Ether’s DeFi activity (ETH) has declined in the bear market and the sector faces increased competition from Ethereum’s annual staking reward of 4%, according to analysts at Glassnode. However, a DeFi narrative is being built around the liquid staking-derived (LSD) tokens which could revive activity on the Ethereum network.
According to a recent report From Glassnode, the percentage of gas consumed by DeFi protocols has fallen from 34% in 2020 to 8% or 16% today, with NFTs taking the top share from 25% to 30%.
Glassnode’s supply-weighted price index for DeFi, quoted in USD and ETH, has recorded a 90% loss since the beginning of 2021.
The so-called DeFi “Blue-Chips”, which represent a basket of governance tokens of well-known DeFi protocols 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 $45 billion in May 2021.
DeFi blue chip tokens have underperformed ETH during market rallies and experienced a more severe drop than ETH “to the downside during bears”. Various analysts predict that since ETH staking now yields 4%, it will act as a “new hurdle rate for token returns to jump over.” This yield represents the benchmark rate for investors in Ether.
Currently, major lending protocols such as Aave and Compound offer 2-3% returns on stablecoin and ether lending. Additionally, DeFi protocols like 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 allowed staking contract redemptions.
As of the end of May, Ethereum users had staked 21.63 million ETH worth $40.021 million, representing 18% of the total Ethereum supply.
Liquid staking derivatives platforms like Lido and Rocket Pool account for a third of this massive market. These apps offer a tokenized representation of locked ETH, allowing investors to access staking returns without compromising liquidity.
A growing trend among Ethereum investors is to engage with LSD-fi, or LSD financialization, which aims to put the liquidity offered by LSD tokens at the service of DeFi applications.
Is LSDfi the solution?
Essentially, LSDfi leverages the liquidity of LSD tokens on DeFi-like lending protocols and liquidity on exchanges to earn higher returns. Since a considerable amount of ETH is staked with LSD platforms, LSDfi has the potential to revive DeFi activity.
A Dune analytics dashboard by data analyst Defimochi shows that the total value locked (TVL) in LSDfi protocols has reached $411 million, increasing exponentially since mid-May. Some of the most popular names in the industry are Pendle Finance, Lybra Finance, Curve Finance and Alchemix Protocol.
The liquidity of LSD tokens on Curve Finance, the market’s stablecoin exchange, has exceeded $1.5 billion. Curve has also allowed the minting of its overcollateralized stablecoin crvUSD using the Frax Protocol token sfrxETH as collateral.
Relatively new protocols such as Lybra Finance and Pendle Finance have also become popular, seeking to take advantage of the liquidity provided by LSD tokens.
As has happened before with DeFi, new applications are likely to take advantage of the liquidity of LSD tokens by making it easier for early depositors to extract liquidity from their governance tokens.
While they may bring decent profits for some users, these protocols could carry smart contract risks and the possibility of being victim of a rug pullintroducing the risks that come with the higher gains that LSDfi provides.
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