The Rise of LSDFi and LPDFi

Everyone in the DeFi space is loading up their bags on LSDs like no tomorrow and no we’re not talking about hallucinogens. LSDs are liquid staked derivatives and LSDFi is the practice of maximising yield with these kinds of assets.

Let’s talk about LSDs and why every DeFi enthusiast dedicates a large portion of their portfolio to them.

Proof of Stake Chains and Staking

Do you ever wonder what makes a chain secure and truly decentralized? Top L1s like Ethereum, Solana, Polygon, and others are all proof of stake chains. Most chains follow a Proof of Stake consensus mechanism as opposed to the Proof of Work, which was first adopted by the OG blockchain, the Bitcoin network.

Firstly, let’s break down what staking is. Staking is the process of participating in a Proof of Stake (PoS) or similar consensus mechanism blockchain network by locking up a certain amount of cryptocurrency as collateral in order to perform specific network functions and earn rewards.

To give you an idea of how big staking is, the global crypto market cap is a whopping $1.04 trillion (at the time of writing), and the global staking market cap is $90.75 billion. (Source: Staking Rewards)

Importance of Staking

Staking is very crucial for a number of reasons. Firstly, security is key. Validators play a very crucial role in ensuring the security and integrity of the network. They are responsible in confirming transactions, maintaining consensus rules and helping prevent malicious actors from attacking the chain.

Secondly, block production. A blockchain is said to be active and in action, so long as validators are creating new blocks and adding them to the blockchain.

Thirdly, network stability. By validating transactions and producing blocks, they keep the network operational and prevent forks or disruptions that could harm the integrity of the blockchain.

Fourthly, governance. Validators play a crucial role in governing the manner in which the blockchain is functioning. Validators vote and exercise their voting power on behalf of their delegates. Their active involvement in governance is of key importance to make sure stakeholders get their say in the running of the blockchain.

Rewards of Staking

Of course, everything in life comes with a payoff and a cost. Hence validators and retail stakers who stake their tokens in turn receive Staking rewards for their contribution and crucial role in validating the chain. Staking rewards vary in APR size from chain to chain. On average, you can earn 5% on ETH up to 60% on EVMOS. It all depends on the Staking infrastructure depending on chain to chain.

The normal practice is for retail stakers to delegate their tokens to a validator who directly interacts with the blockchain. However, a new problem arises, locked liquidity.

Locked Liquidity

The cost of staking native tokens to validate the chain means that the amount of liquidity gets locked up in the process. Although users are earning yield off their holdings, this comes at the cost of locking up liquidity for trading, providing liquidity, or other activities for the DeFi space. To show you how sizable the staking market is, take a look at the ETH staking market cap at the time of writing. (Source: Staking Rewards)

Out of a market cap of $200 billion, 19% of it, or $39 billion worth has been staked. The need for chain validation has come at the cost of capital efficiency, creating the need for a new asset to stake the chain without hard locking the liquidity.

Enter: Liquid Staking Solutions

A number of liquid staking protocols such as Lido Finance, Tenet, Pendle Finance, and others have risen to the occasion to conquer this issue by minting liquid staking derivatives from the underlying assets. Liquid staking derivatives represent the liquid receipt token upon staking, which is liquid by definition and is a value-accruing token as it continues accruing the staking rewards.

LSDFi: A Wave To Earn More Yield

LSDs have become a major hit for the ability to compound and leverage loop your assets.

LSDFi (Liquidity Staking DeFi) has rapidly emerged as a highly popular trend within the DeFi (Decentralized Finance) space. Its popularity can be attributed to its innovative fusion of liquidity provision and staking mechanisms, offering users the opportunity to earn substantial yields on their crypto assets.

LSDFi protocols allow individuals to simultaneously stake their assets and provide liquidity to decentralized exchanges, facilitating seamless trading and enhancing the overall liquidity of DeFi markets. This unique combination not only incentivizes participants to lock up their assets but also ensures a continuous flow of liquidity, which is vital for the efficient functioning of decentralized financial ecosystems. As a result, LSDFi has garnered significant attention and adoption, with users drawn to the promise of attractive returns while actively contributing to the growth and stability of the DeFi sector.

LSDFi It Up

Here are some of the most popular ways that you can earn more yield with your LSDs.

Firstly, liquid mining. Provide liquidity to liquidity pools to earn your share in market-making fees and liquidity incentives from the trading action off the corresponding trading pair.

Demex has a number of pools that support LSDs and the underlying asset. This is to enable liquidity providers an avenue to earn market-making fees, and it also provides a 1:1 ratio to trade an asset for its LSD and vice versa.

Secondly, yield farming. Nitron is Demex’s in-app money market that provides an extensive platform to earn yield from your assets. Nitron often has many incentive programs that you can participate in to earn yield.

Lend out your LSDs on Nitron to earn lending APY, collateralize it and borrow liquidity against your liquidity. This is a means of unlocking more liquidity.

Nitron is home to LSDs from top LSD protocols such as Lido, Stride Zone, StaFi Hub and Eris Protocol. Looking for liquid derivatives of $ATOM, $OSMO, $LUNA, $SWTH? Nitron has got you covered.

Thirdly, staking LSDs on DeFi protocols. There are some prominent new LSDFi-focused protocols such as Tenet and Pendle Finance that offer more innovative ways for you to earn yield. For example, some DeFi 2.0 protocols allow users to stake their LSDs to earn governance tokens, which can be used to vote on the protocol's future direction.

LPDFi: The Next Wave?

LPDfi, short for Liquidity Providing Derivatives, represents the next generation of DeFi ready to revolutionize more liquidity. This innovative concept empowers users to not only participate in liquidity provision but also earn yields from their positions. This novel approach is achieved through the creation of derivative products that closely mirror the performance of liquidity pools.

LSDFi is a predecessor to LPDfi. It is a type of liquidity providing derivative that tracks the performance of a single asset. LPDfi is more flexible than LSDFi, as it can track the performance of multiple assets or even entire liquidity pools.

While it is still too early to conclusively predict LPDfi's future prominence relative to LSDFi, it undeniably holds the potential to become a major trend within the DeFi landscape. The enticing prospect of earning yields from liquidity provision positions, mitigating impermanent loss, and enhancing liquidity provision all contribute to LPDfi's appeal among investors.

The advantages of LPDfi over conventional liquidity provision methods are both numerous and substantial. Firstly, it offers a compelling solution to the persistent problem of impermanent loss (IL). This risk plagues liquidity providers when the value of assets within a liquidity pool fluctuates. LPDfi mitigates this risk by tracking the entire liquidity pool's performance rather than focusing solely on individual assets.

Secondly, LPDfi plays a pivotal role in enhancing liquidity within DeFi markets. By introducing derivative products linked to liquidity pools, it facilitates easier access to liquidity for traders. This, in turn, reduces slippage and significantly enhances the overall trading experience.

Moreover, LPDfi has the potential to boost the yield earned by liquidity providers. Through the creation of derivative products that mimic liquidity pool performance, LPDfi enables liquidity providers to earn a portion of the fees generated by the pool, offering a substantial increase in potential earnings compared to traditional liquidity provision methods.

Looking to explore LPDFi more? You can check out the rising project Logarithm Finance.

Demex is no stranger to LPDFi as we were the 1st Cosmos money market to collateralize an LP token. Demex may dive a little deeper into LPDFi to give you more avenues to earn yield!

The TLDR

In the world of DeFi, LSDFi involves maximizing yields through liquid staked derivatives (LSDs), which combine staking and liquidity provision. It addresses the liquidity lock-up issue faced by stakers. LPDFi, the next-gen DeFi trend, focuses on liquidity provision, tracking pool performance to mitigate impermanent loss, enhance market liquidity, and boost earnings for liquidity providers. Both trends offer innovative ways to earn returns in decentralized finance.