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Navigating the Staking Landscape: Part 3 - Insights Into LSD & LSDFi

CoinGecko's recent report highlights the significant growth in the Liquid Staking Derivatives market. The emergence of LSD has also given rise to the LSDFi sector, showcasing a promising future in DeFi innovation.

CoinGecko has just released its latest insights on the Liquid Staking Derivatives (LSD) market. Here is a quick summary of the key findings from the report.

In traditional crypto staking products, funds are often locked into a platform for a set duration, preventing them from being utilized elsewhere. LSD protocols allow users to stake tokens and, in exchange, obtain a derivative token that enhances liquidity. These tokens not only accrue staking rewards but can also be traded and used as collateral in DeFi platforms.

With Ethereum transitioning to Proof of Stake, the liquid staking market has seen significant growth. According to the report, by August 2023, 11.3 million ETH was staked in LSD protocols. This is 43.7% of the total 26.4 million ETH staked on the network. The numbers are expected to rise further as deposits into LSD protocols consistently surpass withdrawals.

Prior to Ethereum’s Shapella upgrade, most liquid derivative tokens traded at a discount. However, now they trade at a slight premium to ETH. This is because such tokens now earn additional rewards.

As of August 2023, the average annual yield across the top LSD protocols has been on a downward trend, currently sitting at 4.4%. With an increasing amount of ETH being staked each month, this yield will continue to decline.

Currently, Lido (token stETH) dominates the LSD market with a significant 75.6% share. Yet, this dominance has spurred concerns about potential cartelization and concentration risks, especially given Lido's permissioned validator model. There have been many suggestions put forward to fix this issue. Some propose limiting the ETH amount that can be staked in one protocol. Others suggest slowing down the growth of validators. However, a definitive solution remains elusive. 

It is worth noting that, despite Lido's first-mover advantage, its dominance is diminishing with the rise of competitors such as Coinbase, Rocketpool, and Frax.

The emergence of Lido and other LSD protocols has paved the way for a new DeFi primitive: LSDFi. LSDFi protocols are built on top of LSD and include projects that focus on Fixed Yield, Restaking, Collateralized Stablecoins, LSD Indices, and Yield Aggregators.

Since January 2023, the LSDFi sector has grown by a factor of nearly 60. By August 2023, the cumulative TVL of the top LSDFi protocols reached $919 million, with 81% dominance by Lybra, Pendle, and EigenLayer. Despite its substantial TVL, the LSDFi market is still in its infancy and holds significant potential for continued growth. 

In conclusion, as the overall staking market expands, the LSD and LSDFi segments stand out for their vibrancy and innovation, suggesting a prosperous future for protocols tailored to this niche.