Liquid staking derivatives (LSDs) have grown in popularity in recent months. That's because these derivatives allow users to unlock the value of their staked assets, thereby allowing them to both stake and use their assets if they like.
People who use LSDs, as they are called, are having their DeFi cake while eating it. It's a tool that makes life easy for many DeFi investors, and it's little wonder they are now really popular.
However, this class of assets is yet to reach its full potential.
What Are Liquid Staked Derivatives?
Imagine you've got 10 ETH, and you want to
While you're sitting back and earning ETH on your 10 ETH, you could be missing out on even bigger economic opportunities because you're staking. For a long while in crypto, there wasn't any real solution to this problem. People simply accepted it as part of the risks of crypto.
However, in time the idea of liquid-staked derivatives started gathering steam. People soon realized that they don't have to lock up their tokens without access to it. They realized that they could deposit their tokens with a liquidity provider, stake those tokens, and get derivatives in return for their tokens. These derivatives carried the same value as their original tokens and could be sold, loaned, or used to purchase items almost anywhere in the world of Web 3.0.
LSDs got popular in the wake of the
This meant that people who staked their Ethereum were going to lose access to it for a very long time. Liquidity pools were an important solution to this problem, as they provided people with derivatives that they could use after staking their Ethereum. These pools also ensured that people who didn't have up to 32 ETH could simply pool their ETH with others to validate on the Ethereum chain.
Liquid Staking Derivatives Today
Right now, LSDs play a very important role in DeFi. For example, 20% of the total value locked in DeFi is in LSDs. These LSDs are provided by liquidity providers. These Liquidity Providers (LP) are the ones that guarantee the stability of the LSDs they offer. The original tokens are staked through the LPs, and then the LPs give stakers LSD equivalents of their original tokens.
One important effect that LSDs have had on the wider crypto ecosystem is the injection of liquidity. With staking, a lot of the liquidity in crypto is locked away in a vault. This means the higher the percentage of staked assets, the lower the volume of transactions in the ecosystem itself.
However, liquid staking derivatives solve this problem by introducing extra liquidity. Because of LSDs, staked assets no longer have to remain stationary and inactive. These same assets can be put to work in the market and can drive up trading volumes at the same time.
Interestingly, this doesn't mean that LSDs are perfect. These assets usually have limited interoperability, especially in cross-chain situations. Hence, a lot of these assets remain in the native chain, thereby limiting the reach of liquidity to other chains.
However, that doesn't have to be a problem forever.
Introducing Cross-Chain LSDs
The biggest liquidity provider now is Lido Finance. The protocol currently has close to $6 billion in total value locked (TVL) and has close to two hundred thousand stakers securing it. The company currently provides LSDs for five cryptocurrencies. These currencies are Ethereum (ETH), Polkadot (DOT), Polygon (MATIC), Solana (SOL), and Kusama (KSM). Lido Financial's range is impressive, but it still means LSDs cannot be useful in all cross-chain scenarios.
The core problem with many LSDs is that they don't offer a frictionless cross-chain experience. This means that users may have to restrain themselves to one chain when using their derivatives.
But that isn't always the case. There are some protocols that provide liquid derivatives that can be used in both EVM and non-EVM chains.
Entangle Protocol, for one, creates assets that are borderless and can be deployed on any chain. But that's not all. The protocol also allows users to borrow EnUSD, a fully collateralized USD stablecoin, through its synthetic assets. By doing this, Entangle Protocol provides near-instant liquidity to every user holding an Entangle LSD through a separate dApp called Synthetic Vaults.
Synthetic Vaults provide liquid derivatives that are cross-chain replications of liquid assets. This means that these assets can be ported to any chain, and can be used as regular assets to complete transactions.
The innovation that Entangle Protocol brings to the crypto ecosystem is twofold. The first is that the protocol removes the friction associated with bridging liquidity between EVM and non-EVM chains. Secondly, the issuance of an Entangle stablecoin means that users will always have access to easy liquidity in any manner they want.
The implications of this on the wider crypto ecosystem are extremely significant. It means that liquidity can be recycled across several chains and that LSDs will end up having more utility and higher interoperability. For example, users can move the LSD of a liquidity provider of one chain to another chain and use that as collateral for even further yield. So not only can users eat their cake and have it — they can also eat their cake, and then double it. That's the power of LSDs.
In the long run, this will lead to enhanced liquidity and yield optimization. More investors and users will be able to use their assets across more chains and will be able to put them to work at more protocols than ever.
Conclusion
LSDs are a new and growing part of crypto. These assets have contributed to solving the liquidity problem in crypto. However, these assets are still very limited as they are. What Entangle Protocol plans to do is open up LSDs to even more use cases, and massively improve the liquidity in the crypto ecosystem as a whole.