In Decentralized Finance (DeFi), an intriguing and optimistic narrative has surfaced known as LSDFi. The term “LSDFi” describes a collection of protocols covering various aspects of the DeFi ecosystem based on Liquid Staking Derivatives (LSD).

These protocols comprise more intricate initiatives that make use of the special qualities of LSD, as well as more traditional DeFi elements like lending platforms and Decentralized Exchanges (DEXs).

In this blog, let’s have an in-depth look at this new trend in crypto, LSDFi.

What is LSDFi?

LSDFi is a collection of protocols that use the LSD (Liquid Staking Derivatives) platform and associated tokens for financial transactions inside the DeFi sector. We must understand LSD and LST (Liquid Staking Token) to understand LSDFi fully. On the LSD platform, we will receive LST tokens in proportion to the assets we lock up through liquid staking. We will receive 1 stETH (this is LST) if we put 1 ETH into Lido’s liquid staking. LST tokens, like stETH, are used by LSDFi applications for a range of financial transactions in the DeFi sector.

Liquid staking users are a market that LSDFi protocols want to target. Furthermore, the LSDFi ecosystem was developed under the presumption that Ethereum staking rates in Lido-like protocols would eventually rise.

Basically, users of the LSDFi Platform can earn interest beyond what they would have through staking. From the user’s point of view, this is how LSDFi applications are primarily used. 

How Does LSDFi Work?

LSDFi operates on a simple premise: It tokenizes staked assets and makes them tradable. Let’s understand it by a step-by-step breakdown of how LSDFi works:

• Staking: Users begin by staking their cryptos in a participating network or platform. The staked assets are typically locked up to support the network’s operations and secure its blockchain.
• Tokenization: Once the assets are staked, they are tokenized into a liquid form, often referred to as Liquid Staked Tokens (LSTs). These LSTs are representations of the staked assets on the blockchain.
• Liquidity: LSTs can be traded, sold, or used in various DeFi protocols without the need to unstake the underlying assets. This allows users to access the value of their staked assets while still participating in the staking ecosystem.
• Earning Rewards: Users continue to earn staking rewards even while their assets are tokenized and used in DeFi applications. This is a key advantage of LSDFi, as it maximizes the potential returns on staked assets.

Use Cases of LSDFi

Several projects and platforms have embraced the LSDFi concept, and they offer various use cases for tokenized staked assets:

• Play-to-Earn Games:

Play-to-Earn (P2E) games are a fascinating intersection between the gaming and DeFi worlds. They leverage LSDFi to create innovative and rewarding experiences for gamers.

The LSDFi project connected to play-to-earn games allows gamers to stake their in-game assets or tokens, often tied to the game’s ecosystem. Here’s how this works:

• Staking In-Game Assets: Gamers can stake in-game assets such as characters, items, or tokens into a smart contract or within the game ecosystem.
• Earning Staking Rewards: Players continue to earn rewards by staking these assets, which might be in the form of the game’s native tokens or other crypto assets.
• Active Participation: What sets play-to-earn apart is that players can continue using their staked assets in the game. This enables them to actively participate in the in-game economy, such as buying, selling, or utilizing these assets for gameplay.
• Synergy with DeFi: The unique synergy between gaming and DeFi is created as players can use their staked assets both within the game and in decentralized finance platforms. Players can maximize their earnings by participating in both ecosystems simultaneously.

This integration introduces a novel way for gamers to monetize their gaming experiences and invest in digital assets, potentially transforming how the gaming industry operates.

• NFTs:

NFTs have taken the art, entertainment, and collectibles industries by storm. LSDFi extends this trend into the world of staked assets. LSDFi projects that offer NFTs linked to physical items like gold. The concept of tokenizing physical assets via NFTs has gained significant attention, and LSDFi adds a layer of liquidity and utility to this market.

• Staking Physical Assets: Users can stake their physical assets, such as gold, real estate, or luxury items, into a blockchain-based system.
• NFT Representation: These staked assets are represented as NFTs on a blockchain. A real-world asset backs each NFT, and its value is directly tied to the underlying asset’s value.
• Trading and Utilization: NFTs representing physical assets can be traded on NFT marketplaces, and their ownership can easily change hands. Users can also use these NFTs as collateral or assets in various DeFi applications, enhancing their utility.
• Value and Scarcity: The value of these NFTs may fluctuate based on the market demand for the physical asset they represent. Scarcity and uniqueness contribute to their value, much like traditional collectibles.

The fusion of LSDFi with NFTs introduces a new level of liquidity and accessibility to traditionally illiquid assets, offering exciting possibilities for investors and collectors.

• Liquid Staking Platforms:

Liquid staking platforms are central to the LSDFi ecosystem, as they make it easier for users to stake assets and enter the DeFi world with tokenized versions of their stakes. These platforms offer a user-friendly experience for crypto enthusiasts interested in LSDFi.

• Staking Simplified: Liquid staking platforms simplify the staking process. Users don’t need to navigate complex smart contracts or deal with the technical aspects of staking. They can stake their assets easily via the platform.
• Tokenized Stakes: Users receive tokenized versions of their stakes after staking, often denoted as Liquid Staked Tokens (LSTs) or similar terms.
• DeFi Integration: Liquid staking platforms typically integrate with various DeFi applications, including lending, borrowing, and trading. Users can use their LSTs as collateral to access loans or participate in yield farming.
• Staking Rewards: Users continue earning staking rewards while tokenizing their assets. These rewards can often be claimed directly from the platform.

These platforms serve as gateways into the LSDFi world, offering a seamless transition from traditional staking to more versatile and lucrative DeFi opportunities. Users can benefit from staking without sacrificing liquidity.

Conclusion

LSDFi protocols have opened new gates for LSD holders. LSDFi encourages staking participation and may accelerate the expansion of liquid staking by offering more use cases. Since the industry is still in its infancy, it will be important to keep an eye out for new developments and the acceptance of LSDFi. We are only beginning to explore the surface of the rapidly expanding ecosystem that is liquid staking.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.