Bottom Shelf LSD: Your Ticket to Financial prosperity [LSDeFi #1]
What if I told you they will sell you ETH at a 20%+ discount just because they were overleveraged and have no patience.
LSDeFi, or Liquid Staking DeFi, is a term I’ve coined to describe the flavor of DeFi that’s backstopped by Liquid Staking Derivatives (LSD). LSDeFi is Ethereum’s Golden Path and the catalyst for a DeFi renaissance that will dwarf DeFi summer many times over.
There are a number of ways for long-term Ethereum bulls to stack more vitaliks by taking advantage of Liquid Staking Derivatives. This first article will outline LSD, different options on the market, and the best arbitrage opportunities for those willing to scavenge for bottom of the barrel derivatives.
LSDs can additionally be utilized like naked ETH in various DeFi protocols to earn additional yield. All-in-all, the longterm ETH bull can earn dummy high APY to compound more ETH as an LSD enjoooooyer.
This is the tip of the #LSDeFi iceberg, and following articles will explain why LSDeFi will push us towards the DeFi Supercycle Squared. But let’s not get ahead of ourselves. First thing's first:
Understanding Ethereum Staking
With Ethereum successfully merged to Proof-of-Stake, entities responsible for validating transaction and broadcasting blocks are validator nodes. Each validator is backed by 32 staked ETH and earns APY from ETH issuance + transaction tips from blocks validated (from transaction fees).
Today, an ETH validator is taking home 6% total APY, though that rate could increase dramatically with higher activity on Ethereum: if we went back to all-time high gas rates of DeFi Summer, the total APY could be 30%+. Don’t expect 300+ gwei ever again, but a heightened state of activity could take validators into the high teens, per some predictions.
Either way — post your ETH, get more ETH. Pretty cool to earn good yield on an asset you are bullish on and one with low issuance; ETH inflation is now just 0.18% (and could go negative).
But there’s a catch. Your staked ETH is locked, and your rewards are, too. In the future, there will be an opportunity for validators to unstake their ETH and claim their staking rewards per some global queue. Until then, you are trapped in your position, even if you took out undercollateralized loans and aped into an algorithmic stablecoin that went to zero and you need to pay back your lenders ASAP.
WTF is LSD?
Surely, the big brains of Ethereum land can get around this. This, precisely, is LSD. Liquid Staking Derivatives are tokenized receipts of ETH staked by the issuer. You can contribute any amount of ETH to the staking service and receive an LSD 1:1. The LSD tracks the value of the corresponding ETH + yield earned. Once unstaking is enabled, users will be able to redeem the LSD with the corresponding ETH.
You trade your Ethereum for a tokenized receipt of staked ETH, keep the yield without doing any of the validator setup/upkeep, and maintain a liquid ERC-20 token that may be supported in other protocols, giving users additional leverage to trade ponzis or yield farm further. There is some joke here comparing LSD with LSD; I’ll leave that to you to make up for yourself.
LSD ETH Multiplier
LSD offers methods to multiply your ETH at the cost of your patience. For the long-term minded ETH permabull, this is the exact scenario that best satisfies.
LSD can be differentiated as top shelf and bottom shelf. Top shelf LSD trades more-or-less faithfully at 1:1. Bottom shelf LSD offers (steep) discounts. Each group has their tradeoffs. Below explains the best way to multiply your ETH with top shelf and bottom shelf LSD, respectively.
Top Shelf Strategy: LSDeFi Yield Farming
Top shelf LSD is already integrated into the DeFi space as a whole. There are a ton of ways to earn high APY in the space, even in these suppressed bear market conditions. I outline some strategies in greater depth through a lot of my content.
If you aren’t intimately familiar with DeFi yield farming, start there or skip to the next section.
Grab your top shelf LSD of choice and find a good way to take out a loan on Aave, Maker, or Euler. You can leverage up if you are adventurous or stick to kosher yield farming. The article linked just above explains a lot of this in further detail.
Even adhering to low-risk strategies, it’s easy enough to boost that 5-6% LSD APY up closer to 8-12%, a respectful rate of return for an asset with roughly 0% inflation. The goal is to get as much ETH as possible, and this is a good way to get there.
If you want to get staking-yield-and-then-some but don’t have a clue on how, our Lido stETH Vesper pool automates the “then-some” on your behalf.
The landscape of Top-Shelf LSD (categorized as trading within 2% of 1:1) is as follows:
$stETH (Lido): Lido’s stETH is the premier LSD and most intimately integrated into DeFi. There are ample opportunities to utilize stETH in the landscape at large, including Aave, Maker, Curve/Convex, and Euler.
Non-custodial
DAO Governed
Rebasing Token
Alternative wrapped, rise-only token
$rETH (Rocket Pool): Rocket Pool is the closest competitor and closest in makeup to Lido. There has been an uptick in stETH adoption due to very large subsidization via LDO token emissions. Rocket Pool is much more conservative with RPL rewards, but nonetheless, it’s a strong LSD option with several DeFi integrations across Maker, Balancer, and Aura.
Non-custodial
DAO Governed
Rebasing Token
$sETH (Stakewise): Stakewise is the largest tokenized, custodial LSD. It’s not as intimately integrated into DeFi as the two listed above, but they do offer strong APY incentives through their SWISE token for providing open market liquidity. The Stakewise LSD architecture is different from the others, the principle sETH token accrues staking rewards in a separate rETH token.
Custodial/Non-custodial (two options)
DAO-ish Governed
Principle/Reward Token
$bETH (Binance): Binance tokenizes their own ETH staking buildout under their bETH token. It trades close-to 1:1 with ETH. There are several yield opportunities for bETH on BNB Chain.
Custodial
Centralized
Rebasing Token
Bottom Shelf Strategy: Bargain Bin LSD
Not all LSD is created equal, and many of the lesser known alternatives to the ones above lack the resources or strategy to faithfully maintain their peg. Mostly, the higher discounted LSD lacks deep liquidity and first-party incentives to encourage market participants to stick with their brand.
Now, some people will gamble with bottom shelf stuff, others won’t. But if the gamble pays off, you can earn very big returns just by experiencing it.
The idea is as follows: All LSD will ultimately trade 1:1 if it works as intended (or maybe higher, but that’s a discussion for a separate time). Once there is widespread confidence that unlocks will happen, each LSD is worth the underlying ETH. This confidence, optimistically, could settle in within the next 6-12 months.
Assuming you can buy LSD at a discount today and exchange it back 1:1 in six months, your effective APY goes brazy. The most difficult part is these high discount offerings don’t generally have a ton of liquidity, so you may have to average in several ETH at a time.
By the numbers:
25% discount on entry
Exit at parity
6% APY along the way
6 months to execution
You wind up with an ROI of 28-29%. 25 ETH today wins you a full node (32 ETH) tomorrow. Pretty sweet. Even with a lower average discount (perhaps taking a market basket of a few bottom shelf LSD) you can maintain a strategy that targets the elusive 40% APY on the asset you already want to accumulate more of.
Bottom Shelf LSD is as follows:
$cbETH (Coinbase): Coinbase is the newest LSD provider on the block, and with time, they should graduate to Top Shelf. For now, it’s a fairly safe entry to LSD that maintains a bit of an edgy discount. No DeFi integrations to speak of, but that will likely come with time.
4-5% Discount
Custodial
Centralized
Interest-bearing Token (redemption rate increases over time)
$ankrETH (Ankr): Ankr offers a number of <Crypto Operation>-as-a-Service, and staking is a big one. Ankr offers LSD on ETH plus a number of other PoS network currencies. They have decent liquidity on Curve and some small incentives to protect the peg. DeFi integrations may come in time, but they are a ways off as an eligible candidate.
8-12% Discount
Custodial
Centralized
Rebasing Token/IB Token (both options supported)
$rETH (Stafi): Stafi is a Nodes-as-a-Service network that offers ETH staking alongside many other nodes/validator services. It is non-custodial and decentralized, like Lido and Rocketpool, but a smaller ecosystem overall. There is some liquidity on Curve, not a ton.
15-20% Discount
Non-custodial
DAO Governed
IB Token
$vETH (Bitfrost): Bitfrost is designed similarly to Lido and Rocketpool, offering LSD on ETH and several other networks. Bitfrost is a large player in the Polkadot ecosystem, with vETH playing a secondary role in the ecosystem. There is little liquidity on Uniswap.
20-25% Discount
Non-custodial
DAO Governed
Rebasing Token
There are several other LSD out there or to-be released. $gETH (Guarda) comes from a small centralized service, but there isn’t enough open market liquidity to open a meaningful position. Index Coop is proposing an interesting LSD market basket. The to-be-released FraxETH is interesting as well.
With that, go acquire some LSD!