DeFi Liquid Staking Derivatives Are Taking Off: Here’s How You Can Take Advantage

DeFi Liquid Staking Derivatives Are Taking Off: Here’s How You Can Take Advantage

DeFi is paying more attention to the rise of liquid staking derivatives, with protocols like Lido Finance (up 114%), RocketPool (up 89%) and Stakewise (up 128%) exploding in value within the past couple of weeks. 

The rising value of LSDs can only mean one thing: they’re attracting a significant amount of cash as DeFi investors chase the lucrative rewards on offer. But what are LSDs exactly, and how does one take advantage of them?

In a nutshell, LSDs provide a way for investors to generate enhanced returns on their staked Ethereum assets by retaining liquidity that can be used as collateral in multiple DeFi protocols. Compared to native Ethereum staking, they’re far superior. Staking is something that can be done by ETH token holders to participate in network validation and earn rewards for doing so. Traditionally, users have to stake a minimum of 32 ETH (around $49,000) and lock up that deposit for a number of weeks, meaning those tokens cannot be used anywhere else. LSDs are, therefore incredibly attractive, as they enable users to stake any amount of ETH, lowering the barrier to entry for staking.

However, that is not the main advantage. What’s unique about LSDs is that they allow users to retain their liquidity by providing them with so-called “LSD tokens”. So, someone who deposits 1 ETH into Lido would receive 1 stETH, while a user who puts 3 ETH into RocketPool would receive 3 rETH in return. These LSD tokens can then be used as collateral in a range of DeFi yield farming protocols. 

So what exactly can we do with our LSD tokens? What follows are a few different LSD strategies for some of the most popular LSD protocols.


LSD Strategies

One of the safest strategies for Lido Finance is to stake an amount of ETH and then swap the stETH tokens you receive on Curve Finance and deposit into its DAI x USDC – USDT pool, which pays out at a steady rate of 2% APR. This is one of the safest strategies, with Curve’s DAI x USDC – USDT currently holding $565 million in total value locked. More adventurous investors can take their stETH to Alluo and deposit them into its stETH – ETH pool, which pays out 7.3% APR and currently has $37K in TVL. Alternatively, the highest risk strategy is to take those stETH to Beethoven X, swap them and deposit in its wstETH – LIDO pool, which offers a sky-high 32% APR, with $32K TVL. 

It’s important to note that a higher TVL suggests that a liquidity pool is healthy and in high demand. TVL growth signals that many investors have locked assets in the protocol, which in turn signals a positive outlook for the market. On the other hand, a lower TVL clearly denotes a lack of capital, which translates to higher risk for depositors.

Moving on, LSD investors can potentially earn even greater rewards through RocketPool. For the safest returns, investors can take their rETH from RocketPool and deposit it into Aave’s USDT stablecoin pool, which generates 2.4% APR and has a reassuring $351M in TVL. The medium risk strategy involves putting rETH into Beethoven X’s rETH – wETH pool, which currently has $4.8M in TVL and pays out a handsome 15.5% APR. However, for the megabucks rewards, there’s nowhere better to take a chance than Aura Finance’s rETH – BADGER pool. There, investors can generate an impressive 39% APR from a pool that currently boasts around $10.5M in TVL. 

Bear in mind that many of these strategies could become increasingly more rewarding in a few month’s time, when Ethereum implements a major upgrade known as “Shanghai”. 

Shanghai is a crucial update to the network because it will finally allow users who’ve staked ETH to be able to access their rewards. As a result, it’s expected that native staking on Ethereum will become much more lucrative. LSDs may have trouble retaining liquidity as a result of this – and if that happens the only way for them to remain competitive will be to bribe protocols like Curve and Aura Finance to increase their incentives even further. For more on how this might play out, check out Ice v3’s thesis on Twitter, and remember to keep a close eye on those pools in order to maximize your staking rewards.