Ethereum staking rate exceeds 20%, LSDFi upgrades again: high yield, re-staking, more decentralization

Author: Grapefruit, ChainCatcher

According to data from Nansen, as of September 15, the amount of staked Ethereum on the Beacon Chain has exceeded 26.6 million ETH, accounting for 22.3% of the total circulating supply of Ethereum. Based on the current ETH price, this is valued at approximately $43.59 billion, and the amount staked is expected to only increase in the future.

How to activate the staked value of over $10 billion in ETH and release more liquidity is the mainstream narrative in the current LSD (Liquid Staking Derivatives) space.

According to Dune data, the current locked crypto assets in LSDFi applications are only $350 million, indicating potential growth as the Ethereum staking rate rises. This has led to LSDFi being considered the most promising growth sector, with applications focused on LST (Liquid Staking Tokens) assets, such as Pendle and the basket of LST assets called unshETH, receiving funding in August alone.

Conceptually, LSDFi refers to products built around various liquid staking tokens (LST) such as stETH (Lido), rETH (Rocket Pool), sfrxETH (Frax), and cbETH (Coinbase), utilizing DeFi methods or logical narratives to enhance asset yield, liquidity, and utilization.

Currently, LSDFi products can be mainly categorized into four types based on their yield acquisition paths:

The first type combines with existing DeFi products to provide users with more staking, lending, and yield opportunities for LST assets. For example, MakerDAO's newly launched lending protocol Spark Protocol supports LST assets as collateral for minting DAI, Curve's stablecoin crvUSD also supports LST as collateral for minting stablecoins, and Yearn's yETH supports a basket of LST assets;

Refer to the article “Ethereum Shanghai Upgrade: How Established DeFi Applications Can Enter the LSD Space and Share the Pie?

The second type utilizes DeFi product yield logic to construct new stablecoins and lending applications, such as Lybra Finance and Prisma Finance, which support zero-fee minting of interest-bearing stablecoins using LST assets, and Raft and Gravita have launched interest-free lending stablecoin protocols using LST assets as collateral.

Refer to the article “After Surging 40 Times in Just Over a Month, Is the LSD Stablecoin Protocol Triggering a New Round of LSDFi Wars?“

The third type is re-staking products, which involve re-staking LST assets to obtain dual staking yields, with EigenLayer being the main representative product.

The fourth type mainly refers to derivative products built on LST staking yields, including protocols like Pendle that provide automated yield strategies and a basket of index tokens like unshETH.

The first two types are not unfamiliar to DeFi users, and their yield logic is relatively common, primarily constructed around the "LST + DeFi" yield logic, making them easy to understand. In contrast, "re-staking yields and yield derivatives" are less common due to their more complex yield logic. So what exactly are re-staking and LST yield products? What are the representative applications? How do they differ from the common LSD and DeFi integration logic?

Re-staking Track Focused on Yield and Lowering Staking Barriers

The re-staking track mainly targets validators, allowing users to re-stake their staked ETH to obtain dual yields, thereby increasing the yield of staked assets while enabling node operators to earn additional income by "part-time" servicing other networks. The main representative products are EigenLayer and the emerging liquid staking LSD platform Puffer Finance.

• Re-staking Platform EigenLayer

EigenLayer is a re-staking protocol built on the Ethereum staking market that supports re-staking LST assets to earn staking yields beyond Ethereum's PoS. It introduces the concept of re-staking, which simply allows Ethereum stakers to re-stake their ETH staked on the Beacon Chain through EigenLayer to obtain dual staking yields.

EigenLayer was developed by EigenLabs in 2021, with team members primarily from the United States. According to the crypto data platform RootData, EigenLayer has undergone two rounds of public financing, raising $14.5 million in a seed round in 2022 and $50 million in a Series A round in March 2023 at a valuation of $500 million, with investors including Polychain Capital and Coinbase Ventures.

So, what is the operational mechanism of EigenLayer's re-staking?

On the EigenLayer platform, there are three main roles involved: stakers, node operators (AVS), and application chains or small to medium-sized blockchain networks.

Stakers, also known as Restakers, refer to users providing LST assets on the platform. They offer their LST assets to EigenLayer to earn staking yields beyond Ethereum's basic PoS rewards, while also bearing the risk of potential penalties for providing their LST assets as collateral to node operators.

Node operators are also known as AVS (Actively Validated Services), which provide distributed node services that ensure security and decentralization for networks or projects. They obtain LST assets through EigenLayer to provide node services to projects or networks needing AVS services, extracting profits from the node rewards and fees provided by the projects.

Application chains or small to medium networks refer to middleware networks such as cross-chain bridges, oracles, and Rollups that have node validation needs. They are also known as "AVS demanders," needing AVS to provide security while hoping to reduce costs (for example, a Rollup chain or cross-chain bridge can use LST assets as collateral for node operators). They can purchase or lease such services through EigenLayer without needing to build their own AVS. This is part of the modular blockchain functionality, where some smaller networks can outsource node operator services to EigenLayer and focus on what they do best.

From this perspective, EigenLayer can be seen as an intermediary service platform connecting stakers, AVS, and application chains, attracting LST asset holders to lock up (Restaking) on one side and providing the locked LST assets to AVS on the other side, allowing AVS to offer convenient, low-cost AVS leasing services to middleware or sidechains and Rollups. During this process, EigenLayer acts as a bridge between LST providers and AVS demanders, providing demand matching services, with dedicated staking service providers responsible for specific staking security services.

Additionally, the EigenLayer development team has also created a decentralized data availability layer (DA) service called EigenDA, which handles data availability, transaction execution, etc., providing data availability services for Rollups or application chains that need DA layer services. Its functionality is similar to the data availability layer of modular blockchains like Celestia, but EigenDA's data layer maintains DA network security through re-staked incentivized validators from EigenLayer, eliminating the burdens required to launch Celestia.

Currently, multiple Layer 2 networks have indicated they will use or integrate EigenLayer's AVS services and EigenDA data availability layer. For example, Celo will use the EigenDA data availability layer when transitioning to Layer 2; the Layer 2 network Mantle is currently using MantleDA, a modified version of EigenDA; the Rollup expansion layer AltLayer will use EigenLayer's AVS validators; and the ZK infrastructure startup Polyhedra Network announced a strategic partnership with EigenLayer to use its re-staking system to build zkBridge-based interoperability components, etc.

However, it is important to note that EigenLayer's products also have some controversies. First, while many claim that using LST assets as collateral for node operators provides blockchain security on par with Ethereum, the current node validation services provided by EigenLayer do not inherit the security of the Ethereum mainnet and cannot provide the same level of security as Ethereum. It merely re-utilizes ETH staked on the mainnet as collateral for node operators, and application chains purchase validation services from EigenLayer, which do not use the same system as Ethereum's node validation, with the number of nodes and staking amounts not reaching the same level as Ethereum.

Although EigenLayer can integrate Ethereum mainnet node operators into the platform, the AVS integrated into EigenLayer essentially amounts to "part-time side jobs," where node operators complete their Ethereum mainnet validation work while also taking on additional validation work on EigenLayer. While EigenLayer provides these node operators with extra income, the additional validation work also raises the security risks for validation nodes. Vitalik has expressed a similar viewpoint, believing that using Ethereum node operators to validate other blockchain networks will overload the consensus of the entire Ethereum network, and the re-staking mechanism will compound the risk of Ethereum fragmentation, thereby affecting the overall network security.

Moreover, while the node validation services provided by EigenLayer appear to offer convenience to some networks, this outsourcing approach may not be sustainable in the long run, primarily because node operators are responsible for the normal secure operation of the network. Outsourcing means handing security over to a third party, and node validation remains the main application scenario for the network's native tokens. Once networks issue tokens in the future, some application chains will inevitably use native tokens as staking assets to establish their own node validation systems.

Currently, EigenLayer has not opened node staking and AVS services based on LST assets and is still in the testing phase of its roadmap (Restake Mainnet), only supporting users to deposit LST assets (Restaking). According to its blog released in August, it will soon launch the second phase of Operator Testnet node service-related networks.

Currently, EigenLayer only supports users depositing ETH, Lido (stETH), Rocket Pool (rETH), and Coinbase (cbETH). On August 22, the official announcement raised the LST staking limit to 100,000 tokens. When any LST reaches the milestone of re-staking 100,000 tokens, EigenLayer will again pause accepting staking.

According to the official website, the current TVL of the EigenLayer platform is 176,000 ETH, valued at approximately $290 million, with the highest staked amount being 98,300 stETH.

Additionally, users should note that currently, users staking LST on EigenLayer do not earn any yield, only participating for potential future airdrops. The day after announcing the increase in the LST limit, on August 24, EigenLayer's official announcement celebrated its development and the support of Restakers by issuing the NFT series EigenWorlds, allowing users to mint NFTs for free. Anyone is eligible to mint NFTs, but there are three different levels depending on whether the wallet has the following interactions: Restaker (has staked in EigenLayer), Collector (holds Zora NFT), Base Layer (no interaction with the EigenLayer ecosystem). Although the team has not disclosed whether this NFT minting is merely commemorative or has any utility, it is still considered by users as an important reference for future airdrops.

• Emerging LSD Staking Protocol Puffer Finance: Lowering Ethereum Staking Threshold to 2 ETH

Puffer Finance is a permissionless low-threshold liquid staking LSD platform that lowers the staking threshold for users from 32 ETH to 2 ETH.

According to the official introduction, Puffer Finance is not just a liquid staking protocol but also a protocol that can strengthen Ethereum's core position and address the threats to decentralization posed by existing staking pools on Ethereum. It has created a unique Secure-Signer mechanism, a remote signing tool designed to enhance the security of validator keys and prevent validators from being slashed due to software errors or user mistakes. In simple terms, Secure-Signer aims to prevent the possibility of slashing staked Ethereum due to accidents or consensus client errors, making it easier for individual users to participate in Ethereum staking, allowing any user to stake 2 ETH to become a validator, further promoting the stability and decentralization of the ETH network.

Additionally, Puffer Finance has received funding from the Ethereum Foundation, raising $650,000 in a pre-seed round led by Jump Crypto in June last year, and completing a $5.5 million seed round financing on August 8 this year, with investors including Bankless Ventures, Animoca Ventures, and EigenLayer founder, F2pool and Cobo co-founder Shen Yu, and Curve core contributor Mr. Block.

The current LSD space is a red ocean; how will the newcomer Puffer Finance establish itself?

Although there are already liquid staking platforms like Lido and Rocketpool in the LSD space, current LSD platforms have various issues. For example, while Lido has the largest amount of staked Ethereum, accounting for about 30% of Ethereum staking, node control is relatively centralized, and the centralization issue has been criticized; the second-largest staking protocol, Rocketpool, supports any amount of ETH staking but also faces centralization issues. In July this year, Lido accused it of having excessive power concentration, with its DAO organization controlling the output speed of its native RPL tokens. Additionally, to become an independent validator on the Rocketpool platform, one needs to provide 16 ETH and a certain amount of RPL tokens as collateral, which is still a significant amount of funds for validators, and the efficiency of use is limited.

Therefore, the LSD space has emerged new opportunities centered around "providing staking users with lower thresholds, higher yields, and making Ethereum mainnet nodes more decentralized." Puffer Finance is one of the new representatives in this regard, as it not only offers a lower entry threshold of 2 ETH for validating users but also enables higher yields for validating nodes, promoting further decentralization.

How is this achieved?

The main concern for individual validators is the risk of slashing their staked ETH due to unfamiliarity with validation software, operational errors, or external factors. In this case, the Secure-Signer mechanism provided by Puffer Finance can help reduce the risks for individual users' nodes, allowing any individual user to participate in validation staking.

Regarding yields, Puffer Finance integrates EigenLayer, allowing its nodes to operate AVS through re-staking (Restaking) on EigenLayer, earning yields beyond validating the Ethereum mainnet. Additionally, it plans to reasonably allocate MEV income to its nodes through an MEV smoothing yield mechanism to improve validator yield rates. In terms of costs, Puffer Finance only charges a 2.5% fee for staking users, significantly lower than the 10% charged by Lido and RocketPool.

As part of Puffer's commitment to Ethereum decentralization, it has set a cap on the size of the Puffer Pool, with a maximum capacity of 22%. If the Puffer Pool reaches 22% of the Ethereum mainnet validator set, it will stop Ethereum staking and adding new nodes.

Currently, Puffer is still in the early stages of development, with the testnet expected to launch by the end of 2023 and the mainnet expected to launch in 2024. At that time, users will be able to stake ETH on Puffer to obtain the staking certificate pufETH, and the native token PUFI will be used for voting and governance in Puffer DAO.

LST Yield Derivatives Focused on Increasing User Yield

LST yield derivatives refer to derivative products constructed based on LST staking yields, aimed at increasing the yield for users holding LST assets. The main representative products include the principal and yield separation protocol Pendle, a basket of LST token collections unshETH, the automated yield protocol Instadapp Lite V2, and the LST yield lottery platform Asymetrix.

• Principal and Yield Separation Tokenization Protocol Pendle Finance

Pendle Finance (Pendle) was originally a DeFi yield protocol on Ethereum that separates and tokenizes the principal and yield of interest-bearing assets to meet different user investment needs, created in March 2021.

Before 2023, Pendle Finance did not perform particularly well, with its TVL hovering around tens of millions of dollars, and the application remained lukewarm until the Ethereum Shanghai upgrade was completed and the LSD space heated up, allowing this established DeFi protocol to transform through the LSD narrative.

On August 23, Binance Labs officially announced an investment in Pendle Finance, making it a hot application in the crypto community again. According to DefiLlama data, as of September 15, Pendle Finance's application TVL was $145 million, and its token PENDLE is currently priced at $0.58.

In Pendle, interest-bearing assets are divided into two parts: one part is the principal of the interest-bearing asset PT (Principal Tokens), and the other part is the yield portion Yield Tokens (YT). YT and PT can be traded on Pendle AMM, allowing users to purchase assets at discounted prices, participate in various yield strategies, or earn yields by providing liquidity to the liquidity pool.

In the early days, the interest-bearing assets launched by Pendle were primarily aTokens, cTokens, or LP assets related to lending protocols and DEXs. Nowadays, LST assets like stETH, sfrxETH, swETH (Swell), and OETH (Origin) are the main interest-bearing assets on the Pendle platform.

How does it work? Users can deposit interest-bearing assets (yield-bearing tokens) such as LST assets on the Pendle platform, which Pendle will package into standardized yield tokens SY (for example, LST---SY-LST), and the underlying interest-bearing assets can be traded on Pendle AMM. Then, SY is split into two components, principal and yield, and tokenized as PT (Principal Token) and YT (Yield Token), allowing users to trade yield rates by buying and selling PT and YT.

At this point, users can formulate trading strategies based on their risk preferences or needs, such as betting on an increase in stETH's yield by purchasing more yield tokens or using stETH to provide liquidity without increasing risk.

For example, if Xiao Ming deposits 1 stETH, it will automatically mint 1 PT-stETH and 1 YT-stETH, where 1 PT-stETH can be redeemed for 1 stETH, and 1 YT-stETH represents all the yield from the 1 ETH (stETH) deposited in Lido. If Xiao Ming seeks stable low-risk yields, he can sell the uncertain YT-stETH and hold PT-stETH; if he believes the stETH yield will increase, he can purchase more YT. Additionally, he can provide liquidity with his YT or PT on Pendle AMM to earn a share of the trading fees.

In summary, Pendle provides different investment products based on users' risk preferences.

Moreover, what attracts users' attention the most about Pendle is that the yield rates for LST assets provided are far above the current market average. According to the official website, the yield for stETH can reach 10.3%, and the yield for swETH is 13.83%, while on other platforms, LST yields are mostly around 3%-4%.

Why are Pendle's LST asset yields so high? This is mainly because on the Pendle platform, users can not only earn LP fees or the platform's inherent yields but also receive PENDLE token rewards. The emission of PENDLE tokens is based on a VeToken and voting model for liquidity pool mining, and the yield can be inflated based on the amount of VeToken held. vePENDLE holders can vote to determine the weight of PENDLE token reward emissions for liquidity pools. In simple terms, the higher the value of the held vePENDLE, the more yield or incentives one receives, similar to Curve's veCRV. Therefore, Pendle's LST pool yield can reach 10%-30%.

Taking the yield for OETH as an example, the front-end page displays a yield of 24.39% for the OETH liquidity pool. However, upon clicking that page, the actual basic yield is 14.96%, which includes a 6% basic yield for OETH and a 1.34% PT yield, along with Pendle's LP yield, which includes LP fees (1.3%) and accelerated yield portions (6.2%).

The remaining approximately 10% of the yield ultimately depends on the amount of VePENDLE held. For example, if the voting yield for the OETH liquidity pool is 3.84%, the actual yield would be 14.9% + 3.84% = 18.7%.

Currently, two auxiliary protocols, Penpie and Equilibria Finance, have been built based on Pendle's VeToken economic model to enhance LP yields, similar to the relationship between Curve and Convex.

For instance, users can enhance their yields in Pendle through Equilibria Finance, even without holding vePENDLE, achieving the highest yields (for example, OETH's yield on that platform is 23.69%). This application currently has a TVL of $43.43 million. Penpie operates similarly, with a current TVL of $46.38 million.

In addition to its LSDfi business, Pendle is also exploring the RWA sector. The day after Binance announced its investment (August 24), Pendle Finance's developers stated they would use MakerDao's sDAI and Flux Finance's stablecoin fUSDC to develop its first RWA tokenization product.

• A Basket of LST Asset Collection unshETH

unshETH is a collection of basket LST assets aimed at achieving Ethereum decentralization through its designed incentive distribution mechanism. The incentive scheme designed by unshETH prioritizes decentralizing validator nodes to disperse funds within the LSD ecosystem applications. In simple terms, the unshETH platform can prioritize the issue of validator centralization when distributing its ETH in LSD ecosystem applications through its unique incentive distribution mechanism.

In August of this year, unshETH announced the completion of a $3.3 million seed round, with investors including MH Ventures, Soma Capital, and ICONIQ Capital.

On the unshETH platform, LST assets are packaged into an ERC20 token unshETH at a 1:1 ratio (for example, stETH, rETH, and cbETH are packaged into a single unshETH token), and unshETH is an omnichain token that can be transferred freely between the Ethereum mainnet and BNB Chain. Currently, unshETH supports deposits of wstETH, cbETH, rETH, sfrxETH, swETH, ankrETH, and other LST tokens to mint unshETH.

Additionally, the vdAMM on the platform supports exchanging unshETH for any LST asset, allowing users holding unshETH to earn a share of any AMM pool's exchange without having to choose between earning ETH staking yields, LP pool fee shares, and DeFi utility. For example, previously holding stETH and providing LP on the Curve platform would prevent one from earning stETH yields in other DeFi applications. Overall, unshETH's vdAMM mechanism centralizes the liquidity of LST funds, allowing users on the platform to freely exchange between different LSTs, with the cost and steps for A-LST to exchange for B-LST being much smaller and simpler than on DEXs.

How does unshETH guide ETH distribution in LSD applications in a decentralized manner? This is mainly achieved through two innovative products: validator decentralized mining (vdMining) and validator dominion options (VDOs).

Validator decentralized mining (vdMining) is a token incentive distribution method that rewards users for staking their LSD in a manner that aligns with the best decentralization ratio set by the unshETH community. Specifically, users can package ETH or LST into unshETH, and then further stake their unshETH to earn its native token USH rewards. The unshETH community will allocate liquidity pool yield rates based on the staking ratio of LSD protocols, with the specific ratio determined by governance proposals from the unshETH community. For example, if the amount of staked ETH in Lido is relatively high in LSD applications, the yield rate for the stETH staking pool will decrease.

Validator dominion options (VDOs) allow dominant LSD holders to trade options on their own validator node dominion. In simple terms, LSD holders can tokenize their node validation power and then trade it in the market, allowing both dominant LSD holders and dominators to earn rewards.

In summary, both vdMining and VDOs are constructed to promote the current staking ratio to approach the optimal decentralization ratio through different models.

Currently, unshETH has a locked TVL of $8.48 million, and its native token USH is currently priced at $0.03.

It is worth noting that in June of this year, unshETH experienced a situation where a private key in its contract was leaked, prompting the official to immediately suspend ETH withdrawals, resulting in no losses.

• Vault Strategy Instadapp Lite V2 Utilizing Lending Protocol Leverage to Increase LSD Yields

Instadapp was originally a decentralized asset management protocol that aggregates multiple DeFi protocols, including lending, DEX, and yield aggregators, allowing users to manage their funds across various protocols with one click. This protocol was created in 2018 and was once a very popular product during the DeFi Summer period, but it has remained lukewarm since the DeFi market cooled down.

Now, Instadapp has developed the account abstraction wallet Avocado (which supports access to multiple dapps), the DeFi protocol aggregation product Instadapp Pro (which aggregates multiple DeFi protocols for easy asset management), and a set of smart contract vaults Instadapp Lite that automatically execute DeFi strategies.

Instadapp Lite released its V2 version in February this year, launching a strategy for ETH staking rewards, utilizing lending protocols and liquid staking platforms to build its yield smart accounts to increase Ethereum staking yields.

In simple terms, Instadapp Lite amplifies ETH yield rates by utilizing lending protocols and ETH staking rewards. The specific implementation path is that Instadapp Lite's stETH Vault accepts stETH deposits and provides them to various lending protocols, then engages in circular lending, depositing stETH into lending platforms to borrow ETH, and then depositing ETH into Lido to obtain stETH, which is then re-staked to borrow ETH.

Additionally, assets deposited in the Instadapp Lite vault will be marked as iTokens. The IETH we see in LSDFi represents ETH or stETH and other assets deposited in the Instadapp Lite vault.

Currently, the value of Ethereum and LST assets locked in the Instadapp Lite vault is $66.23 million, with its TVL ranking second among LSDFi applications, only behind crvUSD.

• LST Lottery Yield Platform Asymetrix

Asymetrix is a lottery platform targeting LST yields, which pools the LST yields deposited by users and periodically draws lucky winners to award them all the LST yields, while other stakers will not receive any yield, only preserving their principal. This mechanism is similar to the previous on-chain lottery PoolTogether.

How does it work? According to the official example, suppose 100 users each deposit 1 ETH into the Asymetrix smart contract, totaling 100 ETH. Over time, this 100 ETH will generate an additional 5 ETH as staking rewards. Asymetrix collects these 5 ETH and fairly distributes them to only one user, while all 100 users retain their initial deposit of 1 ETH, with non-winning users receiving 0% staking rewards, while the winner receives the excess yield.

Asymetrix hopes to make user participation in LSDFi fun through this gambling approach, especially for small staking users, as they often only receive around 5% staking yields, which is not very attractive to them. This fun lottery approach allows participating users to have the opportunity to win higher yields.

The participation process is as follows: first, users deposit stETH into a public fund pool supported by the Asymetrix smart contract, which will mint PST (Pool Share Token) at a 1:1 ratio based on the amount of stETH deposited and send it to the user's wallet. The PST token reflects the user's share in the protocol and serves as a receipt for retrieving stETH in the future. In the current version of the protocol, the minimum deposit amount is 0.1 stETH.

Then, this fund pool generates yields every 24 hours, and the yields generated by the pool will be randomly selected by the Asymetrix protocol (currently once a week) to award one lucky user. The winning user will automatically receive a reward in the form of PST (equivalent to the amount of stETH), while other users will retain their initial deposits. Users can eventually burn PST to exchange it back for stETH at a 1:1 ratio.

Additionally, all participating users in Asymetrix will receive native ASX token rewards based on their staked stETH's proportion in the protocol's TVL. ASX is currently priced at $0.23, with a total issuance of 100 million tokens. Currently, the amount of stETH locked in the Asymetrix protocol is 10,997,300, valued at $17 million.