After going live for more than a month, the LSD stablecoin protocol surged 40 times, triggering a new round of battles in LSDFi?

Written by: flowie, ChainCatcher

The LSD stablecoin protocol may be igniting a new round of battles in LSDFi.

Recently, the protocol Lybra Finance, which mints yield-bearing stablecoins using LST as collateral, has been gaining momentum. After launching its IDO on April 22, it officially went live, and within just over a month, its native token LRB skyrocketed by up to 40 times. Its TVL once exceeded $200 million, capturing nearly 50% of the market share.

Lybra Finance is not the first protocol to explore this space; many protocols supporting LSD stablecoins are emerging. The TVL of the LSD interest-free lending stablecoin protocol Gravita is also rapidly rising to $21 million. On June 1, the LSD stablecoin protocol Prisma Finance announced the completion of a new round of financing, with notable investors including Curve Finance founder Michael Egorov, CoinGecko founder, OKX Ventures, The Block's research director Adam Cochran, and Ankr founders.

Additionally, Curve recently initiated a community vote to support the minting of over-collateralized stablecoin crvUSD using wstETH as collateral. The liquid-staking Layer 1 blockchain Tenet Protocol, along with LSD protocols Agility and Raft, are successively launching LSD-supported stablecoins. LSD-supported stablecoins may be becoming a new trend in DeFi that cannot be ignored. This article reviews some representative DeFi protocols to understand the mechanisms and driving forces behind the trend's emergence.

How do protocols supporting LSD stablecoins share a piece of the LSDFi pie?

Before understanding the DeFi protocols that support LSD stablecoins, let's briefly review the main types of stablecoins.

First, there are centralized stablecoins backed by fiat currencies like the US dollar, such as USDT and USDC. These stablecoins are typically issued and managed by central entities, usually maintaining a 1:1 collateral ratio. Second, there are decentralized over-collateralized stablecoins backed by cryptocurrencies like Bitcoin and Ethereum, such as DAI, BitUSD, and sUSD, with collateral ratios typically around 1:1.5 or 1:2, meaning that to issue $1 of stablecoin, $1.5 or $2 worth of corresponding cryptocurrency is needed as collateral. Third, there are algorithmic stablecoins that maintain their price through algorithms, such as Frax and the collapsed UST. These stablecoins often introduce elastic supply mechanisms and incentive structures to adjust supply and demand, maintaining price stability, which can be quite complex.

The role of these well-known stablecoins is to serve as a medium of exchange between fiat currencies and mainstream digital currencies, as well as to hedge against the price volatility of mainstream digital currencies.

Currently, a new type of stablecoin has emerged in the crypto market, which is decentralized stablecoins backed by liquid-staking derivatives (LSD) such as stETH, cbETH, Sfrx ETH, and rETH. These are primarily issued by decentralized protocols through over-collateralization. Compared to traditional stablecoins, their more apparent utility lies in two aspects: first, they release the liquidity of LSD tokens; second, they provide scenarios for the appreciation of LSD tokens, such as staking, lending, and earning interest.

After the Ethereum upgrade, the LSD market has grown rapidly, with its TVL now exceeding $19 billion, ranking first among all DeFi protocol categories. The vast LSD assets have become one of the most important battlegrounds in DeFi, with LSD-supported stablecoin protocols attempting to carve out a share through combinations of stablecoins, over-collateralization, arbitrage, and liquidation mechanisms. From the representative projects, one focuses on earning interest from LSD stablecoins, while another emphasizes interest-free lending of LSD stablecoins.

1. [Lybra Finance](https://www.rootdata.com/zh/Projects/detail/Lybra Finance?k=NzY5OA==) ------ LSD Yield-Bearing Stablecoin Protocol

Lybra Finance has launched a yield-bearing stablecoin, eUSD, which is pegged 1:1 to the US dollar and offers an APY (annual percentage yield) of 7.2% for eUSD holders. There are two ways to acquire eUSD: one is to exchange mainstream stablecoins like USDT, USDC, or FRAX for eUSD on decentralized exchanges. The other is to deposit ETH or stETH as collateral in the Lybra Finance protocol to mint eUSD with zero fees, with a minimum collateral ratio of 150% (below which forced liquidation occurs), ideally maintaining above 200%.

Lybra Finance pays users' interest and generates revenue through a mechanism where, when users deposit ETH into Lybra, it automatically stakes it in Lido to convert it into stETH, earning yield. Lybra takes a portion of this yield as a fee, and the remaining yield is used for the interest of eUSD holders. The fee is charged at an annual rate of 1.5% based on the total circulation of eUSD.

To illustrate this, Lybra provided an example in its whitepaper: suppose Alice deposits $135,000,000 worth of ETH and mints 80,000,000 eUSD, while Bob deposits $15,000,000 worth of ETH and mints 7,500,000 eUSD. The current circulation of eUSD would then be 87,500,000, and the total collateral would be $150,000,000 stETH.

One year later, Lybra generates $150,000,000 * 5% = $7,500,000 worth of stETH through LSD.

Assuming Bob uses his 7,500,000 eUSD to purchase the increased stETH, the fee for the past year would be eUSD circulation (i.e., 87,500,000) * 1.5% = 1,312,500 eUSD, and the dividend would be 7,500,000 eUSD - 1,312,500 eUSD = 6,187,500 eUSD. This amount would then be distributed to all eUSD holders, resulting in an annualized interest rate of around 7.2%. Moreover, for eUSD holders, compared to the volatility brought by staking ETH assets over a year, the yield from stablecoin deposits is much safer.

Besides the yield mechanism, how eUSD maintains its peg to the US dollar is a key aspect. Overall, Lybra Finance employs over-collateralization, liquidation mechanisms, and arbitrage opportunities to ensure the stability of eUSD.

Firstly, each eUSD requires at least $1.5 worth of stETH as collateral, reducing the risk of insolvency through over-collateralization. Secondly, the Lybra protocol incorporates a liquidation mechanism to protect the system from under-collateralization. If a user's collateral ratio falls below a safe threshold, any user can voluntarily become a liquidator and purchase the liquidated portion of stETH by paying the corresponding eUSD. This mechanism ensures that eUSD's appreciation pressure stabilizes its value. Recently, Lybra Finance also launched a collateral ratio monitoring feature to guard against liquidation risks in volatile markets. When a user's collateral ratio drops below a specific threshold, it will automatically repay part of the user's debt, and this automatic repayment function will stop once the collateral ratio returns to the predetermined level.

Additionally, Lybra ensures that the price of eUSD does not deviate from its peg by providing arbitrage opportunities. If 1 eUSD > 1 USD, users can mint new eUSD by depositing ETH as collateral and then sell the newly minted eUSD on DEX. As more eUSD is sold, the market supply increases, pushing the price back to $1. For users, buying back eUSD at a lower price or using it to repay loans can yield profits from the price difference.

When 1 eUSD < 1 USD, users can purchase eUSD at a discount in the market and then redeem it for $1 worth of ETH/stETH within the Lybra protocol. As demand for eUSD increases, it drives the price back up to $1. Users can either hold the redeemed ETH/stETH or sell it for profit from the price difference.

In addition to issuing the yield-bearing stablecoin eUSD, the Lybra Protocol also launched its native token LBR and initiated its IDO on April 22, distributing 5 million LBR tokens (5% of the total supply).

As mentioned earlier, Lybra Protocol generates all its revenue through staking, part of which is used to pay interest to eUSD holders, while another part serves as fees. This fee portion will be distributed to LBR holders. If a user holds 1% of LBR in the LBR staking pool, they will receive 1% of the total fee revenue.

In summary, users can choose to hold the yield-bearing stablecoin eUSD to earn interest, mint eUSD through collateral to receive LRB rewards, or stake LRB as LP to provide liquidity and earn returns through the Lybra Protocol.

Currently, the yield of the first pool (eUSD mint pool) is 27.82%, the second pool (LBR/ETH LP) is 133.72%, the third pool (eUSD/USDC LP) is 9.52%, and the yield for single-staking LBR is 74.56%. Due to the significant fluctuations in LBR's price and its protocol revenue, its yield also varies greatly.

Currently, the TVL of Lybra Finance has fallen back to $182 million (having previously exceeded $200 million), and the price of LRB has also significantly decreased to $1.22 (previously over $4).

The innovative model of Lybra Finance's yield-bearing stablecoin and interest-free lending indeed provides a solution for those who need stability while pursuing certain staking yields. However, for users, this also means bearing an additional layer of contract security risk, and the protocol's fees may reduce part of the staking yield. Although Lybra Finance experienced a short-term surge in TVL and token price, it has also seen a significant recent drop, raising concerns about how Lybra Finance can ensure long-term sustainability.

Recently, Lybra Finance announced plans to launch the v2 testnet in mid-June to address the current bottlenecks in TVL growth and the lack of application scenarios for eUSD through several aspects: first, it plans to expand across chains via LayerZero. According to crypto KOL @qiaoyunzi1, the team has begun discussions with protocols on Arbitrum for collaboration, with Layer 2 being the preferred direction for cross-chain expansion. In the future, Lybra Finance may cross-chain eUSD to other alt-layer 1s to broaden its application scenarios. Second, it aims to add more types of LST assets; third, it will update the tokenomics of LBR to introduce VC and other investors to the protocol. Additionally, it will modify the protocol's revenue and fee mechanisms to introduce deflationary elements to LBR and extend the vesting period for esLBR (increased to 60 days), as well as allow for longer lock-up periods. Furthermore, the liquid-staking derivative esLBR will be introduced into DAO governance, allowing the community to participate in protocol decision-making.

The Lybra Finance team is currently anonymous, and the recent rapid increase in its data has sparked much discussion, leading to speculation that it is a project under Lido. However, Lido has since clarified that the two are unrelated and reminded users to conduct due diligence before interacting with the project.

2. [Gravita](https://www.rootdata.com/zh/Projects/detail/Gravita Protocol?k=ODEyOA==) ------ LSD Interest-Free Lending Stablecoin Protocol

Gravita Protocol is a decentralized lending protocol built on Ethereum that allows users to deposit wstETH (Lido), rETH (Rocketpool), and blusd (ChickenBonds) to receive Gravita's native stablecoin GRAI in return. It also supports collateralized loans of GRAI for consumption or depositing into stable pools to purchase liquidated LST collateral at a discount. As a fork of Liquity, its native stablecoin GRAI has a similar volatility suppression mechanism to Liquity's native stablecoin LUSD.

Gravita sets up independent lending pools for each type of collateral, isolating their risks, with different collateralization lines, and a maximum LTV of up to 90%. For example, when the price of ETH is $2000, users can borrow a maximum of $2000 * 0.9 = 1800 GRAI, and if the price of Ethereum falls below $2000, it will be liquidated. Considering that LST carries higher risks, the LTV for LST collateral is lower.

Compared to Lybra Finance, which encourages users to hold yield-bearing stablecoin eUSD to reduce LST yield risks (not considering the additional layer of contract risk), Gravita focuses more on increasing users' capital turnover rate, meeting users' funding turnover needs, especially for short-term borrowing, through low-fee mechanisms and liquidation mechanisms.

On one hand, when users' LST is used as collateral, they should still receive the staking APR without being affected, but users can choose to use the GRAI obtained from collateralized borrowing in other DeFi protocols for yield opportunities. This means that if the price of ETH remains stable or increases, the LTV will decrease over time, reducing the risk of liquidation or redemption for users.

On the other hand, Gravita has a lower fee mechanism and liquidation line compared to MakerDao. Currently, using the Gravita protocol, for positions over 6 months, the maximum one-time fee is only 0.5%. For users repaying their debt before the six-month (approximately 182 days) expiration, the 0.5% fixed borrowing fee will be proportionally refunded based on the time used, but at least one week's interest must be paid. In contrast, MakerDao has varying annual fees. Additionally, Gravita's LTV is approximately 85%, translating to a liquidation line of about 116%, while MakerDao has a minimum liquidation line of 160%.

Regarding how GRAI maintains its peg to the US dollar, GRAI has a price ceiling of $1.1 and a floor of $0.97. The maximum LTV of 90% creates a price ceiling; when the market price of GRAI is $1.2, ETH holders can mint GRAI by collateralizing Ethereum at 90% LTV and sell it in the market for arbitrage, with potential arbitrage profits of nearly 8% (0.9 * 1.2). The protocol can redeem GRAI at $0.97 for collateral (i.e., 1 GRAI can be exchanged for $0.97 worth of collateral), establishing a price floor for the GRAI stablecoin.

Currently, Gravita's TVL is steadily rising to over $21 million.

Recommended Reading: "LSD Interest-Free Lending Stablecoin Protocol Gravita ------ The Birth of the New Stablecoin GRAI"

3. Agility ------ LSD Liquidity Distribution Platform + aUSD Trading Platform

Agility describes itself as an LSD liquidity distribution platform + aUSD trading platform, aiming to allow LSD holders to obtain higher yields and release the liquidity of LSD. However, the LSD liquidity distribution system and the aUSD trading platform have not yet officially launched.

Agility currently supports ETH staking to generate aETH; it also supports multiple LSD staking options such as stETH, rETH, and frxETH, generating aLSD. After obtaining aETH and aLSD, users can choose to hold aLSD to earn corresponding LSD staking yields, or use aLSD or aETH to participate in the LSD liquidity distribution system, providing liquidity to selected vaults and earning returns. Additionally, users can stake aLSD or aETH to mint Agility's native stablecoin aUSD for trading or hedging risks.

A key point to note about Agility's aUSD trading system is that aUSD, similar to the previously mentioned eUSD, is also an over-collateralized stablecoin. Users can mint aUSD by collateralizing aLSD or aETH. Its initial collateralization rate is 130%, and it cannot fall below 110%, or it will be liquidated.

After obtaining aUSD, users can trade or hedge, such as going long/short on ETH, GMX, GNS, Pendle, Gear, etc., going long/short on LSD yields, engaging in options trading, and participating in gaming, among others. In its roadmap, Agility plans to attract external developers to build more aUSD trading scenarios, including external application scenarios for aUSD.

Agility has also issued its native token AGI, which was publicly sold on 1inch/airswap on April 7. On April 10, Agility launched its "Fair Launch," initiating five mining pools for liquidity mining, including four single-asset pools for ETH, stETH, rETH, frxETH, and an AGI-WETH LP pool, as well as an ankrETH pool.

Initially, the high yields allowed Agility to reach a peak TVL of nearly $500 million ($487 million) within just two weeks of its launch, with its governance token AGI rising from an initial issue price of $0.04 to a high of $0.79. However, it quickly fell back, and the current TVL is only $2.25 million, with AGI's price at just $0.015.

Recommended Reading: “Interpreting the LSDFi Protocol Agility: Token Soars 20 Times in Two Weeks After Launch”

4. [Prisma Finance](https://www.rootdata.com/zh/Projects/detail/Prisma Finance?k=ODA2NA==) ------ LSD Yield-Bearing Stablecoin Protocol

Prisma Finance is an early-stage project that only launched its official Twitter in May, and its website consists of a single-page introduction. Its team is also anonymous.

However, Prisma Finance has announced the completion of a funding round, with the specific amount undisclosed. Notable investors include Curve Finance founder Michael Egorov, Convex Finance founder C2tP, FRAX Finance, Conic Finance, Tetranode, Llama Airforce, CoinGecko founder, OKX Ventures, DeFiDad, MrBlock, Impossible Finance, 0xMaki, GBV, Agnostic Fund, Swell Network founder, The Block's research director Adam Cochran, Ankr Founders, MCEG, Eric Chen, and others.

From the only introduction article available for Prisma Finance, it appears that Prisma Finance will support more LSD assets compared to Lybra Finance, such as wstETH (Lido), cbETH (Coinbase), rETH (Rocket Pool), sfrxETH (Frax Ether), and WBETH (Binance) as collateral to mint over-collateralized stablecoin acUSD. Prisma's over-collateralization model supports automatic repayment, allowing users to utilize Ethereum staking yields to automatically repay debts.

Additionally, users can stake their stablecoins in Curve pools to earn rewards in CRV (Curve) and CVX (Convex Finance) forms, in addition to Ethereum staking yields. Prisma mentions that its codebase is based on the decentralized lending protocol Liquity, which launched a stablecoin pegged to the US dollar, LUSD, allowing ETH holders to mint LUSD interest-free by collateralizing ETH.

Recently, the data growth of the LSD stablecoin model Lybra Finance has garnered much attention, and Prisma Finance, as an early project with a similar model, has also received funding from many well-known institutions. Many users are interested in Prisma Finance's further plans, especially the IDO timeline, but the Prisma Chinese community has stated that there is currently no IDO timetable.

5. Raft ------ LSD Interest-Free Lending Stablecoin Protocol

Raft is similar to Gravita Protocol and is also a decentralized lending protocol built on Ethereum. It issues the stablecoin R, allowing users to deposit R or collateralize stETH or wstETH to borrow R, earning staking yields while also being able to consume R in other protocols within the ecosystem, improving capital utilization. Currently, the minimum collateralization rate is 110%, and users must borrow at least 3000 R. Raft currently charges a fee of 0.1%.

Raft claims to allow users to achieve up to 11 times leverage on stETH while providing a very simple operational process. Users only need to set the amount of stETH to deposit, the target leverage, and slippage, and they can execute operations according to automated steps. The maximum leverage for Raft is calculated based on the stETH collateral ratio in Aave v3 and Maker, with annual fees based on the difference between the stETH supply APY and the USDC borrowing APY on Aave v3, as well as the DAI stability fee.

According to information from Raft's official website, its investors include well-known market makers such as Wintermute, Jump, and GSR.

Raft went live on June 5, and within less than a day, its TVL has reached $16.43 million.

6. [Tenet Protocol](https://www.rootdata.com/zh/Projects/detail/Tenet Protocol?k=Nzk3OQ==) ------ Liquid Staking Layer 1 + Interest-Free Stablecoin Lending Protocol

Tenet Protocol is an EVM-compatible Layer 1 blockchain based on Cosmos and is also an interest-free stablecoin lending protocol that provides multiple yield opportunities for LSD holders.

First, users can stake LSD with Tenet network validators to earn staking yields. Users can borrow LSDC collateral assets interest-free while ensuring the yield from their original LSD assets and deploy LSDC for consumption in the DeFi ecosystem, releasing additional liquidity and utility through LSDC.

Additionally, users can provide liquidity for LSDC in the stability module to earn extra yields in the Lucidity system through liquidation and receive Tenet token rewards from the local reward pool. The minimum collateralization rate for LSDC is 125%, and users must borrow at least 500 LSDC. The stablecoin section of Tenet Protocol is also a fork of Liquity. Recently, Tenet Protocol announced that it is building for full-chain expansion on LayerZero.

The project team of Tenet Protocol has extensive experience in product and marketing. CEO Greg Gopman was the former CMO of Ankr, growth lead at Kadena, and co-founder of Akash. COO Dan Peterson is a former revenue operations expert at Blockdaemon. CPO Alex Cheng was a senior product manager at Tendermint-Cosmos and Composable Finance. CTO Dan Lashin was the former CTO of Minter.

Tenet Protocol has launched its testnet and will soon launch its mainnet on Ethereum. In May, Tenet Protocol initiated its IDO at a price of $0.02, raising a total of $3.36 million.

Recommended Reading: “An Interesting IDO Project: Tenet Protocol”