Liquid Staking Derivatives is a new financial instrument that was created to solve the problem of “lack of access to liquidity” in normal staking services.
LSDs are a symbol of deposited assets and are a double benefit for staking enthusiasts. Because in addition to receiving stake rewards, the user can use derivatives in various DeFi services.
To answer the question of what is the concept of LSD token, learn more about the concept of liquid staking derivatives and the difference of depositing in this field compared to normal staking, and of course, to introduce some examples of protocols that provide LSD tokens continue reading.
In this article we will explore together:
- Key points of LSD token
- What is an LSD token?
- The history of LSD tokens
- What is the difference between staking and liquid staking?
- What is LSDFI?
- What are the advantages and disadvantages of LSD tokens?
- How to invest in LSD protocols?
- What are the best LSD token provider protocols?
- How do liquid stacking derivatives help DiFi growth?
- Frequently asked questions on LSD token
Key points of LSD token
- One of the challenges in the field of staking in DeFi platforms is known as the locking of the deposited capital.
To solve this problem, the concept of liquid staking derivatives or LSD tokens have been introduced. - Based on the working model of LSD token, the depositor can stake the asset in his chosen pool and receive an LST token.
- Depositors can benefit from the liquidity of staked assets in addition to getting a reward for their investment in these pools.
What is an LSD token?
One of the biggest current trends in the blockchain industry is the staking service, which rewards users for depositing digital assets. Since staking is a way to earn passive income, it is gaining more fans every day, and on the other hand, it also makes the network more secure, but unfortunately, staking token is facing the important challenge of “lack of access to liquidity”.
Deposited assets are usually locked for a certain period, and during this period the user does not have access to his assets and cannot trade them.
This issue is not very pleasant for investors who need liquidity of their assets. As a result, to solve this problem, Liquid Sticking derivatives were proposed.
To answer the question of what LSD token is, it should be said that this service is actually a new financial tool and allows the user to access the liquidity of their staked tokens in addition to earning staking rewards.
According to this model, the user deposits his tokens in a liquid staking pool and in return is issued a receipt or token representing the staked tokens.
The depositor can trade these tokens (referred to as LST) or use them as collateral in another pool.
The immediate liquidity of staking tokens is derived from the overall liquidity of the main token.
For example, the daily trading volume of liquid staking token stETH, which has the largest market share among derivatives, is currently around 29 million dollars.
While the daily trading volume of the Ethereum native token (ETH) is about 4 billion dollars on average.
The history of LSD tokens
On December 1, 2020, the Ethereum network tested the Proof of Stake (PoS) approach in the Beacon Chain, and users could become validators by staking 32 ethers.
In this model, the deposited tokens will be locked for a certain period of time and will be uncashable.
Beacon China began to attract depositors, but there was a serious problem. Not all investors could deposit 32 Ether in this time frame.
Since staking Ether was a good option for passive income, users were looking for a way to stake their Ether tokens without risking their liquidity. It was here that the rise of steak ether in China’s bacon marked the emergence of liquid staking protocols.
Rocket Pool is one of the protocols providing LSDs, which allows users to receive liquid staking derivatives compatible with the ERC-20 standard with a stake of at least 0.01 ether. These tokens have one-to-one backing and give the user the freedom to enter or exit the market.
In addition, since these tokens are part of derivatives, they also provide investors with access to new markets. Two protocols, Lido and Ankr, provide liquid staking service.
On September 15, 2022 (24 September 1401), the Ethereum network successfully merged with Beacon China, and the entire network switched from a Proof-of-Work (PoW) consensus mechanism to a Proof-of-Stake (PoS) and validators who had staked their Ether tokens, replaced the miners.
Although merge did not allow depositors to withdraw their locked tokens for a certain period of time, this was made possible with the upgrade of Ethereum Shanghai.
What is the difference between staking and liquid staking?
In traditional staking protocols, the user locks his tokens in the desired protocol for a certain period and does not have access to his assets during this period.
Lack of access to liquidity is a big challenge. Because the user cannot take advantage of other opportunities of the desired DiFi service.
Liquid staking protocols, on the other hand, solve this problem by providing tokenized tokens of staked assets. Users can use LSD tokens in various DiFi applications and at the same time get Stake rewards.
What is LSDFI?
LSDFI is a term for protocols that use LSD platforms and their tokens for financial activities in the DeFi industry. A better understanding of LSD-Fi depends on knowing the two concepts of LSD and LST:
- LSD: This term is a term for Liquid Staking Derivatives.
- LST: The concept of LST is also a term for the token (Liquid Staking Token) of LSD platforms. For example, stETH token for Lido, rETH for Rocket Money and frxETH for Frax Finance.
Therefore, it can be said that users of LSD platforms receive LST tokens equivalent to their locked assets. For example, if you deposit one unit of ETH token in Lido Staking Liquid, you will receive one unit of stETH token (called LST token).
Currently, the LSD ecosystem has the highest Total Locked Value (TVL) in the DeFi industry at around $19.8 billion. Lido protocol has about 74.2% of this market share.
The purpose of creating LSDFI protocols was to dominate the market of liquid staking users. Also, the LSDFI ecosystem was created with the assumption that the stake rate of Ethereum in protocols like Lido will increase in the long term.
What are the advantages and disadvantages of LSD tokens?
Protocols providing LSDs have several advantages. For example, the greater flexibility and liquidity of these protocols compared to traditional staking protocols provides conditions for users to participate in other DiFi programs.
Also, due to the lack of technical knowledge, user entry barriers are reduced. Another advantage of LSD protocols is that the value of staked assets can potentially increase. Because the derivatives themselves may have value in the secondary markets.
Although liquid stacking derivatives have many advantages, they are also threatened by risks. One of the most important risks is the possibility of bugs in smart contracts or security gaps that could lead to the loss of staked assets or derivatives.
Also, when providing liquidity for such pools, there is a risk of impermanent loss. Because there is a possibility of fluctuations in the value of derivatives compared to staked assets.
How to invest in LSD protocols?
Follow the steps below to deposit your assets in Liquid Staking derivatives protocols:
- Stake your tokens in an LSD protocol.
- Equivalent to your staked assets, receive liquid staking derivatives that represent your assets.
- Use LSDs as collateral in various DeFi applications such as lending platforms and yield farming.
- Monitor your staking reward and investment performance in DiFi programs.
- Whenever you decide to withdraw your assets from escrow, redeem the original tokens using LSDs and claim the staking reward.
What are the best LSD token provider protocols?
Currently, there are several liquid staking solutions in the market, each of which has its own advantages and disadvantages and different fees.
Some of the best liquid staking protocols are:
- Lido DAO
Lido Dao is a liquid staking solution that lowers staking barriers across multiple proof-of-stake blockchains, particularly the Ethereum network.
Almost 30% of all Ethereum was deposited during 2022-2023 (1401-1402) through Lido’s Liquid Staking service, and in return users received stETH tokens for transactions in decentralized finance (DeFi).
- Frax Finance
Frax Ether is a liquid staking protocol that uses the Frax Finance ecosystem to maximize profits and facilitate the Ethereum staking process.
- Rocket Pool
Rocket Pool is the most decentralized liquid staking protocol of Ethereum. More than 2,500 node operators around the world have deposited more than $1.8 billion in Ether tokens in this protocol.
Users can get rETH liquid staking token by depositing at least 0.01 Ether.
- Tempus Finance
In addition to providing liquid staking service, Tempus Finance also aims to create decentralized fixed income for users. Investors can earn steady income by depositing tokens such as stETH, cDAI, aDai and xSushi.
- Hubble Protocol
Hubble Protocol is a liquid staking platform on the Solana blockchain. Users can receive stablecoin USDH in exchange for depositing HBB native token.
- Meta Pool
Meta Pool is a liquid staking platform on the Near blockchain. By depositing NEAR token, users can receive stNEAR liquid staking token and use it as collateral in DeFi platforms.
How do liquid stacking derivatives help DiFi growth?
By creating liquidity for staked assets that lose their liquidity, LSD tokens enable users to participate in multiple DeFi services simultaneously.
For example, users can use LSDs as collateral in decentralized yield farming, lending, and lending programs and increase the overall return on their capital.
This increased liquidity and interoperability is an effective factor to attract more users and boost innovation in the DeFi ecosystem.
Frequently asked questions on LSD token
What is an LSD token?
Liquid staking derivatives or LSD tokens are a new service that allows active users in the field of DeFi to access the liquidity of deposited assets in addition to receiving their staking rewards.
What is the most important feature of liquid stacking derivatives?
Derivatives-based services give you a receipt or token based on the value of your asset. As a result, you can not only participate in other DeFi services, but also have the possibility of increasing the value of LSD tokens themselves in secondary markets.
In this article, we answered the question of what is LSD token in different ways. In summarizing the answer to this question, we must say that Liquid Staking Derivatives (LSD) is an effective solution to solve the problem of lack of access to liquidity in staking protocols in the blockchain ecosystem.
While the user receives the staking reward, he is not deprived of the liquidity of the deposited tokens. Although access to liquidity, no need for technical knowledge and the value of derivatives in the secondary market are among the advantages of liquid staking derivatives.
Users should be aware of risks such as loss of assets and unstable losses due to security gaps and fluctuations in the value of derivatives.
What do you think about the LSD token? Which protocols do you choose to invest in liquid staking derivatives?