15 Jul 2023
An Update on LSDFi Stablecoins
This article will provide an update and overview of the current LSDfi stablecoin market.
The world of decentralized finance (DeFi) is rapidly evolving, introducing new trends and protocols that offer more efficiency, inclusivity, and financial innovation than ever before. Among these innovations, stablecoins have become a core component of DeFi, providing a more stable form of digital asset pegged to traditional currencies like the US Dollar, Euro, or other stable assets. The current LSDfi market stands at over $750 million, and the LSD market at over $20 billion, providing a solid foundation for growth. The stablecoin market, exceeding $120 billion, highlights the demand and value of stablecoins in the broader crypto space
The LSDfi stablecoin market is ever-growing, with over $440 million accounted for, which is more than half of the total LSDfi market cap. Lybra accounts for $385 million of this, Raft accounts for $58 million, and Gravita accounts for $24 million. The stablecoin market, exceeding $120 billion, highlights the demand and value of stablecoins in the broader cryptocurrency ecosystem. The potential for LSD stablecoins is significant considering the overall market size of both the LSD market and the stablecoin market.
This article serves as an update on the rapidly evolving world of DeFi, with a particular focus on LSD stablecoins and the LSDfi market. We will be introducing new LSDfi projects and providing updates on the current major LSDfi projects.
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Lybra is preparing to release its V2 upgrade, which is set to bring a host of new features and improvements. One of the most significant changes is the expansion of the range of Liquid Staking Derivatives (LSTs) that can be used as collateral. This expansion is accompanied by a comprehensive plan to maintain fund safety, which is at the heart of the V2 upgrade.
The onboarding process for every new asset includes a two-stage due diligence procedure, involving risk evaluation by both the core team and the DAO. Each LST asset is then held in a separate, isolated pool to contain the risk of contagion during a hypothetical "black swan event." Additional steps have been added to the liquidation process to improve fund safety.
The V2 upgrade will also introduce peUSD, an omnichain version of eUSD, which will bridge eUSD from the Ethereum mainnet to Layer 2s, allowing users to deploy it on the full range of supported chains. This new feature is designed to maximize fund safety during the minting process, with Lybra V2 creating isolated pools for each LST asset on the protocol.
In terms of liquidation, an additional step has been added to boost fund safety on Lybra V2 during the eUSD liquidation process. Whenever eUSD is converted to peUSD, the eUSD is locked in the mainnet contract. This locked eUSD can be used to make flash loans that facilitate liquidation. The liquidation process for peUSD on Lybra V2 remains broadly similar to the eUSD liquidation process in V1, with the exception that the global liquidation process that was in place on V1 has been removed for peUSD.
In conclusion, Lybra V2 is set to bring a range of new features and improvements, all while maintaining a strong focus on fund safety. As the protocol’s functionality expands, new measures are being put in place to ensure that funds remain secure and risk is minimized.
Raft has been focusing on decentralization, transparency, and community involvement. To facilitate this, they launched the Raft governance forum, where community members can actively participate in discussions, propose ideas, and contribute to shaping the future of Raft.
In terms of product development, Raft successfully approved the proposal to add rETH as collateral, making R a multi-collateralized stablecoin supported by both stETH and rETH. This expansion strengthens the stability and resilience of the Raft protocol.
Another significant update is the introduction of One-Step Leverage (OSL). This feature allows users to reach up to 6x leverage in a single transaction, increasing potential earnings from liquid staking derivatives (LSDs). With OSL, users can easily adjust or deleverage in just one click, providing greater flexibility and control over their collateral.
Raft is also committed to providing a platform where the community has a say in its evolution. This commitment is realized through the adoption of a governance-minimized approach, creating an efficient, transparent, and community-driven protocol. The RAFT token extends voting power to its holders on pivotal governance matters, including decisions related to the governance scope, future direction of the Raft product, the allocation of treasury and ecosystem funds, potential partnerships, and the possibility of changes to the RAFT token supply.
One of the major updates is the introduction of the Redemption feature. This mechanism allows GRAI holders to redeem other user’s collateral at a specific rate, which is designed to reduce the volatility of GRAI and assist borrowers in maintaining a healthy Loan-to-Value (LTV) ratio. Redemptions serve as a safety net for the system, ensuring that the value of GRAI remains stable and that the protocol continues to function smoothly even in volatile market conditions.
The Redemption mechanism prioritizes the riskiest Vessels (those with the lowest collateralization) in the system. This means that borrowers who maintain a low LTV ratio relative to other Vessels are less likely to face redemptions. When a Redemption occurs, GRAI holders can redeem other user’s collateral at a specific rate. Initially, this rate is set at 0.98:1, providing a slight discount to the GRAI holder and incentivizing the redemption process.
Gravita Protocol announced that redemptions would go live on July 18th with a 0.98 parameter, and on August 18th with a 0.99 parameter. This gradual increase in the redemption rate is designed to provide a smooth transition for users and to allow for potential arbitrage plays, given that the current GRAI price is 0.984.
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Davos Protocol is introducing a new LSDFi stablecoin, DUSD, which aims to overcome the limitations of traditional Collateralized Debt Position (CDP) protocols. This is achieved by leveraging LSDs and accessing Ethereum Proof-of-Stake Rewards, unlocking a scalable and lucrative source of yield generation for stablecoins.
DUSD is designed to be an inflation-proof stablecoin, providing a groundbreaking paradigm shift that positions crypto-backed stablecoins as a solution for generating yield backed by LSDs. The Davos Protocol addresses the issue of eroded yield potential due to the near-zero borrowing costs facilitated by traditional CDP models by offering an unbiased monetary policy and fair borrowing rates. By aligning the borrowing rate of DUSD with the Consumer Price Index (CPI) Annual Change or a rate above it, the protocol ensures that users’ purchasing power is protected and establishes a robust monetary policy framework.
To incentivize participation and ensure liquidity within the Davos Protocol, the platform implements liquidity gauges and borrowing gauges. These gauges distribute rewards in the form of DGT to various stakeholders, including lenders, borrowers, and liquidity providers. Furthermore, the protocol distributes yield in the form of DUSD to DUSD stakers. The allocation of these revenues will in part be decided by the Global Davos Council, specifically in terms of distribution between DUSD stakers and DUSD liquidity providers.
TAI is a new LSDFi stablecoin that is being introduced as a version of the RAI stablecoin. It is designed to support ETH LSDs as collateral. This means that users will be able to take out low-interest loans of TAI against their ETH, wstETH, rETH, and also RAI. More LSDs will be supported in the future.
TAI aims to overcome the shortcomings of its predecessors, RAI and DAI. While DAI has made sacrifices in terms of decentralization for the sake of growth, TAI is designed to maintain credible neutrality for long-term sustainability. Unlike DAI, which relies heavily on USDC and USDC derivatives, TAI will not need to onboard centralized stablecoins to maintain a fixed USD peg.
The TAI protocol will also feature a floating price mechanism, similar to RAI. This mechanism will be controlled by an on-chain controller that adjusts the rate of change of TAI's price. This will help to influence market prices and avoid extended de-pegging seen in other crypto collateralized stablecoins.
TAI will also introduce a lower liquidation penalty compared to RAI and DAI. This is expected to reduce the risk for any collateralized debt position and make it more attractive for depositors to mint stablecoins. The majority of the system backing token, RATE, will be distributed to users of the TAI protocol. This is part of TAI's "fair launch" strategy, which aims to maximize credible neutrality by giving control of the decentralized stablecoin to as many users as possible.
Alacrity is a new project that focuses on LSDs to enable users to access the liquidity of their staked assets and generate higher yields. The project introduces a native LSD stablecoin, USDL, which is over-collateralized and backed by high-quality LSD assets and stablecoins.
USDL is designed to help LSD holders access liquidity at lower costs and offers various use cases. Users can profit from participating in USDL liquidation, earn profits by providing liquidity to the USDL lending platform, gain profits from participating in USDL lending liquidation, and engage in the USDL trading platform.
The Alacrity Protocol also includes a Liquidity Distribution Platform, which is designed to assist LSD-related protocols in bolstering their initial liquidity. The platform is expected to play a crucial role in the anticipated LSD WAR, as numerous LSD-related protocols are entering the market.
The project also hints at the potential for vaults on the Liquidity Distribution Platform to open USDL lending pools. This combination of the Liquidity Distribution Platform, USDL lending, and USDL trading leaves ample room for creativity and innovation.
Each LSD Strategy Vault in the Alacrity Protocol represents a unique LSD-related strategy, such as staking incentivized low-liquidity LSDs with better mechanism designs and returns compared to Lido, providing rETH-WETH pair liquidity on Aura, supplying LSD for Gearbox passive pool, offering LP rETH-WETH Aura liquidity on Pendle, and more.
Alacrity also includes a Voting Module, where ALSD token holders can stake their ALSD tokens to receive veALSD tokens, granting them voting power to decide on vault emissions each epoch. The voted vaults will emit more veALSD tokens to liquidity providers offering ETH or ALSD.
The Alacrity Protocol is yet to go live, but it promises to bring a fresh perspective to the stablecoin landscape.
The rise of LSDfi stablecoins offers a new way for users to access liquidity and generate higher yields. The introduction of new LSDfi projects like Lybra, Raft, Gravita, Davos, TAI, and Alacrity, each with their unique features and improvements, is a clear indication of the growing interest and investment in this space.
These projects are not only innovating within the LSDfi market but are also contributing to the broader DeFi ecosystem. They are pushing the boundaries of what's possible, introducing new mechanisms, and providing users with more options and flexibility. As these projects continue to develop and mature, they are likely to play a significant role in shaping the future of DeFi. The continuous growth and development in this space underscore the potential and promise of LSDfi stablecoins and the broader DeFi ecosystem.
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