Under the Shanghai Upgrade Wave: Sub-sectors and Development of LSDFi
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Under the Shanghai Upgrade Wave: Sub-sectors and Development of LSDFi
As time progressed, more LSDFi protocols were launched.
Navigating Web3 tides with focused insightsProduced by: TechFlow Research Institute
Author: Yu Zhong Kuang Shui
In our previous article "The LSD Matryoshka War Escalates: It’s Not Just About Liquidity, But High Yield," we mentioned three LSDFi protocols: YFI, PENDLE, and AURA. With the completion of Ethereum's Shanghai upgrade, more LSDFi protocols have emerged and performed well.
Agility is a prime example. During its launch period, Agility attracted $400 million in TVL thanks to high-yield liquidity mining rewards. In fact, the title of our previous article already highlighted the most critical aspect of LSDFi: pursuing high returns. If we extend this further, it becomes about pursuing higher capital efficiency—that is, under the same conditions, minimizing costs or maximizing output to use capital more effectively.
As time progresses, more LSDFi protocols are being launched. Next, we will introduce several noteworthy LSDFi protocols and break down their underlying logic.
EigenLayer
EigenLayer is an Ethereum restaking protocol that allows stakers to re-stake their ETH into new smart contracts, using ETH to secure other networks—such as sidechains, cross-chain bridges, and middleware. Beyond expanding revenue streams for ETH stakers, EigenLayer broadly enables developers to build sidechains, bridges, and middleware atop Ethereum restaking, thus promoting further growth of the Ethereum ecosystem.
Currently, EigenLayer has launched a non-incentivized testnet. Interested users can refer to this guide for interaction.
It’s also worth noting that Ion Protocol is a CDP protocol built on top of Ethereum staking positions. The protocol aims to accept deposits of various types of liquid staking tokens (LSTs) and EigenLayer staked asset positions. After aggregating these assets into a category called allETH, it uses vaETH to track the yield of allETH. Its goal is to consolidate all Ethereum liquid staking derivatives and achieve yield aggregation.
unshETH
unshETH is an LSDFi protocol that promotes decentralization of Ethereum staking validators through liquidity incentives. unshETH introduces two key concepts: validator decentralization mining (vdMining) and validator dominance options (VDOs).
We can understand vdMining as a form of layered liquidity incentive. Pure layering isn't sustainable, so vdMining incorporates decentralization incentives. In simple terms, vdMining uses governance to set an ODR (Optimal Decentralization Ratio). The closer the CR (Current Ratio) gets to the ODR, the higher the mining rewards for all users in the pool. This mechanism aims to incentivize users to stake ETH into more decentralized LSD protocols, thereby advancing overall decentralization across the Ethereum staking landscape.
We’ve mentioned ODR; within ODR, holders of dominant LSD assets can write VDOs, which non-dominant LSD holders can purchase via the unshETH DAO. My personal understanding is that VDOs represent your right to exercise at expiry, with profits or losses depending on the CR. If the LSD asset's share at expiry is closer to the ODR, you profit.
This provides non-dominant LSD asset holders with an additional revenue stream. The ultimate goal of VDOs is to better adjust the CR value by creating a secondary market. Of course, this is just my personal interpretation—the final product may differ.
Lybra Finance
Lybra is an over-collateralized stablecoin protocol. Unlike MakerDAO and Liquity, Lybra mints interest-bearing stablecoins (eUSD) by collateralizing yield-generating assets like stETH. The stETH-generated yield is converted into eUSD and distributed to both eUSD holders and Lybra token stakers.
At its core, Lybra captures Ethereum staking yields through the stablecoin eUSD. The safe collateralization ratio for eUSD is 160%, with an APY of 7.2%. Under ideal conditions (minting $1 of eUSD with $1.6 of stETH), the profit efficiency of eUSD is slightly lower than holding stETH directly. However, eUSD is a liquid asset, allowing holders to deploy it in DeFi protocols for additional gains, thereby offering higher capital efficiency to Lybra stakers.
From another perspective, Lybra essentially helps Ethereum stakers monetize future yield in advance.
However, prior to its IDO on April 20, Lybra faced widespread community skepticism due to funds originating from Tornado Cash, a frontend deposit cap without a backend limit in the IDO contract, and the team’s ability to withdraw raised funds before users claimed their tokens. Despite the FUD, Lybra’s IDO sold out within one minute.
Index Coop
Index Coop has launched three LSD-related index products.
The first product is the dsETH index. dsETH consists of rETH (Rocket Pool), wrapped stETH (Lido), and sETH2 (StakeWise). This design aims to reduce single-LST risk and stabilize overall returns across the token basket. Currently, dsETH has 800 ETH staked, with an APY of 4.93%.
Index Coop’s second LSD-related index is the icETH index. icETH leverages the lending protocol Aave to provide leveraged exposure for Ethereum stakers, aiming for higher returns. It offers leveraged exposure to icETH holders and reduces the risks and manual effort of managing leverage through automated leverage management. Simply put, after purchasing icETH, the protocol deposits stETH into Aave as collateral to borrow ETH. Then, it converts the borrowed ETH back into stETH and redeposits it into Aave, creating a leveraged position. Currently, icETH has 10,139 ETH staked, with an APY of 9.79%.
dsETH and icETH capture value from both the “staking layer” (validator rewards) and the “execution layer” (DeFi yields).
The third product is the gtcETH index. gtcETH is an index product jointly launched by Gitcoin and Index Coop. Rather than maximizing returns, gtcETH enables stakers to support public goods funding by sharing staking rewards with Gitcoin.
From my perspective, including Index Coop in this article lies in the simplicity of its product logic and low entry barrier. While icETH’s yield isn’t extraordinary, its automated leverage execution makes it easier for more investors to access enhanced staking rewards.
Conclusion
Ultimately, the goal of every LSDFi product is to enhance capital efficiency in Ethereum staking, but we can also observe the emergence of niche segments:
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Driving adoption of LSD assets: EigenLayer, Lybra, Aura;
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Simple, low-barrier index products: Index Coop, YFI;
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Delivering higher capital efficiency: Pendle, Agility;
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Promoting decentralization in LSD staking: unshETH;
Short-term price fluctuations in Ethereum following the Shanghai upgrade won’t diminish the potential of the LSD and LSDFi sectors. Undeniably, LSD assets and LSDFi applications have become integral components of the Ethereum ecosystem.
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