What Is Liquid Staking Token Finance (LSTfi)? 

Written by Ryan McNamara

Reviewed by Logan Ross

Published on 2023-08-293 min read

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Liquid Staking Tokens (LSTs) have carved out a thriving sector in DeFi as an inclusive approach to staking Ethereum. With LSTs, users can enjoy staking rewards with a deposit of just 0.01 ETH, while also retaining control of their capital.

LSTs have become an increasingly popular choice for investors looking to benefit from Ethereum’s proof-of-stake consensus. Their unique mechanics make staking ETH far more accessible than previously possible. 

This growth has also seen the emergence of LSTfi protocols that seek to aggregate yield on offer across DeFi’s leading LST platforms. 

How Does Liquid Staking Token Finance (LSTfi) Work? 

Leading liquid staking protocols like Lido Finance and Rocket Pool allow users to deposit ETH to staking pools. In exchange, users receive an LST representing their holdings and accrued interest. 

These LSTs, such as Lido’s stETH and Rocketpool’s rETH, can be used freely in DeFi. As a result, users are able to retain control of their capital while earning yield.

Liquid Staking Token Finance (LSTfi) protocols further enhance this capital efficiency via platforms that provide opportunities for users to put their ETH and LSTs to work. 

These protocols utilize novel mechanics to maximize yield by deploying staked assets to various DeFi protocols. LSTfi projects thus enable users to compound their staked ETH.

Overview of 3 Notable LSTfi Apps

Despite the sector’s nascency, a number of LSTfi protocols are already competing to dominate market share. These innovative staking services are growing rapidly as more users stake ETH and look to maximize returns on their liquid staking derivatives. 

What is Pendle?

Launched in 2021, Pendle.Finance allows users to earn fixed yields on their assets. The protocol currently supports Frax’s sfrxETH, Lido’s stETH, Swell’s swETH, and USDT.

Pendle’s product suite offers users a number of opportunities to boost their returns.

Users can also provide liquidity, trade yield and bet on future growth through Pendle’s novel automated market maker (AMM).

The protocol is governed by holders of vePENDLE, which is granted to investors who stake the platform’s native token, PENDLE. At present, Pendle’s sfrxETH vault delivers the highest APYs on the platform, with users enjoying ~4.9% returns.

What is Origin Ether?

Origin Ether’s launch in May 2023 disrupted the LSTfi space with cutting-edge mechanics. Users can deposit ETH in addition to premier LSTs – stETH, rETH, and frxETH. In exchange, participants receive an equivalent amount of OETH representing their holdings and generated yield. 

Holders are free to use OETH like any other token, with yield distributed directly to holders’ wallets. Meanwhile, supplied collateral is deployed to blue-chip DeFi protocols in order to generate maximal yield. 

Origin Ether is governed by Origin DeFi Governance (OGV), which acts as the governance and value-accrual token for the broader Origin DeFi ecosystem. OGV stakers receive veOGV which empowers stakers to vote on new proposals and strategy allocations. At the same time, OGV stakers enjoy double-digit APYs derived from a portion of protocol fees.

OETH’s battle-tested strategies have seen the platform claim a place as Ethereum’s 2nd largest yield aggregator after Yearn Finance. 

The protocol’s unique mechanics have generated more than 44,000 ETH in TVL in just four months. Impressively, the protocol has still been able to offer trailing 30-day APYs of >6.6% despite scaling rapidly. 

What is Lybra Finance?

Lybra Finance entered the LSTfi fray in 2023 with a native interest-bearing stablecoin, eUSD.

Users can deposit ETH or Lido stETH in order to mint eUSD. Participants earn interest on their staked capital in eUSD, which can also be traded freely in DeFi. eUSD is an algorithmic stablecoin that maintains its peg through a number of mechanisms, such as overcollateralization.

Users who mint eUSD or provide liquidity to the eUSD-ETH pool can earn Lybra’s native token, LBR, which governs the protocol. 

Risks of Earning Yield on Ethereum?

Etherem’s thriving DeFi landscape offers endless opportunities to earn passive yield. Users can earn yield through a number of mechanisms, such as providing liquidity for trading pairs or staking tokens to specific protocols.

However, all investments carry varying degrees of risk. Conducting thorough research is vital when it comes to avoiding fraudulent projects. With battle-tested LSTfi apps like Pendle and Origin Ether, users can rest assured that their funds are being managed transparently and securely.

Will Liquid Staking Finance Catch On? 

As crypto’s most robust smart contract network, Ethereum’s success is integral to the space. It’s inevitable that Ethereum staking will continue its upward trajectory as the technology matures.

However, this also means that yields will decline as rewards are split between an increasing number of users. Liquid staking finance is built to address this decline in pure staking rewards. By aggregating yield through innovative mechanics, LSTfi protocols offer vital utility that boosts yield for users.

Despite making substantial strides, LSTfi remains in its infancy. With this in mind, the sector is primed for tremendous growth in years to come.