Worried you're missing the boat with LSTfi? Read on. We look at the different types of protocols forming in LSTfi space and help you make more informed decisions on how to participate in what is now the biggest category of DeFi on Ethereum.

In this guide, we take a look at the entire LSTfi ecosystem, including some of the top LSTfi protocols, helping you realize the full potential (and associated risks) of investing in this new category of DeFi.

What is LSTfi all about?

Liquid Staking on Ethereum has seen significant growth in 2023 and is showing no signs of slowing down.

The rise in liquid staking has paved the way for a new category of DeFi, called LSTfi (also known as LSDfi). You can get a primer on LSTfi in the Introduction to LSTfi article in our Journal.

The LSTfi space consists of Structured Products that use Liquid Staking Tokens (LSTs) as a primary source of collateral. These Structured Products provide extra utility and yield-earning opportunities to holders of Liquid Staking Tokens (LSTs).

There are already a number of Structured Products in the LSTfi space that are innovating the use of this yield in different ways. Before we take a look at the different LSTfi protocols available to you, we thought it would be better to take a step back and see how LSTfi fits in within the entire ETH staking landscape.

Starting from the ground up, let’s take a brief look at each layer of the Ethereum Staking Ecosystem…

The Ethereum LST Ecosystem

Protocol Layer

At the base of the LST Ecosystem lies the Beacon Chain. This is Ethereum's Proof-of-Stake blockchain and the foundational layer for all block production on the network. The emissions of blocks serve as the basis for the Annual Percentage Rate (APR) in Liquidity Staking Token (LST) staking, and they play a crucial role in facilitating the development of products that leverage this yield.

Validator Layer

Positioned above the protocol layer, the operators and technology providers give the essential infrastructure required for running validators on the network. They bear the responsibility for achieving and maintaining network consensus.

Staking Layer

The validators are the base layer that Liquid Staking Protocols are built upon. These protocols provide Liquid Staking as a service and issue an Liquid Staking Token (LST) as a receipt for a user's staked amount in their protocol.

DeFi <> Staking Bridge

LSTs essentially give the staker a tokenized representation of their assets on the blockchain.

These tokens are generally compliant with the ERC-20 standard, enabling their utilization not only on the Ethereum network but also across various Layer 2 and EVM compatible networks. LSTs further empower stakers to engage with multiple DeFi operators for activities such as asset exchange and lending.

DeFi Infrastructure

DEXs

Redeeming an LST for its underlying asset is never instantaneous. DEXs play an important role in alleviating that risk, as they provide the liquidity for users to exit their staking positions much quicker.

Lending Markets

Lending platforms like Aave and Compound offer investors the opportunity to utilize their LSTs as collateral to secure loans. This arrangement enhances liquidity and provides additional leverage for LST holders, thereby enabling them to amplify the yield generated from Ethereum staking.

Structure Products in the LSTfi Market

Occupying the top section of the technology stack are the Structured Products constructed utilizing LSTs. In the subsequent sections, we will examine some of the leading Structured Products forming within the LSTfi landscape.

Why participate in LSTfi?

LSTfi has been the hottest trend of 2023 so far. Will it continue to experience exponential growth? Or will this be another trend that dies on a hill? Let’s take a look at the current state of play and outline why we think LSTfi is worth paying attention to.

Firstly, staking on ETH is going from strength to strength. The Staking Ratio on the network recently surpassed 20% for the first time. This percentage represents the number of eligible tokens that are being staked on the network. When the Shappella upgrade went live back in April 2023 this total was at 14%. The increase this year represents an additional 7B worth of Staked ETH, more importantly, 4.8B of this is Liquid Staked ETH!

ETH Staking Ratio

Secondly, the surge in ETH staking mentioned above has pushed the total addressable market for LSTs up to new heights. At the time of writing the Total Market Cap of all LSTs on Ethereum is worth $19B. In comparison the total market cap of structured products in LSTfi is only $800M, which is around 4% of the market cap of LST.

This represents a huge amount of untapped collateral available, and gives a lot of headway for LSTfi protocols to continue growing and maturing.

LSTfi Market Share

Now that we’ve better outlined where LSTfi sits in the staking landscape, let’s take a closer look at some of the different categories of Structure Products available to you in the LSTfi Market. In specific, in this article we'll focus on LST-Backed Stable Coins, Interest Rate Swap LSTs and Index LSTs.

Let's dive in...

LST-Backed Stable Coins

Stablecoins have been in existence for almost 10 years. Up until now, they have generally fit within three broad categories, Fiat-Backed, Crypto-Backed or Algorithmic. Within these categories Stablecoins can differ, based on their underlying assets, collateralization ratios, and price stability mechanisms.

Nearly all of DeFi is currently powered by FIAT backed stablecoins such as USDT and USDC, both of which have proven capital efficiency and price stability but fall short in decentralization.

Ever since the Shapella upgrade back in April, Stablecoin protocols have led the charge on growth in the LSTfi market.

What are LST-Backed Stablecoins?

LST-Backed Stablecoins are assets whereby the underlying collateral is made up of Liquid Staking Tokens (LSTs) such as stETH, rETH etc. Issuers allow users to mint stablecoins using LSTs as the underlying collateral.

Most of them are exclusively backed by LSTs, however some are partially backed such as DAI or crvUSD and include other asset types such as ETH as part of their collateral.

Opportunities with LST-Backed Stablecoins

LST-backed stablecoins preserve the key attributes of a stablecoin while creating a number of new opportunities for investors. These include:

Earn Yields: Holders of LST-backed stablecoins have the opportunity to earn yields. This is in contrast to traditional stablecoins, where the yield from collateral is usually recorded as income for the issuer, not the stablecoin holders.
Avoid Opportunity Cost: In a rising interest rate environment, holding traditional stablecoins incurs an opportunity cost as you miss out on other yield-bearing instruments. LST-backed stablecoins allow you to avoid this opportunity cost.
Crypto Collateralization: Most current iterations of LST-backed stablecoins are crypto collateralized, offering a different risk profile compared to fiat-collateralized stablecoins.
Price Stability Mechanisms: LST-backed stablecoins often have built-in mechanisms for price stability, such as minimum collateralization ratios and redemption mechanisms, which form the "Price Floor" and "Price Ceiling" respectively.

Risks with LST-Backed Stablecoins

There are also many risks that come with LST-Backed Stablecoins, which need to be considered before investing. Some of the main risks you should watch out for include:

If the value of your collateral falls below a certain threshold, your assets will be liquidated (sold off) to cover the decrease in prices, resulting in the loss of your staked assets.
The liquidity of LST-Backed Stablecoins can be considered a risk. What are the underlying assets of the stablecoin? How do you trade in and out of them? What exchanges are they available on?
The collateralization ratio can also present a risk. A lower collaterization ratio means there will be less time to respond to a stressed market environment, to prevent the Stablecoin from becoming depegged.
There is always a smart contract risk when investing in any LSTfi protocol.

Protocols offering solutions:

1. Lybra Finance

Released:	April 24, 2023
Stablecoins:	eUSD, peUSD
Current TVL:	$216M
Collateral accepted:	ETH, stETH, rETH, wbETH, wstETH
Collateralization ratio	A minimum of 150%
DEX Availability:	Curve, Uniswap

An Overview of Lybra

Lybra’s LST-Backed Stablecoin, eUSD continually accrues yield over time.

Lybra recently went live with their v2, which brings in new functionality such as the addition of a new stablecoin, peUSD (Pegged eUSD). Unlike eUSD, peUSD is compatible with a number of different L2s and a variety of DeFi applications.

Lybra now supports BETH, rETH and wstETH as collateral to mint eUSD/peUSD.

How to use Lybra

Deposit ETH/LSTs to mint either eUSD or peUSD against your collateral.
If you hold eUSD, you can earn an interest of circa 5% APY. Yield is taken from the underlying staked assets deposited and redistributed evenly to holders of eUSD.
Users can convert eUSD to peUSD and use it across DeFi, whilst still earning the underlying yield on the LSTs used as collateral.

Why Use Lybra Finance?

By minting eUSD users can outperform inflation. At time of writing holders can earn up to 5% APY on their staked ETH.
With peUSD, users can engage in DeFi activities while continuing to earn yield, thus making their capital work harder.
Lybra offers LBR tokens as incentives to holders of eUSD. LBR can be an additional source of income but can also be used to vote in governance proposals.

2. Prisma Finance

Released	Sep 1, 2023
Stablecoins	mkUSD
Current TVL	$59M
Collateral accepted	wstETH, cbETH, rETH, sfrxETH
Collateralization ratio	A minimum of 120%
DEX Availability	Curve, Uniswap
Audits	Mixbytes, Zellic and Nomoi

An Overview of Prisma

Prisma is a new DeFi primitive focused on realizing the full potential of LSTs on Ethereum.

Prisma allows users to mint a stablecoin, mkUSD, fully collateralized by liquid staking tokens. The stablecoin will be incentivized on Curve and Convex Finance to create a capital-efficient flywheel where users can receive trading fees, CRV, CVX, and PRISMA on top of their Etheruem staking rewards.

Although relatively new, Prisma successfully hit their launch target in the first day, with $20M in mkUSD minted, backed by ETH LSTs.

How to use Prisma?

Users can mint mkUSD by depositing either wstETH, cbETH, rETH or sfrxETH as collateral.
Holders of mkUSD can take advantage of yield opportunities via Curve and Convex pools or Prisma’s own Stability Pool.
PRISMA tokens are used to incentivize minting mkUSD, maintaining an active loan or deposit into their stability pool.
Users can participate in governance by locking their PISMA tokens for a set period. In exchange they receive vePRISMA, which gives them voting weight based on lock length (from a week up to a year).

Why Use Prisma?

Prisma is natively multi-collateral, supporting 5 popular LSTs as forms of collateral.
vePrisma holders will be able to incentivize actions, adjust collateral parameters, and receive up to 100% PRISMA reward boosts based on voting weight. A bribe layer complements governance for additional incentives.
Prisma has completed security audits from Mixbytes, Zellic and Nomoi.

3. Raft

Released:	May 29, 2023
Stablecoins:	R
Current TVL:	$23M
Collateral accepted:	ETH, stETH, rETH
Collateralization ratio	A minimum of 120%
DEX Availability:	Balancer, Maverick, Uniswap
Audits	Trail of Bits (also an audit competition & bug bounty with Hats Finance)

An Overview of Raft

Raft is a DeFi protocol that lets you generate its native stablecoin “R” by depositing LSTs as collateral. R is a decentralized USD stablecoin, with deep liquidity across many trading pairs and a stable peg.

Users can borrow R with a debt position of 120%, which is a lower minimum collateralization requirement than other LST-backed stablecoins.

Raft has also proven the ability to keep a tighter peg than the major LSD-backed stablecoins thanks to a better design that ensures a better incentive alignment among borrowers, liquidity providers, and stablecoin holders.

How to use Raft

Deposit stETH or rETH to borrow R stablecoin against your collateral, opening a debt position on Raft.
R has a minimum collateral ratio of 120%, as an example users can deposit 1.20USD worth of wstETH and mint 1R.
R can be used for various purposes such as liquidity provision, trading, lending, or as collateral in other DeFi protocols.

Why use Raft?

Capital efficiency: Keep all your staking rewards on your LSD collateral while benefiting from a minimum collateralization ratio (120%), which is lower than other major protocols.
Lower cost: Generating R only incurs a one-time fee with no additional ongoing interest charges
One-Step Leverage: Achieve up to 6x leverage on your staking rewards at a lower cost than other major protocols at the click of the button.
R use cases: Put your R to work in the DeFi ecosystem, including by becoming a liquidity provider in one of the many R pools.

4. Ethena

Released	Not live (Set for launch in Q4 2023)
Stablecoins	USDe
Current TVL	n/a
Collateral accepted	stETH, ETH, USD
Collateralization ratio	pending
DEX Availability	pending
Audits	Chaos Labs (pending)

An Overview of Ethena

Ethena is a decentralized stablecoin protocol built on Ethereum that will provide a crypto-native solution for money not reliant on the traditional banking system.

How to use Ethena

Users will deposit stETH/ETH/USD or any USD stablecoin and can mint USDe 1:1.
The stablecoin will be backed by stETH collateral.
USDe can be used throughout CeFi and Defi for trading pairs, as well as an option to stake it with Ethena to earn a yield.
It will also be possible to mint USDe via an overcollateralized debt position.

Why use Ethena?

Fully transparent, on-chain collateral
Scalable stablecoin at 1:1 collateralization ratio
Returning rewards to holders, vs current model of centralized stablecoin issuers internalizing yield and offering “return-free risk”.
Stability thanks to offsetting delta hedged short futures positions.
Censorship resistant stablecoin that can serve as backbone of both DeFi and CeFi

More options

Other notable LST-Backed stablecoins include Gravita and Gyroscope. Both of which launched protocols this year and are making headway in the market.

LST Interest Rate Swaps Products

What are LST Interest Rate Swaps Products?

Interest Rate Swaps (IRS) can best be described as the exchange of interest rates between two parties, over a set period of time. In the TradFi world, Interest Rate Swaps are already a core pillar of the global derivatives market. However, IRS has largely been left untouched when it comes to DeFi, until now.

This year, new structured products have been emerging that enable the exchange of yield generated through liquid staking. Has LSTfi ushered in a new decentralized era for this giant in the TradFi world?

Opportunities with LST Interest Rate Swaps Products

Interest Rate Swap Products in the LSTfi space take the yield that is accrued through your Liquid Staked Tokens and leverage it to power trading, lending and other fixed income solutions.

These protocols innovate the use of yield generated from LSTs, giving users additional utility and earning opportunities.

Risks with LST Interest Rate Swaps Products

Interest Rate Swap Products occupy a more sophisticated realm of DeFi, so less experienced users may find them complex to understand.

Since Interest Rate Swap products are new to DeFi, they can include novel complexities in various parts of the protocol. An increase in complexity can also mean an increased risk.

As with all DeFi products, there is always a smart contract risk. Ensuring the protocol has been audited by reputable smart contract audit firm is a must.

Protocols offering solutions:

1. Pendle

Released	Apr 28, 2021
Tokens	PENDLE, vePENDLE
Current TVL	$161M
DEX Availability	Camelot, Uniswap, Balancer, SushiSwap, Curve
Audits	Ackee, Dedaub, Dingbats

An Overview of Pendle

Pendle is a permissionless, yield-trading protocol that enables fixed rates for users in DeFi. Put simply, Pendle enables the ability to trade the yield generated from LSTs.

Pendle splits LSTs into two separate tokens, the first being Principle Token (PT) which represents the underlying asset, and the second the Yield Token (YT) which represents the future yield.

Users can trade PT and YT tokens on Pendle's AMM.

Pendle AuM Growth.png

How to use Pendle

There are two modes of operation on the platform, Pendle Earn and Pendle Trade. Users can switch between both on the interface.

Pendle Earn is the simplest way to interact with the platform. Users can either chose to either obtain a fixed yield position, which is redeemable on maturity. Or they can provide liquidity to facilitate trades. Both of which are presented in an easy to use UI.

Alternatively, Pendle Trade provides a full suite of functions, enabling users to trade yield by buying and selling PT and YT tokens on Pendle's AMM.

For a complete guide on how to use Pendle Earn and Pendle Trade, head to Pendle's docs.

Why use Pendle?

Pendle gives users access to the following yield strategies:

Fixed yield - volatility proof yield, the backbone of institutional hedging that can be key to attracting more institutional-grade investors into the space.
Fixed yield - Users can earn a fixed yield on LSTs such as stETH or sfrxETH
Long yield - Users can bet on LST yield going up by purchasing more yield
Earn a yield without additional risks by providing liquidity for trades with your LSTs
A mix of any of the above strategies

LST Index Products

What are they?

LST Index Products give investors the ability to gain exposure to a range of different LSTs through one investment vehicle.

Users can invest in LST index products to diversify their exposure to any one LST. In a similar vein to a traditional ETF or Index Fund, an Index Product in the LSTfi space is made up of a basket of LSTs, each with a specified weighting or strategy.

Based on their specific strategy, LST Index Products can be grouped into either a Diversification Index, a High Yield Index, a Liquidity Aggregator Index or a Stabilized Yield Index.

Opportunities

By investing in an LST Index, you are diversifying your exposure to the liquid staking market, thus spreading your risk.

Another benefit is that you are helping to decentralize the network. With an LST Index, you are investing in a basket of LSTs, instead of just one.

A third benefit is the ease of use. An LST Index Product will spread your investment across more than one LST automatically, instead of investing in individual LSTs yourself.

Risks

The underlying assets always pose individual risks when investing in Index LSTs, make sure you DYOR.

As with all structured products in the LSTfi space, there is a smart contract risk which needs to be considered.

Protocols offering solutions include...

1. Diversified Staked Ethereum Index (dsETH)

Released	Jan 24, 2023
Token	dsETH
Current TVL	$1.3M
Asset allocations & weightings	rETH (37.3%), wrapped stETH (24.0%), sETH2 (22.1%) and sfrxETH (16.7%)
Variable APY	3.24%
DEX Availability	Uniswap, Cowswap
Audits	OpenZeppelin, ABDK, Iosiro, Code4rena

An Overview of dsETH

Built on Index Protocol (a good-faith fork of Set Protocol v2), dsETH is an Index LST designed to provide easy access to complex DeFi strategies by translating them into ERC20 tokens.

dsETH enables diversification of liquid staking tokens, ensuring users benefit from decentralization, reduced volatility, and the overwhelming selection process - analysis paralysis.

How to buy dsETH

Users can buy dsETH via the the Index Coop App.
dsETH is also available to buy via the DEXs listed above.

Why buy dsETH?

Users gain diversified exposure to top liquid staking tokens, reducing risks associated with any one token.
Holders of dsETH earn a yield, which is a weighted aggregate APR of the underlying tokens.
dsETH has a unique methodology that weights LSTs based on their degree of decentralization; issuing protocols with more node operators and better distribution of stake constitute a greater share of the index.

2. srETH

Released	Not live
Token	srETH
Asset allocations & weightings	pending
Audits	Trail of Bits, Chainsecurity

An Overview of srETH

srETH is a robust Ethereum Liquid Staking Index managed by the Staking Rewards team. srETH minimizes volatility with a more predictable yield.

How to buy srETH

At launch, users will deposit either ETH or USDC to mint srETH

Why hold srETH?

Get a more predictable yield over the long term, instead of being subject to fluctuations in staking rewards.
Risk-optimized strategies managed by the Staking Rewards team of unbiased researchers.
srETH will always give users the best vanilla staking yield, with additional yield from our trusted DeFi partners.
The ability to withdraw at any time in a collateral of your choice.

Sign up for early access to srETH before it goes live.

3. Origin Ether (OETH)

Released	May 16, 2023
Token	OETH
Current TVL	$70M
Asset allocations & weightings	Convex ETH+OETH (62.54%), sfrxETH (23.53%), rETH (9.66%) and stETH (3.37%)
Trailing 30-day APY	7.65%
DEX Availability	Curve, Uniswap, 1inch
Audits	OpenZeppelin, Narya

An Overview of OETH

OETH is an LST yield aggregator, that combines stETH, rETH and sfrxETH into one token. OETH holders receive daily yield in the form of a positive rebase directly into their wallets.

Users that hold OETH never need to worry about managing a DeFi position, as the protocol will rebalance collateral between audited strategies each week, chasing the highest yields in DeFi.

How to buy OETH

The native way to buy OETH is by using either the OUSD dapp or OETH dapp.
OETH is also available to buy on the DEXs listed above or a number of CEXs.

Why hold OETH?

OETH holders receive higher yields than the yield they'd earn using any of the underlying LSTs or yield strategies.
The normal validator rewards are pooled together from the underlying assets and distributed to holders. On top of that, any ETH converted into OETH is held in a smart contract that deploys the capital among Morpho, Curve, and Convex, generating a higher yield for users.

4. UnshETH

Released	Feb 2023
Token	USH
Current TVL	$8.13m
Asset allocations & weightings	WETH (4.31% \| 5%), cbETH (18.27% \| 18.75%), sfrxETH (22.18% \| 18.75%), ankrETH (11.20% \| 10%), rETH (14.71% \| 18.75, swETH (13.95% \| 10%), wstETH (15.39% \| 18.75%)
Current APY	5.33%
DEX Availability	Uniswap, PancakeSwap, SushiSwap, Maverick, Balancer
Audits	Certik, Paladin

An Overview of UnshETH

UnshETH promotes decentralization by cultivating competition among ETH liquid staking protocols. The protocol achieves this by driving decentralization through its incentivization model.

The goal of UnshETH is to distribute capital across the LST ecosystem in a manner that prioritizes validator decentralization.

How to mint UnshETH

You can mint USH via their official deposit page. Users can convert either ETH or one of 7 different LSTs into USH, which will subsequently be transferred to your wallet address.

Why mint UnshETH?

Holders of USH benefit from yield generated from the underlying LSTs as well as yield from swap fees generated by the unshETH vdAMM.
Investors can also chose to stake their USH, in return for vdUSH, which represents voting power for proposals and decisions on the governance of the protocol.
Additionally, unshETH can be used across multiple blockchains including BNB Chain and Arbitrum.

5. ETHPLUS (ETH+)

Released	April 16, 2023
Token	ETH+
Current TVL	$2.3M
Asset allocations & weightings	rETH, wstETH or mint with Zap using any asset
Variable APY	4.5% native APY, plus LP yield opportunities of 18%+ across Curve, Convex, StakeDAO and Yearn
DEX Availability	Curve
Audits	Code4rena, Halborn

An Overview of ETH+

ETH+ is a community-governed, diversified, Ethereum LST index with over-collateralization protection.

How to buy ETH+

Mint and redeem ETH+ at Register.app or by directly interacting with its smart contract
Users can mint ETH+ natively using rETH, wstETH or via a Zap using any asset
ETH+ is also available to buy on Curve

Why use ETH+

Up to 4.5% native APY, plus LP yield opportunities of 18%+ across Curve, Convex, StakeDAO and Yearn
Permissionless minting and redeeming, with auditable proof of reserves on chain 24/7
Diversified basket of rETH and stETH, and flexible to additions/diversification based on decentralized governance
In addition to diversification, ETH+ utilizes Reserve Protocol's novel over-collateralization mechanism, where RSR stakers are the first loss capital in the case of failing collateral

More options

Other notable LST Index Products include yETH and Asymmetry. Both of which launched protocols this year and are making headway in the market.

Conclusion

In conclusion, the growth of Structured Products in the LSTfi space has been nothing short of remarkable. LSTfi has injected a new life into DeFi, offering investor innovative ways to amplify their liquid staking yields. However, with this new frontier of DeFi, it is crucial that investors acknowledge all of the challenges and risks associated.

Liquid Staking is already a battle tested passive income solution for many. Comparatively, the LSTfi space is newer and still has a lot to prove. As the LSTfi ecosystem on Ethereum continues to expand, it will be interesting to see if the space continues to eat away into the LST market share.

Structured Products within LSTfi have complexities and may present a steep learning curve for some. For the majority, the currently staking yield is likely enough to keep them invested in Ethereum (not everyone feels the need to hunt for higher yields, and that's ok!).

Nonetheless, the opportunity of higher yields and further decentralization are both strong driving forces within the liquid space on Ethereum. For now, it is clear that liquid staking will continue to grow and the LSTfi space will grow with it. We're still at the very beginning of this exciting evolution in DeFi.

The Ultimate Guide to LSTfi on Ethereum