Interest-paying stablecoins: A new trend in LSDFi

Introduction

Traditionally, stablecoins are divided into three primary categories: Fiat-Collateralized stablecoins, Cryptocurrency-Collateralized stablecoins, and Algorithmic stablecoins. Each category represents a different approach to attaining price stability, based on the collateral assets, issuance methods, and stability mechanisms. However, recent advances in DeFi have fostered a new collateral of stablecoins known as Liquid Staking Derivatives stablecoins or LST stablecoins.

LSDfi introduces the innovative concept of stablecoins collateralized by Liquid Staking Tokens (LSTs).The potential for LST stablecoins is significant when considering the overall market size of both the LST market and the stablecoin market. With the current LSDfi market standing at $500 million and the LSD market at $18 billion, there is already a solid foundation for growth. Furthermore, the stablecoin market's size, which exceeds $120 billion, highlights the demand and value of stablecoins in the broader cryptocurrency ecosystem.

By combining the benefits of proof-of-stake assets and the innovation of DeFi, LST stablecoins have the potential to capture a substantial portion of the stablecoin market. As more users recognize the advantages of collateralizing stablecoins with liquid staking derivatives, we can expect increased adoption and liquidity within the LSDfi space.

In this article, we delve deeper into this promising realm of DeFi by exploring emerging projects . Each of these platforms illustrates the innovative potential of LSDfi, highlighting a common trend towards the creation of stablecoins backed by multiple types of LSDs. In doing so, they offer a more capital-efficient means of borrowing and accrue interest rewards, thereby enhancing the capital efficiency and stability of the entire DeFi ecosystem.

LST Stablecoins

Lybra

The Lybra Protocol represents an innovation in the field of decentralized finance. Built on the solid foundations of LST, the protocol relies heavily on Lido Finance-issued Ethereum Proof-of-Stake and stETH as its principal components, with an open trajectory for incorporating additional LST assets in the future.

Lybra aims to do this by introducing a safer, more decentralized stablecoin called eUSD, which promises to deliver stable interest to token holders, enhancing both their financial stability and the overall dependability of the cryptocurrency industry.

As an avant-garde DeFi protocol, Lybra enables users to mint eUSD by using their deposited Ethereum and stETH as collateral for borrowing. eUSD stands out as an Ethereum-assets-over-collateralized stablecoin, providing users with the requisite security and stability to transact with confidence in the volatile landscape of digital finance.

A distinguishing characteristic of the Lybra Protocol is the opportunity it provides for users to earn a steady stable income. This is made possible through the holding of minted (borrowed) eUSD, which is underpinned by the LST income generated from the deposited Ethereum and stETH. In simple terms, when users deposit Ethereum or stETH and mint eUSD against them, they receive a stable income in stETH of approximately 5%. This income is then converted into eUSD via the protocol and disseminated to the users. In recent months, Lybra has had exponential growth. Lybra’s TVL has grown to over $200 million TVL.

Prisma Finance

Prisma Finance has emerged as a potent tool to exploit the latent potential of Ethereum liquid staking tokens (LSTs). The protocol empowers users to mint a stablecoin (acUSD), exclusively collateralized by LSTs. Encouraged by incentives on platforms such as Curve and Convex Finance, this setup engenders a high-octane flywheel effect. The users reap the benefits of trading fees, CRV, CVX, and PRISMA, all on top of their Ethereum staking rewards.

Drawing on Liquity's principles, Prisma's immutable codebase is engineered to offer a resilient protocol and a truly decentralized stablecoin. It has been tailored with attractive and flexible collateral parameters to make it the most appealing for individuals seeking to maximize their LSTs. Prisma boasts the support of an impressive list of backers. Curve Finance's founder, Convex Finance founders, FRAX Finance, Conic Finance, and Tetranode are amongst its supporters.

Prisma offers its users the ability to mint its native overcollateralized stablecoin (acUSD) against a range of LSTs. This mechanism offers the holders of liquid-staking ETH tokens a unique opportunity for capital efficiency. Leveraging Ethereum staking rewards, loans secured by LSTs can self-liquidate over time. The introduction of a Curve pool allows users to stake their stablecoins and earn further rewards in the form of CRV and CVX. The protocol strongly incentivizes participation in the Curve wars.

Prisma is not yet live but at launch, Prisma will support a variety of assets including wstETH (Lido), cbETH (Coinbase), rETH (Rocket Pool), sfrxETH (Frax Ether), and WBETH (Binance). Over the coming weeks, Prisma plans to disclose more about its launch, tokenomics, and innovative mechanisms as the protocol undergoes meticulous audits by leading auditors in the field.

Raft fi

Raft Finance is a DeFi protocol, designed to change the landscape of digital finance. It offers users the ability to generate 'R', a stablecoin, by depositing liquid staking tokens as collateral. This provides a capital-efficient method for borrowing, all the while maintaining your staking rewards.

So, what exactly is 'R'? In simple terms, 'R' is a high-capital-efficiency Ethereum USD stablecoin, which is backed by liquid staking tokens such as stETH and rETH. This mechanism offers a means of borrowing against LST collateral. With a primary goal of becoming the preferred stablecoin within the decentralized ecosystem, 'R' offers deep liquidity across numerous trading pairs, along with a stable peg to the US dollar.

'R' employs a combination of hard and soft peg mechanisms to maintain a consistent and stable link to the US dollar. This dynamic approach ensures that the peg is not only durable but adaptable to market conditions. The 'R' stablecoin takes its cue from the design principles of SAI (Single Collateral Dai) and LUSD, but goes a step further. With enhanced capital efficiency, flexible fees, immediate and efficient liquidations, and a robust incentive and soft peg mechanism, 'R' pushes the envelope of stablecoin technology. It's not just about creating a new stablecoin, it's about improving the entire ecosystem to benefit all DeFi participants. In just a month, Raft has over $55 million in TVL and has potential to capture an even bigger market share.

Lucid finance

Lucid Finance is a decentralized borrowing protocol that has changes yield-earning loans against your Ethereum portfolio. With Lucid, you can unlock the potential of ETH-backed assets to borrow Digital USD (DUSD), a highly overcollateralized, rebasing USD-pegged stablecoin designed to accrue passive interest directly in your wallet. DUSD, an omnichain, non-custodial, immutable, and censorship-resistant currency, thrives on real yield, always growing even when you're simply holding it in your wallet.

Lucid is not yet live but at launch, Lucid Finance will support leading Ethereum Liquid Staking Tokens and will actively participate in developing more LSTs to foster a truly decentralized ecosystem. Lido Finance (stETH), Rocketpool (rETH), Frax (frxETH), Coinbase (cbETH), and Binance (BETH) are among the supported tokens. Furthermore, Lucid will take a proactive stance in assisting nascent LST protocols in gaining liquidity.

So, what sets Lucid apart? Lucid allows you to retain your crypto while spending it by providing a rebasing yield on minted DUSD, borrowable against your complete ETH portfolio. The DUSD, is an omnichain currency that continually grows using rewards earned by collaterals deposited into the protocol. Lucid also stabilizes yield earned by your assets from volatile assets into a stablecoin form, allowing you to take profits regularly. Minting DUSD incurs no interests or fees and is always redeemable for $1 worth of high-quality assets.

Alchemix

Alchemix has recently announced a version 2 of their project, this includes a new stablecoin. Alchemix USD (ALUSD) represents a development in the DeFi landscape.The platform offers its users the opportunity to borrow against their crypto asset deposits, while also earning interest. However, Alchemix tries to set itself apart from other lending protocols by facilitating an automatic loan repayment process, thereby making it stand out in the crowded DeFi space.

Here's how Alchemix operates: the protocol utilises Yearn to generate yield, pooling the collateralized assets on the platform and depositing these funds into other DeFi protocols. A user can deposit their Yearn staked Ether and for each user, their deposit doubles as collateral for a loan, up to 50% of the deposited amount. The profits yielded from these deposits are then automatically used to gradually repay the user's loan debt, a process facilitated by Yearn's vaults.

Upon making a deposit, users are immediately eligible to borrow up to 50% of the deposited amount in the form of ALUSD, a synthetic stablecoin that maintains a peg to the U.S. Dollar. ALUSD can then be traded or utilized within the Alchemix ecosystem, which includes compatibility with apps such as Curve, and Sushiswap.

The unique approach of Alchemix ushers in a multitude of financial possibilities for its users. For instance, on a personal level, users can simultaneously borrow against their crypto assets and earn interest on their deposits. In terms of investing, Alchemix gives investors the opportunity to access their yield in advance, allowing them to employ that capital for immediate investment. This proves particularly advantageous for investors who have already hedged with stable coins. Alchemix enables the maintenance of such a hedged position, while also allowing users to speculate on other tokens, all without the fear of being liquidated. Hence, Alchemix brings a fresh perspective to the DeFi scene, weaving together elements of stability and speculative opportunity.

PSY

PSY is aiming to facilitate interest-free loans in its stablecoin, SLSD, through the collateralization of a variety of LSTs and their LP tokens. Set for launch on the Arbitrum network, PSY stands as a testament to the power of community-driven initiatives in the world of DeFi.

So, what exactly is PSY and its stablecoin, SLSD? At its core, PSY is a project that is currently in development, with the objective of creating a decentralized stablecoin, SLSD, that offers scalability and a user-friendly way to borrow stablecoin, based on multi-LSD collaterals. The PSY protocol is being developed upon the tried-and-tested foundation of Liquity, recognized for its efficiency and innovative approach.

This allows users the most capital-efficient means to borrow using their Liquid Staking Tokens (LSTs), while still accruing LST rewards. The protocol also plans to accept LP tokens such as the wstETH-WETH LP token, and will support various collaterals at launch, including wstETH (Lido), rETH (Rocket Pool), and sfrxETH (Frax). But perhaps one of PSY's most enticing features is its provision for interest-free loans.The goal of PSY is to take this proven base and expand its scope by collateralizing innovative LST assets.

SLSD's price stability is ensured through both hard and soft peg mechanisms. While hard peg mechanisms revolve around the redemption of SLSD for collateral at a one-to-one ratio (1 SLSD for $1 of collateral token) and a minimum collateral ratio of 110%, soft peg mechanisms strive for parity with the USD, maintaining a stable price. Moreover, the protocol's inclusion of a leverage mechanism and the provision of flash minting add to its appeal.

Seneca Protocol

Seneca Protocol is providing a gateway for exotic collaterals. Set to launch on the Arbitrum network on July 17th, Seneca makes it possible to borrow senUSD against a whitelist of yield-bearing collaterals. This distinct mechanism enables DeFi investors to tap into institutional-grade lending and leverage while simultaneously maximizing capital efficiency.

At its core, Seneca is specifically tailored for Collateralized Debt Positions (CDPs), where users deposit whitelisted assets as collateral to borrow senUSD, Seneca's native stablecoin. One of the crucial aspects of this system is that if the value of the collateral dips below a specified threshold, the CDP could potentially be liquidated to compensate for the loan. On the bright side, users have the flexibility to withdraw any surplus collateral whenever they choose, without facing any risk when withdrawing all collateral after repaying the entire debt.

One of the unique features of Seneca is its emphasis on yield-bearing assets. By prioritizing these types of assets, it ensures DeFi investors can avail themselves of institutional-grade lending and leverage, thereby boosting capital efficiency. The array of yield-bearing collaterals accommodated by Seneca includes vault tokens, liquidity position receipts, and LSTs.

Zooming in on senUSD, it's a CDP stablecoin with a loose peg to $1. The underlying goal is to keep senUSD as closely tied to the USD as feasible, a stability measure primarily achieved through arbitrage. For instance, users with senUSD debt can purchase additional senUSD at a discount and use it to settle their position. Alternatively, those who have deposited collateral could borrow senUSD and sell it when its value exceeds $1, thus freeing up proceeds for other purposes. Crypto owners can take advantage of inter-DEX discrepancies, purchasing senUSD on a DEX where the price is below $1 and selling it on another where the price equals or surpasses $1. Automated bots, constantly on the lookout for such pricing anomalies across pools, undertake the majority of the market-to-market arbitrage. This automated mechanism facilitates rapid price adjustments, contributing significantly to senUSD's stability.

Final Thoughts,

These projects provide users with capital-efficient borrowing options, the opportunity to earn stable income from their deposited assets, and the potential for significant growth in the LSDfi market. However, it's important to note that these stablecoins, like any other financial instrument, carry risks. The value of the derivatives may depeg from the value of the original tokens, and stablecoins can experience fluctuations in their stability.

To mitigate these risks, overcollateralization is a crucial aspect of stablecoin design. Ensuring that the collateral backing the stablecoin exceeds its value provides a safety buffer and helps maintain stability. It's also important for users to conduct thorough research, understand the mechanisms and risks associated with each stablecoin project, and make informed decisions when participating in the DeFi ecosystem.

Overall, the introduction of LST stablecoins adds another layer of innovation and opportunity to the evolving DeFi landscape. By leveraging liquid staking tokens and derivatives, these projects aim to enhance capital efficiency, stability, and inclusivity in the decentralized finance space, potentially transforming the way we interact with stablecoins and digital assets.