided by LSDfi.
By Marina Meza
