Half a year has passed since the Shanghai upgrade, and the LSD War continues to heat up. Due to its huge market value of hundreds of billions, LSD has always been a fiercely competitive field. In the past, old players such as Lido and Rocket Pool were constantly at odds with each other. Later, new players such as Puffer and Stader joined the table. So what are the new trends and new ways to play in the field of LSD? Where is the LSD circuit headed? What kind of projects will gain greater advantages in competition? What’s the endgame for the LSD circuit?

Decentralization: a banner of political correctness

In July this year, LIdo launched a bombardment against Rocket Pool, pointing out that its contract has sudo permissions and the team can make arbitrary modifications to key parameters, accusing Rokect Pool of not being decentralized enough. Then in August, Rocket Pool teamed up with StakeWise and other five Ethereum LSD protocols to launch an initiative in the name of maintaining the decentralization of Ethereum. The pledge share of each LSD protocol was limited to less than 22%. The spearhead of this initiative was directly Refers to Lido, the industry leader, because only Lido’s pledge share exceeds 22%.

Lido has not officially responded to this, but its community supporters countered: Lido cannot be regarded as a single entity, but rather a coordination layer.

Decentralization has always been one of the main narrative points of all DeFi protocols, including the LSD protocol. In the field of encryption, “decentralization” is a banner of political correctness. Whoever can prove that he is more decentralized than his opponents can be more confident than his opponents. This “ethos” has indeed promoted the protocol’s efforts in decentralization.

In fact, Rocket Pool is the first protocol to implement a permissionless mechanism at the node level, and Lido has implemented a Staking Router mechanism and a two-tier voting system in its V2 version. Both have made certain achievements in decentralization and are still working hard.

The decentralization of the LSD protocol consists of four levels

1. One is decentralization at the level of the node itself, pointing to technologies such as DVT/SSV, ​​which allow multiple people to control a node;
2. The second is the decentralization of the protocol selection node level. Does the protocol allow free access to nodes? How many nodes can be covered? What is their geographical distribution?
3. The third is the decentralization of the protocol governance level. Who has the final say on the protocol, who decides on changes and upgrades to the protocol, and who decides how to select nodes? Do protocol developers have super permissions?
4. The fourth is the diversification of the LSD protocol. For a public chain, it is indeed not a good thing if most Tokens are pledged in one protocol. Lido really cannot be understood as a simple coordination layer.

In the struggle between Lido and Rocket Pool, the author does not take any side. He just feels that this kind of competition and mutual “supervision” actually promotes everyone to develop in the direction of decentralization. Decentralization at four levels is beneficial.

DeFi Enhancement: The goal is to maximize yield

The basic rate of return carried by LSD assets depends on the staking rewards defined at the bottom of the blockchain and the distribution method defined by the LSD protocol (the distribution ratio between validators, protocols, and users). At this point, most LSD protocols are close, and some will subsidize in various ways (such as Frax Finance) to increase the base rate of return, but it is certainly not sustainable. From a user’s perspective, what is more important than the basic rate of return is the “overlay rate of return”. The so-called superimposed rate of return refers to the greater rate of return that can be obtained through certain DeFi combination strategies while controlling risks.

The most adopted strategy currently is circular staking through lending protocols. For example, you can pledge ETH in Lido to obtain stETH, mortgage stETH to Aave or Compound to lend ETH, and then return to Lido to pledge. This operation can be cycled many times until the lending rate is equal to the LSD rate of return. Through cyclic pledge, the superimposed rate of return can far exceed the basic rate of return. In essence, this is a kind of interest rate arbitrage behavior, and it is also a Leveraging behavior. The risk of this operation is that as the number of cycles increases, the liquidation risk will be amplified.

Some protocols provide holders of LSD assets with revenue maximization strategy management tools (even the Leverage Rate of circular pledges, that is, the number of cycles, can be managed). LSD holders don’t have to manually cycle through staking, but can do it with one click through these protocols. The more representative ones are DeFiSaver, Cian, and Flashstake. They all provide diversified DeFi enhancement strategies for LSD, and also provide Leverage Rate management tools.

In addition to recurring lending, users can also use LSD assets for other interest-earning activities. For example, put it in DEX to provide liquidity, or put it in Index-type protocols or income aggregation-type protocols to earn interest. Here you can refer to this article “ LSD hides “sevenfold benefits”, the end of APR-War is TVL 10X growth “

These protocols with LSD as the underlying asset are sometimes called LSDFi protocols. In the future, the LSDFi protocol and the LSD protocol will be integrated and intertwined with each other. Some LSD protocols will launch their own LSDFi, or integrate other LSDFi protocols to provide users with combined income strategies in their own interfaces. In turn, the LSDFi protocol will also integrate the LSD protocol, allowing users to use basic assets such as ETH to execute income strategies with one click.

For the LSD protocol, the LSD War should not be regarded as an APR War at the basic rate of return level, but should try to promote its LSD assets to be listed in more LSDFi protocols so that it can be combined into a better overlay. yield to meet the needs of Yield Maximers.

Multi-chain: from multi-chain deployment to full-chain architecture

When we discuss LSD, in many cases we default to ETH LSD, because Ethereum has a huge market value, and the PoS transformation of Ethereum has contributed to the explosion of LSD, but in fact LSD is an old track. LSD has long been available on public chains that adopted PoS consensus, but at that time it was still called “Staking derivatives.”

In fact, the earlier LSD protocols all support more than one chain. Even the later LSD protocols are constantly expanding to multiple chains to expand their territory.

Lido now supports Solona and Polygon in addition to Ethereum. Users can use Lido to cast stSOL on Solana or cast stMatic on Polygon; Stader supports 7 chains, including: Ethereum, Polygon, Hedera, BNB Chain, Fantom, Near, Terra 2.0; Ankr supports 7 chains, including Ethereum, Polygon, BNB Chain, Fantom, Avalanche, Polkadot, Gnosis Chain; LSD protocol StaFi, which originated in the Cosmos ecosystem, supports Ethereum, Polygon, BNB Chain, Solana, Atom, HUAHUA, There are 9 chains: IRIS, Polkadot, and Kusama; the LSD protocol Bifrost, which originated in the Polkadot ecosystem, supports 6 chains: Ethereum, Polkadot, Kusama, Filecoin, Moonbeam, and Moonriver.

Here, Bifrost’s multi-chaining strategy is a bit special and different from other LSD protocols. Bifrost does not repeatedly deploy the Bifrost protocol on multiple chains, but adopts a brand-new architecture.

Bifrost has its own chain, called Bifrost Parachain, which is a parallel chain of Polkadot. Bifrost only deploys the main protocol on the Bifrost Parachain, and then deploys a lightweight module that supports remote access on other chains. The LSD minted by the Bifrost protocol is called vToken. When the user mints vToken on other chains, the main protocol of the Bifrost Parachain will be accessed across the chain through the remote module. After the vToken is minted by the main protocol, it will be sent back to the chain where the user is located across the chain. .

What users feel is that the LSD casting is completed locally, and the process behind it includes back-and-forth cross-chain transmission. According to Bifrost’s article “ Take Bifrost as an example to analyze the new paradigm of full-chain application “, the reason why Bifrost is designed in this way is mainly to consider the following two factors:

1. The global state of vTokens minted for all chains is on the Bifrost Parachain, rather than being split across different chains. The unification of data brings better cross-chain integration. DApps on any chain can be integrated into the vTokens of all chains by docking with the corresponding remote modules, without having to integrate vTokens from different chains one by one. Users can also cast any vToken on any chain, such as casting vDOT on Ethereum;
2. The liquidity of all vTokens is entirely on the Bifrost Parachain, so Bifrost does not need to guide liquidity in different chains. Users on other chains who want to redeem vToken can do so by remotely accessing the liquidity pool on Bifrost Parachain. In this way, the problem of insufficient depth caused by liquidity fragmentation is avoided. If lending dApps on other chains integrate vToken, they can also complete liquidation by remotely accessing the unified liquidity pool on Bifrost Parachain. Since the liquidity is not dispersed, the loss rate during liquidation will be smaller.

Bifrost calls such an architecture a “full-chain architecture.” Under this architecture, dApp is only deployed on one chain and does not deploy on multiple chains. Users and applications on other chains use the dApp through remote access, but the experience is the same as using local chain applications. Bifrost believes that this architecture has better cross-chain composability and has the advantage of unified liquidity.

The author believes that Bifrost’s “full-chain architecture” is undoubtedly the correct solution for multi-chain applications and may be a more general application form in the future. This architecture embodies a new thinking in application construction, which takes multi-chain interoperability as a premise and designs the parts of dApp on different chains as a whole, rather than simply replicating single-chain applications. Go run multi-chain.

With the excellent cross-chain composability of the “full-chain architecture”, Bifrost can implement more complex DeFi revenue strategies for vToken across multiple chains. Having said this, do readers smell the smell of “Intent-Centric”?

However, this architecture has higher requirements for cross-chain bridge infrastructure. There must be a sufficiently secure and high-performance cross-chain protocol layer to support high-frequency cross-chain interoperation.

summary

Driven by the culture of “decentralization” in the crypto world, the LSD protocol will continue to develop in the direction of decentralization to gain narrative points and impression points;

Users’ use of the LSD protocol is not limited to using it to obtain basic Staking Rewards. Instead, users will formulate DeFi portfolio strategies through various means such as circular lending to obtain higher yields. At this time, the competition among LSD protocols has also turned to the competition of composability and superposition yield;

In order to expand its business scope, the LSD protocol tends to be deployed on multiple chains, but there is also a “full-chain architecture” approach that can achieve “single-chain deployment, multi-chain access”, which has better cross-chain composability and also It has the advantage of unified liquidity and represents the future multi-chain application paradigm.

Competition and innovation in the LSD field are still fierce. At present, although the Top 5 LSD protocols account for more than 80% of the LSD market, Lido alone accounts for more than 70% of the ETH LSD share. It seems unshakable, but strong winds Starting from the end of Qingping, users’ belief in decentralization, pursuit of superimposed yields, and expectations for a multi-chain experience to transform from fragmentation to unity will definitely reshape the landscape of LSD.

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