What is LSTfi?

      LSTfi is the term given to a new set of DeFi protocols that are built on top of Liquid Staking Tokens (LSTs).

      Liquid Staking Token Finance (LSTfi) has seen explosive growth this year, taking the spotlight as the hottest narrative of 2023. In this article we explore what LSTfi is, why it has risen to prominence this year, and what is next on the horizon for this new category of DeFi.

      What are Liquid Staking Tokens (LSTs)?

      At present, solo-staking on Ethereum requires a user to have a minimum of 32 ETH and the technical skillset to run and maintain a node. Liquid Staking lowers this barrier of entry for anyone looking to stake their assets. Instead investors can now stake any amount of ETH without the technical overhead. 

      When a user participates in Liquid Staking they receive tokens (LSTs) that represent their underlying staked asset in the network. Unlike regular staked assets, LSTs are liquid by nature and allow users to trade, leverage, and invest their tokens in other areas of DeFi.

      LST vs LSD, What is the Difference?

      • LST = Liquid Staking Token
      • LSD = Liquid Staking Derivative 

      Before we move further it’s worth pointing out that both terms refer to the same thing. However, due to a lack of regulation, LST is the preferred terminology to help future proof its continued and responsible growth of the market. This research was conducted by the Proof of Stake Alliance alongside a panel of legal experts .

      The Rise of LSTs in 2023

      Following the successful Shappela upgrade of the Ethereum network in April, confidence in ETH staking has gone from strength-to-strength. Shappella gave investors the freedom to stake and unstake their ETH at their own leisure. Since then the net inflow of staked Etheruem has consistently surpassed $700 million a week.

      This surge in staked ETH has been in-part been fuelled by the LST market, which has seen tremendous growth in 2023. This year alone, the combined TVL of all Liquid Staking Tokens on Ethereum has reached a market cap of $18+ billion, crowning LSTs as the top ranking category in DeFi, surpassing the combined TVL of Decentralized Exchanges.

      The top three players in the Liquid Staking space are Lido ($stETH), Rocket Pool ($rETH) and Frax Finance ($frxETH).

      Lido has dominated the liquid staking market since their launch, with stETH receiving inflows of $2.4 billion this year alone. At time of writing they currently command a 74.39% market share of all Liquid Staking tokens and have a TVL of $13.94b.

      Rocket Pool, the second largest non-custodial provider, has also had significant growth this year, rising in TVL to $1.85b. Similarly, Frax Finance has also seen healthy growth and is currently at $431.45m in TVL.

      Liquid Staking has given investors a lot more flexibility. They no longer need to choose between staking their assets or participating in DeFi, they can instead reap the benefits of both.

      The Emergence of LSTfi

      The rising tide of the Liquid Staking market has paved the way for a new category of decentralized finance, aptly titled LSTfi. 

      LSTs now provide a strong backbone of liquidity for new LSTfi products to build upon. So much so that LSTs are fast becoming the preferred collateral in Ethereum DeFi, replacing ETH itself.

      This year has already seen a new wave of LSTfi products enter the market, offering a range of innovative yield solutions to investors. More than 50+ LSTfi protocols have been launched to date, including new stablecoin protocols, lending services and indexes.

      LSTfi TVL $ Market Share by protocol
      LSTfi TVL $ Market Share by protocol – Source: DeFi Mochi’s Dune Analytics Dashboard

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      What’s Next for LSTfi?

      Although the LSTfi market is still in its infancy, the category has seen unprecedented growth this year and is well positioned to continue its growth trajectory in the coming months.

      The Ethereum LSTfi market cap currently sits at around $520mil, while there is over $18.66B in the Ethereum Liquid Staking market. That presents a big opportunity for both new and existing LSTfi protocols to offer alternative innovative yield solutions to existing Ethereum stakers. By doing so, the LSTfi market will likely continue to expand, further solidifying its presence as a pillar in the DeFi ecosystem.

      LSTfi protocols have provided the tailwind DeFi needed during the current bear market. While we may not yet be in an LSTfi summer yet, it is clear that Liquid Staking is contributing to the continued expansion of DeFi and growth of the Ethereum network as a whole.

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      About The Author

      Adam Campbell

      leads growth at Staking Rewards. He is most passionate about self-sovereignty, Web3 growth, marketing automation and community building.