LSD — Tokenomics and Valuation Comparison
What is LSD?
LSD (Liquid Staking Derivatives) is a protocol for liquidity staking derivatives that has emerged along with the ETH merge in the DeFi derivatives arena. It allows ordinary users to participate in staking without the need to maintain staking infrastructure and receive rewards, while also releasing the liquidity of underlying assets during the staking period.
According to DefiLlama, the leading LSD protocols include Lido, Rocket Pool, and Frax, and this article only discusses protocols with governance tokens, excluding Coinbase.
Lido Finance
● Lido is the largest provider of $ETH liquidity staking and was launched in October 2020. It currently occupies over 70% of the staking market share and 30% of the ETH staking volume, making it the industry leader in the LSD.
● Lido is set up as a decentralized autonomous organization (DAO), and LDO is the “membership card” of the DAO, with governance rights.
● Lido has 29 professional node operators who manage the ETH committed to them. Lido’s business model is to take a 10% cut from staking rewards as protocol revenue, with 5% going to staking node operators and the other 5% going to the Lido Treasury, which is governed by $LDO.
Rocket Pool
● Rocket Pool was launched in November 2021 and currently holds over 5.83% of the staking market share and 2.42% of the ETH staking volume, making it the second-largest LSD solution.
● Rocket Pool is positioned as a mass-market LSD solution, with users being able to set up nodes on servers with 16 ETH, and the other half will be “crowded” from non-node operating users. When a node is slashed, the ETH of the node operator will be deducted first, and RPL will be sold to exchange for ETH to replenish the node operator’s ETH.
● Rocket Pool has over 2,000 node operators, and rETH depositors are paired with independent node operators to prioritize decentralization. Compared with Lido,Rocket Pool has no advantages in terms of returns and liquidity, but has a higher degree of decentralization.
● Rocket Pool’s staking volume has reached 407,000 ETH, and node operators receive a commission of 15%, but Rocket Pool does not receive this income. Instead, RPL tokens are tied to the protocol to gain inflationary revenue.
Frax Finance
● Frax Finance was launched in 2020, consisting of two stablecoins Frax pegged to the USD and FPI pegged to the inflation index), an AMM (Fraxswap), and a lending tool (Fraxlend).
● Frax launched its Ethereum liquidity staking product frxETH on October 21, 2022, which grew from 0 to over 100,000 pieces in a short period of time. It currently holds over 1.43% of the staking market share and 0.49% of the ETH staking volume, making it the fourth-largest LSD solution for ETH.
● Frax Finance’s frxETH protocol takes a 10% cut, with no fees being paid to node operators (with slightly higher centralization). 8% is given to $FXS holders, and 2% is given to the DAO Treasury.
● Frax’s rapid success on LSD is due in part to its series of DeFi products and its advantage in the Curve War.
Source: Dune
Which projects has the highest staking reward?
Lido Finance
stETH
● stETH represents the ETH deposited in Lido, combining the value of initial deposit and staking rewards minus the potential validator penalties.
● As an interest-bearing asset of ETH, holding stETH allows one to receive daily staking rewards on the ETH 2.0 beacon chain without locking up ETH or maintaining staking infrastructure.
● The rebases mechanism causes the stETH balance to change daily.
wstETH
● the second interest-bearing asset of ETH, wstETH is a packaged version of stETH.
● Since some DeFi projects. such as Maker annd Uni do not support rebasing token — stETH, stETH holders are unable to receive staking rewards in such projects.
● wstETH balance is constant. The exchange rate of wstETH/ETH will rise steadily since the underlying share system reflected the staking rewards obtained.
Rewards:
A. The discount of stETH
stETH can be withdrawn after the ETH Shanghai upgrade, so the expected value of stETH is pegged to ETH. However, as the market fluctuates and with news of delays in the ETH Shanghai upgrade, one-sided selling can cause stETH prices depeged. In June 2022, stETH’s worst depeg was over 6.5% compared to ETH, butcurrently only 0.16% discount. Whenever stETH’s depeg occurs, it presents a good arbitrage opportunity. stETH with discount can be obtained through lido.fi or 1inch.io.
B. Lido ETH staking reward is currently 5.2%
stETH is a rebasing Token, which has added staking reward automatically to stETH balance on daily basis
C. Using stETH to get additional reward on other Defi project
● AMM-type protocol that can be used to earn extra income from stETH: When stETH is deposited into the Curve ETH / stETH pool, steCRV tokens are obtained, which can be deposited into Convex’s stETH pool to harvest rewards.
● Curve Gauge APY 5.47% = Base APY of 2.86% (including transaction fees and ETH staking reward) + CRV 0.00066% + LDO 2.605%
● Convex is a yield aggregator that boosts rewards for CRV stakers and liquidity providers Convex stETH Pool APY 5.54% = a base Curve APY of 2.86% + CRV 0.0012% +CVX 0.00018% + LDO 2.67%
● Lending protocol that can be used to earn extra income from stETH:
● The stETH leveraged liquid staking strategy based on Aave with 8%+ APY
● Operating procedures:
● Deposits stETH as collateral on Aave;
● Recursively borrows ETH through Aave
● Swaps for more stETH
● Example:
● Assuming deposit 100 ETH, stETH/ETH = 0.9984, 100 ETH for 100.16 stETH
● 100.16stETH deposited into AAVE, the LTV of Aave stETH is 72%
● Lend 72.115 ETH from AAVE
● By following the above process four times, you will finally have:
● Assets: 261.5822 stETH ; Liabilities: 161.4230769ETH; Leverage Ratio= 2.6
● Rewards are calculated as follows:
● stETH Staking APR = 5.2%, ETH borrowing ARP = 3.22%
● The total APR = (stETH Staking APR - Borrow APR)/ principal = (261.58225.2% stETH- 161.42307693.22% ETH) / 100 ETH = 8.4%
● Risk for leveraged liquid staking strategy:
● Large gas cost for repeated operations, better use this strategy on L2.
● The liquidation therahold on Aavefor stETH is 83%, should be monitorec the leverage ratio to avoid liquidation.
● If the exchange rate of stETH to ETH drops significantly, there has the liquidation risk.
● The variable ETH borrow APR for Aave. During Ethereum merge, the variable ETH borrow APR rose to 43.23%. when stETH Staking APR less than Borrow ETH APR, leveraged liquid staking strategy will generate losses.
D. Using wstETH to get additional reward on other Defi project
● Lending protocol that can be used to earn extra income from wstETH:
● The wstETH leveraged liquid staking strategy based on Makerdao
● Operating procedures:
● Deposits wstETH as collateral on Makerdao;
● Recursively borrows DAI through Makerdao
● Swaps for more wstETH
● Currently 67.8% of wstETH is staked in Makerdao
Up to 2.66x wstETH exposure on MakerDao by the leveraged liquid staking strategy
Rocket Pool
● When ETH is deposited into Rocket Pool, rETH is received.
● Similar to wstETH, rETH balance is constant. The rETH/ETH exchange rate steadily increases since ETH staking rewards naturally accumulate in the value of the token. When the staking period ends, the value of rETH will exceed the amount of ETH paid.
Rewards：
A. Node operators: Stake at least 16 ETH + Run Node
Earn ETH staking rewards, RPL rewards and 15% commission from running node. Total APR up to 15%.
B. Non-node operating users:
Staking ETH for rETH, with a staking reward of 4.55% APR.
C. The arbitrage between rETH market value and fair value
The Fair Value of rETH represents the accumulated value of ETH staking reward. However, the market price of rETH is fluctuated due to market supply and demand, resulting in a premium or discount.
● market premium means the given price is higher than the redeemable rETH exchange rate
● market discount means that the price given is lower than the redeemable rETH exchange rate
At present, the exchange rate of 1 rETH Market Value is 1.07456 ETH, while the exchange rate of 1 rETH Fair Value is 1.05965 ETH. there is 1.41% Premium. While the rETH Market Price has a large discount (as below pic shown in September 2022), its a good arbitrage opportunity to buy discounted rETH. After ETH Shanghai upgrades, the premium or discount of rETH will disappear.
D. Using rETH to get additional reward on other Defi project
● AMM-type protocol that can be used to earn extra income from rETH: When rETH is deposited into the Curve ETH / rETH pool, rethCRV token are obtained, which can be deposited into Convex’s rETH pool to harvest rewards.
● Curve Gauge APY 2.45% = Base APY of 2.29% (including transaction fees and ETH staking reward) + CRV 0.16%
● Convex rETH Pool APY 2.67% = Base Curve APY 2.29% + CRV 0.33% + CVX 0.047%
● Lending protocol that can be used to earn extra income from rETH:
● The leveraged liquid staking strategy based on MakerDAO or Aave V3 with 5%+ APY
● Operating procedures:
● Deposits rETH as collateral on MakerDAO;
● Recursively borrows Dai through MakerDAO
● Swaps for more rETH
● Up to 2.42x rETH exposure on MakerDao
Frax Finance
According to the Frax Finance Dashboard, it can be seen from sfrxETH and frxETH/ETH that about half of users choose to become Curve frxETH LP, and the other half choose to stake frxETH to sfrxETH. Users who do not stake frxETH to sfrxETH means their part of ETH staking rewards shall transfer to sfrxETH holder, so the APR of sfrxETH can be kept at a relatively high level. Users can either use frxETH to pursue rewards in DeFi, or stake into sfrxETH to obtain ETH staking rewards.
frxETH
● When ETH is deposited into Frax, frxETH(1:1 pegged to ETH) is received.
● frxETH can not generate any ETH staking rewards.
● frxETH can be use to get additional reward on other Defi project
sfrxETH
● the interest-bearing asset of ETH, sfrxETH collected all ETH staking rewards which also includes the ETH staking rewards for frxETH holder.
● If users want to obtain the ETH staking reward, users need to deposit frxETH into the staking vault to become sfrxETH.
● The frxETH/sfrxETH exchange rate increases over time as all ETH staking rewards added to the sfrxETH staking vault.
● sfrxETH has not yet been developed into other DeFi-related usage scenarios.
Rewards：
A. sfrxETH staking reward is currently 8.63%
sfrxETH SUPPLY 51,447.92 frxETH : sfrxETH = 1 : 0.9765
B. Using frxETH to get additional reward on other Defi project
● AMM-type protocol that can be used to earn extra income from frxETH: When frxETH is deposited into the Curve ETH/frxETH pool, frxethCRV token are obtained, which can be deposited into Convex’s frxETH pool to harvest rewards.
● Convex APY 7.34% = Base Curve APY 0.084% + CRV 3.74% + CVX 0.56% + FXS 2.95%
Frax Finance holds the most Convex governance token CVX (20.5%), and Convex controls more than half of Curve’s voting rights (veCRV). Frax uses the huge influence to affect Curve’s reward emission, thereby creating higher returns on Curve frxETH/ETH.
Through its influence on Curve, Frax Finance has found a differentiated competitive advantage for frxETH that is different from similar products such as stETH — a higher-yielding option under the arbitrage balance between frxETH and sfrxETH.
Summarize
This article uses three LSD projects to analyze the opportunities to maximize the ETH staking rewards, which can also help users obtain additional DeFi benefits.
● Lido is the leading project in the LSD. stETH has the deepest liquidity in the Curve ETH/stETH pool—currently about 1.6 billion US dollars, which is very friendly to Whale users. stETH can be used, traded and staked in various DeFi integrations to further strengthen the Lido ecosystem.
● Rocket Pool is more suitable for people with cheap node server resources. Node operators on Rocket Pool can enjoy the highest rewards. For non-node operation users, the ETH staking reward has no advantage compared to Lido and Frax. Currently, rETH is not widely used in DeFi integration.
● Frax Finance benefits from the ingeniously designed dual-token model, leading the highest ETH staking reward. Then, using their influence on Curve to control the reward emission, making frxETH a considerable rate of return
● Investors can compare the advantages and disadvantages of each projects based on this article: rate of return, operator commission, discount rate of pegged assets, liquidity, degree of decentralization, and protocol risk to find a best solution that works for you.
