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LSD Hidden Winners: How lending protocols leverage LSD for leveraged collateral and protocol revenue.

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Leveraged staking is the primary growth engine for LSD.

Original Title: "The Biggest Hidden Winner of LSD: Loan Agreements"

Original Author: CapitalismLab

The profit earned from the lending agreement relying on LSD may be even more than the LSD agreement itself? Yes, you heard it right. After the upgrade on ETH, this potential is expected to be fully realized. There are not only investment/arbitrage opportunities here, but also clear airdrop opportunities. Let's take a look at this article for a breakdown.

First, let's take a look at the specific data. For stETH, which has not yet been unstaked and has large price fluctuations, currently 31% is on the AAVE/MakerDAO lending protocols, and a small amount is on Compound/Euler and other lending protocols. Even though its potential has not been fully tapped, it still holds the top spot as the largest application scenario for stETH, as Curve only accounts for 10%.

What will happen to this block after unstaking? Let's take a look at Avax, a relatively mature Alt-L1 DeFi ecosystem, where Benqi/AAVE, two lending platforms, account for as much as 65% of sAVAX (AVAX LSD) shares. In the past, during Solana's untroubled times, more than half of stSOL was on Solend, Solana's largest lending platform. If other protocols such as Larix are included, the overall proportion is also above 60%.

Why is this happening? There are two reasons:

LSD is already a high-quality collateral in the encryption industry. When mortgaged, it can also earn interest. It is suitable for people of all ages. From 3AC to wormhole, hackers like it.

Leveraged staking is the number one engine for LSD's growth, with collateral and borrowing highly correlated. It increases profits while minimizing the risk of liquidation. Please refer to the following figure for details.

Essentially, the loan agreement serves as a channel for transmitting the pledge interest rate to the underlying assets. For example, the stETH circular loan significantly increased the interest rate and volume of AAVE ETH, and AAVE transmitted this interest rate to the combined DeFi ecosystem and other platforms, thereby increasing the benchmark interest rate of ETH.

Since LSD is so profitable, there are optimized policies for lending agreements specifically for LSD, such as AAVE V3 Emode. If you only borrow ETH, the LTV of stETH collateral can be as high as 90%. Comp V3 also has similar terms for stETH/cbETH. Under these terms, 1 ETH can ultimately become 10 stETH, quickly expanding the scale of stETH. For arbitrageurs who buy stETH at a discount, they can also use this 10x expansion to increase their arbitrage profits.

Based on the above data, we estimate the earnings of the lending agreement. Assuming the total staking reward of LSD is X, 60% of LSD is in the lending agreement, the average LTV is 75%, the lending interest rate is 75% of the staking interest rate, and the agreement fee is 15% (AAVE ETH fee), then the income earned by the lending agreement is X*60%*75%*75%*15% = X*5.1%, while the staking reward split of the Lido agreement is only 5%.

This is essentially because the threshold for lending agreements is higher and places more emphasis on historical credit accumulation (such as AAVE, which has continued to widen the gap with Compound even without liquidity mining rewards). In addition, current competition has basically slowed down, so higher commission rates can be set.

As mentioned above, with the growth of LSD scale and the decrease of price fluctuations brought by Shanghai's upgrade, lending agreements will make a fortune quietly. However, it must be noted that the valuation of lending agreements is generally not low when valued by the total circulation market value/agreement income, with AAVE reaching as high as 160 times. Even if this good news is implemented, it will still not be undervalued, so this opportunity still needs to observe the narrative changes.

It is not easy to capture the narrative naturally, but there are still several airdrop opportunities to pay attention to here.

LSD mortgage has naturally generated some demands:

Avoiding mortgage liquidation requires appropriate leverage management tools.

Leveraged collateral operations are complicated and Gas costs are high. It's much simpler to use flash loans, which also require automated strategies (see the strategy of cian.app in the figure below).

One is the veteran project DeFiSaver that specializes in DeFi position management and leveraged trading. It has also proposed many one-click automation strategies for LSD. However, despite being online for more than three years, it has not yet issued its own token. With the profits earned from the previous bull market, it is unknown whether it has the desire to issue tokens. Nevertheless, DeFi Saver has been listed on Arbi/OP and the gas fees are not high, so it's worth a try.

Another one is cian.app, which is currently focused on developing automated strategies related to LSD. This project is basically a transparent airdrop and often releases various NFTs. They also mentioned in an AMA that they will launch their own coin in 23 years. According to TVL data, the growth is also good.

Cian supports three chains: ETH, Polygon, and Avax. When you open their official website, you'll see that they mainly offer LSD leveraged staking strategies. It's likely that they plan to take advantage of the current upgrade in Shanghai by launching their token in 2023.

In short, the income obtained from the loan agreement in LSD may not be inferior to LSD, but considering the current high valuation of the loan agreement, it still needs to rely on narrative to drive. Leveraged collateral can indeed expand collateral income, and there are currently airdrop opportunities. However, since it involves leverage, the risk is naturally higher than usual, so more homework needs to be done. Where to learn? Of course, pay attention to Miao Wa Zhong Zi Miao, thank you Miao (twitter.com/NintendoDoomed).