According to Glassnode analysts, activity in the DeFi (Decentralized Finance) sector has declined during the bear market, and it is now facing increasingly stiff competition from rewards staking annual rate of Ethereum up to 4%. However, there is a growing story in the DeFi sector regarding Liquid Staking Derivative (LSD) tokens that could help restore the Ethereum network to life.
According to a recent report from Glassnode, the share of gas (transaction costs) consumed by DeFi protocols has dropped from 34% in 2020 to between 8% and 16% now. Meanwhile, NFT transactions (e.g., unchangeable tokens) account for the highest proportion between 25% and 30%.
Glassnode’s DeFi Price Index, which is supply-weighted and priced in USD and ETH, has recorded a loss of 90% of its value so far in 2021.
DeFi projects are called “Blue-Chip”, representing a group of governance tokens from 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 from their all-time highs in May 2021, when their combined value hit $45 billion.
Bluechip DeFi tokens have not been able to outperform ETH’s performance during bull market rallies and have experienced more severe price drops than ETH during “bearish times”. Analysts predict that staking ETH with a 4% yield will create a “new hurdle” for DeFi tokens’ returns to rise. This staking ETH yield represents a benchmark for ETH investors.
Currently, leading lending protocols such as Aave and Compound offer yields between 2-3% on stablecoin and ETH lending. In addition, DeFi protocols such as Aave and Compound also offer a smart verification mechanism to eliminate smart contract risk through proof of stake (PoS).
Staking has become popular among ETH investors, especially after the Shapella upgrade was implemented in April 2023, allowing withdrawals from the staking contract.
By the end of May, Ethereum users had staked 21.63 million ETH, worth $40.021 billion, representing 18% of Ethereum’s total supply.
Liquid Staking Derivative (LSD) platforms like Lido and Rocket Pool account for a third of this large market. These applications provide a tokenized version of the ETH that has been staked, allowing investors to access profits from staking without compromising liquidity.
A growing trend among ETH investors is interacting with Liquid Staking Derivative (LSD-Fi) or LSD financialization, which aims to utilize the liquidity provided by LSD tokens in DeFi applications.
IS LSDFI THE SOLUTION?
Liquid Staking Derivative (LSDfi) essentially leverages the liquidity of LSD tokens in DeFi, including lending and liquidity protocols on exchanges, to achieve higher yields. With significant amounts of ETH staked on LSD platforms, LSDfi has the potential to bring about a rebound in DeFi activity.
An analytics dashboard from Dune Analytics by Defimochi, a data analyst, shows that the total value locked (TVL) in LSDfi protocols has increased significantly to $411 million, and has grown exponentially since from mid-May. Some of the popular projects in this area include Pendle Finance, Lybra Finance, Curve Finance, and Alchemix Protocol.
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