About LSD and LSDFi

LSD, which stands for Liquid Staking Derivatives, is commonly referred to as LSD. Even after the successful completion of the Shanghai upgrade (Shapella) on Ethereum, LSD has continued to gain popularity since May. The staking services market is also thriving, with the participation of well-known entities such as LidoFinance, Coinbase, Stakefish, Figment, Binance, and more.

LSD Sector Project Distribution (Source: https://pro.nansen.ai/eth2-deposit-contract)

LSDFi is LSD+DeFi, referring to the DeFi protocol created on the basis of liquid staking derivatives (LSD). It provides more profit opportunities through the composability of DeFi protocols, helping maximize capital gains.

LSDFi usually has its own derivative tokens, such as stETH, rETH, wstETH, etc. Holders can freely trade them in the market, providing liquidity and returns for stakers. For example, if you deposit ETH tokens into Lido Finance, Lido will generate stETH as a voucher for you. Then, you can stake 100 stETH in the LSDFi protocol for lending and borrowing, which significantly increases the annualized returns without requiring any further actions from you.

LSDFi utilizes LSD as collateral or assets, offering additional profit opportunities and functions such as lending, trading, stablecoins, and indexes, thereby expanding returns.

About Prisma Finance

Prisma Finance is a new DeFi native protocol designed to unleash the full potential of Ethereum’s liquid staking tokens. Currently, Prisma supports Lido’s wstETH, Rocketpool’s rETH, Coinbase’s cbETH, and FRAX’s sfrxETH. Prisma allows users to use LST as collateral to mint a stablecoin called acUSD.

Usually, when users collateralize their digital assets in a liquidity pool, and mint their collateralized stablecoin acUSD, Prisma allows users to participate in Curve’s liquidity mining using acUSD. Users can earn rewards in tokens such as PRISMA, CRV, and CVX, increasing their overall earnings and helping them achieve higher returns while also enjoying Ethereum staking rewards and other incentive mechanisms. In summary, the emergence of Prisma aims to maximize capital efficiency and returns for users participating in liquidity collateralization.

Team Background

Although the Prisma team has not disclosed it yet, the investment lineup is quite impressive. Prisma has received joint endorsements from the founders of several projects such as Curve Finance, Convex Finance, Swell Network, and CoingeckoFinance. Additionally, prominent project parties like Frax Finance, Conic Finance, Tetranode, OK Venture, Llama Airforce, GBV, Agnostic Fund, Ankr Founders, MCEG, and Eric Chen have also participated in the investment.

Investment and Financing Team (Source: https://prismafinance.com/#the-fam)

Advantages of Prisma Finance

Supports a wide range of LSD collateral

Prisma supports every type of liquidity collateral on the Ethereum network, such as $stETH, $cbETH, $rETH, $frxETH, $bETH, to mint stablecoin $mkUSD with over-collateralization. Loans secured by LST will be automatically repaid under Ethereum staking rewards.

Competitive protocol revenue

The core design of the Prisma protocol is flexibility and adaptability to meet different user needs. Prisma protocol fees are divided into two types: fixed fees (minting and redemption fees) and borrowing interest rates. These fees aim to maintain protocol stability and liquidity while providing incentives for user participation. Both fixed fees and continuous interest rates can be adjusted through Prisma protocol governance. This means that the Prisma community can vote on fee parameters for each collateral type, enabling the protocol to adapt to changing market conditions and ensure competitive rates for its users.

$vePrisma has real demand

One key difference between Prisma and other LSDFi projects is that all decisions require voting. By locking $PRISMA, users can obtain $vePrisma, which allows holders of $vePrisma in the Prisma DAO to vote on parameters, protocol fees, and the amount of $PRISMA reward emission for each collateral type in each liquidity pool for the next week. These reward amounts directly affect the pool’s annual percentage yield and miners’ choices.

Prisma was officially deployed on the Ethereum network in September 2023, and the current locked value of Prisma is around $410 million.

Prisma Data (Source: https://defillama.com/protocol/prisma-finance)

Stablecoin Mechanism

In the world of blockchain, tokens are decentralized, and the instability of their value prevents them from fulfilling their monetary function. This is where stablecoins come in. Stablecoins can be understood as tokens that are pegged to fiat currencies, mainstream digital currencies, or commodities, and their relative stability is achieved through third-party active control of the currency supply chain.

Prisma allows users to stake their encrypted assets to mint their collateralized stablecoin, acUSD, providing capital efficiency for holders of liquidated ETH. With the help of ETH staking rewards, the LST-backed loans will eventually be recovered. The use of a stable fund pool as a security measure ensures that acUSD and Prisma have sufficient repayment capabilities. Additionally, users can participate in Curve’s liquidity mining using acUSD and receive token rewards such as PRISMA, CRV, and CVX.

The Prisma stable pool serves as the primary source of liquidity for repaying and liquidating position debts. When the position collateralization ratio falls below 110%, liquidation occurs to ensure continuous support for acUSD supply. During the liquidation process, the corresponding remaining debt acUSD will be destroyed from the stable pool balance, and all collateral assets exchanged for the liquidated position will be transferred to the stable pool, where stablecoin providers will be paid using these transferred collateral assets.

LSDFi Project Comparison

Lybra Finance

Lybra, as one of the most well-known projects in the LSDFi track, is an over-collateralized lending protocol that allows users to deposit ETH or stETH and stake them to the LDO platform. The system automatically converts ETH to stETH and generates algorithmic stablecoin eUSD, providing users with an annualized interest rate of 8% on eUSD.

The growth of TVL brought by the stable 8% interest on eUSD is gradually slowing down, and the over-collateralization model also limits the capital efficiency of eUSD, resulting in ongoing liquidation risks. Only users holding eUSD can enjoy the rewards for staking ETH, and eUSD can be purchased directly on the market. In the future, eUSD may experience a premium, affecting its stability as an anchor.

Lybra TVL (Source: https://defillama.com/protocol/lybra-finance)

Raft

Raft and Lybra Finance are very similar; they are both decentralized stablecoin protocols. Users can deposit stETH or wstETH into Raft to generate their stablecoin, R. The value of R is pegged to 1 US dollar, and users holding R can earn an annual interest rate of 4.5%. Additionally, Raft allows users to use leverage to go long on stETH.

There is nothing innovative about Raft’s stablecoin, $R. Furthermore, $R uses a Collateralized Debt Position (CDP) model, which limits the scale of the stablecoin and exposes it to over-collateralization and liquidation risks, similar to Lybra. For ordinary users, it is not the best choice.

Raft TVL Data (Source: https://defillama.com/protocol/raft)

Gravita

Gravita is an interest-free lending protocol where users can use LST as collateral for staking and receive rETH, wstETH, and other LST tokens. By depositing in Gravita, users can earn stablecoin GRAI as returns. Additionally, users can borrow stablecoin GRAI through Gravita and deposit it into the stablecoin pool to enjoy discounted purchases of liquidated LST collateral.

$GRAI, like $R, does not bring any innovation. However, Gravita supports $bLUSD as collateral, which has no liquidation risk and does not deduct any fees from the collateral earnings.

Gravita TVL (Source: https://defillama.com/protocol/gravita-protocol)

Prisma Finance Tokenomics

The token name of Prisma is $PRISMA. The token utilizes the veToken model and controls various aspects of the protocol, including the stable pool, parameters for new collateral, protocol fees, reward distribution, etc. vePrisma holders can also vote to determine the number of rewards for PRISMA, thereby incentivizing corresponding liquidity providers.

Token Allocation

• Community Rewards: 62%
• Core Team: 20% (12-month linear unlocking)
• Early Supporters: 10% (12-month linear unlocking)
• DAO Treasury: 5%
• Airdrop (ve PRISMA holders and Point holders): 3%

PRISMA Token Allocation (Source: https://mirror.xyz/prismafinance.eth)

Token Operating Mechanism

Users need to lock PRISMA tokens to participate in Prisma governance. Once locked, the tokens grant users “locking weight” to determine their voting power. Prisma implements a flywheel effect through the veToken model, where $PRISMA tokens can be locked for a maximum period of 52 weeks and users can choose to repeat the locking process. As the unlocking period approaches, the user’s voting weight linearly decreases. Repeated locking ensures that the voting value in the user’s possession is maximized.

Source: https://docs.prismafinance.com/governance/prisma-locking-and-lock-weight

Incentive Distribution

The weekly emission results are allocated according to the voting results. The total amount released each week follows a set schedule:

The first four weeks are the “high emission period.” During this period, a maximum of 9 million PRISMA tokens (3% of the total supply) are released linearly. All PRISMA tokens obtained during this period will be locked for 26 weeks after redemption, with the aim of rewarding early users and encouraging healthy participation in the protocol’s governance through voting weight.

After the high emission period ends, the weekly emission amount is calculated based on the percentage of the remaining unallocated PRISMA supply. The weekly release percentages are as follows:

Source: https://docs.prismafinance.com/governance/the-prisma-token

Acquiring PRISMA Token

To obtain PRISMA tokens, you can purchase them through a cryptocurrency exchange. A reputable exchange that supports the purchase of PRISMA is Gate.io. To do so, you simply need to create a Gate.io account and complete the KYC process. After depositing funds into your account, you will be able to directly purchase PRISMA tokens.

Development

Prisma, in addition to receiving endorsements from well-known institutions such as Curve, Convex, LIamaNodes, and LayerZero, also has deep collaborations with OK Venture and Huobi Venture, as evident from their interactions on X (formerly Twitter.) With backgrounds in Frax, Curve, and Convex, it is likely that Prisma will actively participate in the Frax and Curve ecosystems.

Conclusion

In the DeFi market, security is of greater concern to people than constant innovation. The Prisma codebase is completely immutable. We can see that Lybra, Prisma, and Raft all use the same set of contracts based on Liquidity. They all aim to convert collateral from ETH to stETH, rETH, or LSD. Prisma’s flexible collateral parameters are perfect for those who want to make full use of LST without bearing the tail risk of other stablecoins.

Although LSDFi’s TVL is rising rapidly, it is still in the early stages. Compared to the volume of LSD, there is still a lot of market space. The market demand for LSD is increasing day by day, and we believe that LSDFi will also experience significant growth and acceleration in the same race.