Liquid Staking Derivatives (LSD) là gì?

Liquid Staking Derivatives (LSD) emerged in the context of strong development of Proof of Stake (PoS) blockchains, especially Ethereum's transition from Proof of Work (PoW) to PoS. LSD appeared as a solution, allowing users to stake assets while receiving derivative tokens that can be traded and used in DeFi applications, providing high liquidity and optimizing investor profits. So what is LSD? Let's explore with Allinstation through the article below!

What are Liquid Staking Derivatives (LSD)?

Most current blockchains are developing with Proof of Stake (PoS) as the core consensus mechanism. PoS blockchains like Ethereum allow users to "stake" their coins to validators to receive staking rewards. However, traditional staking mechanisms face significant issues such as inconsistent APR/APY, long unstaking times, and especially low liquidity, particularly during periods of strong market volatility. Therefore, Liquid Staking Derivatives (LSD) were developed to solve these problems and create a new derivative asset class, helping to optimize user profits in the DeFi world.

Liquid Staking Derivatives (LSD) is a service that allows users to stake their assets on PoS-supported blockchains and receive a corresponding synthetic token that can be used in DeFi projects. These tokens not only represent the staked asset but also provide high liquidity, allowing users to continue participating in DeFi activities like Lending, Liquidity mining, or providing liquidity,...

For example: Lido Finance allows users to stake ETH and receive stETH. This token not only helps users receive staking rewards but can also be used in other DeFi protocols like Aave, Curve Finance, or Uniswap to increase profits.

Operating Mechanism of LSD Projects

LSD protocols operate through staking and asset minting mechanisms. When users stake in an LSD project, instead of waiting to receive rewards after a long time, they receive a synthetic token (e.g., stETH from Lido Finance) that can be traded, borrowed, or participate in other protocols.

• Stake assets: Users stake coins into the LSD protocol (for example, stake ETH into Lido Finance).
• Receive synthetic token: Users receive a token representing the staked asset, such as stETH.
• Use token in DeFi: This synthetic token can be used in DeFi protocols like lending, liquidity mining, or even as collateral in lending protocols. This helps users not miss profit opportunities from DeFi activities while participating in staking.

What Drives LSD's Strong Development?

Before LSD's emergence, Proof of Work (PoW) was the main consensus mechanism, requiring validators to own powerful hardware to validate blocks. However, PoW is very costly in terms of expenses and resources, and also has negative environmental impacts.

In contrast, PoS allows validators to simply stake a certain amount of tokens, reducing operating costs and protecting the network from fraud through penalty mechanisms. Therefore, PoS has clear advantages such as low costs, fast transaction processing, and lower environmental impact. Since Ethereum's transition from PoW to PoS, LSD has developed even more strongly, attracting special attention from the investor and DeFi user community.

Factors Determining a Successful LSD

• APR/APY: The higher the staking profit, the more attractive to users.
• Use Case of Synthetic Token: The more popular the synthetic token, the more it attracts DeFi users.
• Liquidity: Need a large liquidity pool for users to easily swap synthetic tokens.

Benefits of LSD

• For users: Earn additional profits from two sources: block rewards and incentives from DeFi Protocols, increasing capital efficiency.
• For Blockchain Network: Increase network security and decentralization when more users stake tokens in LSD Protocols.
• For Node Operators: Receive a portion of fees when supporting stakers in operating hardware and software to stake coins.
• For projects developed on the network: Increase TVL and trading volume when users use tokens from LSD Protocols.
• For LSD project holders: Share revenue and participate in project governance.

Risks Associated with LSD

• Risks for Liquid Staking tokens: Tokens like stETH, rETH, ankrETH,... can easily de-peg if sold in large volumes in a short time.
• Cascading risks: If Liquid Staking Derivatives tokens are used in multiple DeFi locations, it can cause cascading risks. For example, using stETH as collateral on Aave to borrow other assets, if stETH suddenly drops in price, the borrowing position will be in danger, causing bad debt risks for Lending Protocols.
• Hacking risks: Some projects like Stader Near have been hacked, leading to NEARX being minted indiscriminately and dumped by hackers to near 0 in the NEARX-NEAR pair.

Prominent LSD Projects

Lido Finance – Emperor of Liquid Staking

Lido Finance is recognized as the largest Liquid Staking platform in the crypto market, and also the largest DeFi platform in terms of TVL, surpassing even veteran names like MakerDAO, AAVE, Compound, Uniswap, Curve Finance,...

Strengths of Lido Finance

• stETH Use Case: Users can use stETH to provide liquidity on Uniswap, SushiSwap, Curve Finance, and many other AMMs. Additionally, stETH is accepted on Lending & Borrowing platforms such as AAVE, Compound, MakerDAO,…
• Large Liquidity: stETH has deep liquidity on Curve Finance and Uniswap V3, increasing its attractiveness. Major Lending platforms all accept stETH as collateral.
• Deployment on Layer 2: stETH has been deployed on Layer 2 platforms like Arbitrum and Optimism, showing Lido's expansion into other ecosystems.

Rocket Pool – Pursuing TOP 1 Position

Rocket Pool stands out with its ability to enhance Ethereum's decentralization, providing tens of thousands of new nodes. Rocket Pool is strongly supported by a community that loves Blockchain and DeFi decentralization.

Rocket Pool's Strengths

• Development Team: Veteran and renowned in the crypto market.
• Attractive APR: Rocket Pool's APR is higher than Lido Finance.
• Decentralization: Strongly improving decentralization for Ethereum 2.0.
• rETH Use Case: rETH is becoming collateral on MakerDAO, AAVE,…

Frax Finance

In early 2023, Frax Finance launched Liquid Staking Derivatives with 2 tokens: frxETH and sfrxETH.

Characteristics of frxETH and sfrxETH

• frxETH: Maintains ETH price, commonly used to provide liquidity on DEXs.
• sfrxETH: Similar to rETH or cbETH, but will absorb all rewards of fxrETH, providing higher APR.

Summary

Liquid Staking Derivatives (LSD) is a very promising area in the blockchain field, especially in the DeFi ecosystem. With clear benefits in liquidity and profit optimization, LSD is becoming a strong development trend among crypto users and investors. However, risks still need to be carefully considered before participating in these protocols. Wish you luck and wisdom in your investment decisions!