A Comparative Overview of LST-Backed CDP Stablecoin Protocols
Raft, Gravita, Lybra and Prisma Finance
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Introduction
Raft
Gravita
Lybra Finance
Prisma Finance
Conclusion
Introduction
In our first part, we covered LSD protocols, the comparison with traditional staking, Ethereum Shanghai Update, as well the various structures such as Distributed Validator Technology (DVT), and single-level collateral LSDs. See below:
Now we move on to the second layer over this framework: LSDfi, which allows us to utilize LST and improve the yield of the basic assets. The research of LSDfi will be split into additional 2 parts: in the first we will look at the general state of LSDfi and the projects representing LST-backed stablecoins, such as Raft, Gravita, Lybra Finance and PrismaFi; And in the next part we'll look at various other projects that are also LSDfi but offer completely different functionality and ways to improve returns, such as Pendle, Flashstake, Eigen Layer, UnshETH and others.
Since our first part of the article at June 14th, LSD protocols' profitability is dropping as Ethereum staking rises, highlighting the need for strategies to optimize returns from staked ETH through derivatives. Previously, yield enhancement was mainly through liquidity pools like Aave, Balancer, Frax, and Convex, providing returns for both single-asset and LPs.
Crypto-backed stablecoins can be backed by Liquid Staking Tokens (LSTs). Technically, DAI and other protocols that allowed LSTs to be used as part of the provisioning were the forerunners of LSDfi. It allowed for some sort of LST accommodation before the formalized LSDfi came along.
LSDfi started to evolve rapidly between March and April 2023 with the emergence of LSDfi, a new trend allowing the use of ETH derivatives for yield management and recollateralization via protocols like ACID, AURA, FXS, Raft, LSDx, 0xACID, Agility AGI, unshETH, Lybra, and more.
Leading in Total Value Locked (TVL) are Lybra, IETH, Pendle, Raft, and UnshETH. Binance Research reported LSDfi's TVL exceeded $400m by early June 2023, peaking at $799.9m in July. As of 30 July, it stands at $740.53m. Meanwhile, in the LSDfi, despite supporting only one LST (stETH) at the time of the research, Lybra dominates with a TVL share of 48.9%.
TVL trends include Lybra's steady growth, Pendle's and Raft's recent stability, UnshETH and EtherFi's decreasing TVL since April, and LSDx's volatile TVL due to smart contract migration. Despite this, Binance Research believes LSDfi has growth potential compared to LSD protocols.
To prevent any potential misunderstanding as we progress through the material, let's take a moment to recap and solidify our understanding of which Liquidity Staking Tokens (LSTs) are associated with each respective protocol:
stETH, wstETH = Lido
frxETH, sfrxETH = Frax
rETH = Rocket Pool and StaFi
cbETH = Coinbase ETH
bETH = Binance ETH
swETH = Swell Network
ankrETH = Ankr
ETHx = LSDx
unshETH = is a diversified liquid staked ETH basket from UnshETH
The most used LST in LSDfi LST is stETH ($464,92m$), 2nd place is wstETH (18th July was $201.8m$, 30 July is $186,29m), third place is sfrxETH (18th July was $39.8m$, 30 July is $37,29m), which is strange since it is supported by a small number of protocols, and in 4th place is rETH (18th July was $35.8m$, as of 30 July is $27,88m):
Raft
Raft shares similarities with a variant of Liquity, but it operates using Lido stETH and Rocketpool rETH. Even though Liquity could theoretically incorporate wstETH/rETH into its collateral selection, its current focus remains centered on Lido stETH. Much like Liquity, Raft offers connectivity for third-party frontend solutions, in addition to providing its own DApp. It's worth mentioning that Raft allows users to borrow from a starting point of 3000 $R, and not any lower.
A unique aspect of Raft is its provision for up to 6x leverage through a One-Step Leverage (OSL) feature. This enables users to gain up to 6x leverage in just a single transaction, amplifying potential earnings from liquid derivatives (LSDs). The OSL feature facilitates a convenient method for users to modify or lower leverage with a single click, affording them increased flexibility and control over their collateral.
Notably, Raft utilizes a dual-oracle system, featuring a primary and a secondary (backup) oracle. This redundancy serves as a preventive measure against complications arising from oracle failures or incorrect configurations, as witnessed with Lido.
Raft presents a decentralized stablecoin named R, which is backed by a liquid staking token. Raft can be exchanged for wstETH through the Protocol. A minimum of 120% is needed as collateral, and if this threshold is breached, it may trigger liquidation, compared to Lybra’s 160% and Gravita’s 110% recommended collateralization threshold.
Additional Information
The Twitter account of the protocol has seen growth from 6,907 followers in mid-April to 16.8k as of July 30th. Similarly, the Discord channel has increased its membership from 6,194 in mid-April to 9,253 members as of July 30th.
As per DeFiLama's data, the protocol's TVL, which was introduced on June 5th, experienced a significant initial surge. However, since the beginning of July, it has remained within a consistent range. At the time of the research, the TVL dynamics is close to neutral:
Gravita
Gravita, like Raft, operates based on the Liquity economic model, and is often referred to as a 'stablecoin-centric LSDfi'. Gravita extends users the opportunity to secure interest-free loans, underpinned by both LST and the Stability Pool (SP). Loans are dispensed in the form of GRAI, a token with a volatility control mechanism similar to LUSD, and can be up to 90% of the user's collateral value (requiring a minimum of 110% collateral). The protocol may refund users' loan fees (excluding a minimum one-week fee) if the loans are repaid within a six-month window, encouraging short-term borrowing.
Like Raft, Gravita did not initially use omnichain tokens. The introduction of LayerZero support and the launch of GRAI as an OFT token was announced recently, on 21 July, but has had no impact on TVL to date. Also on 28 July, Gravita announced the rollout of Arbitrum on the network and a reduction in the minimum loan amount from GRAI 2,000 to GRAI 200, significantly lower than the current Raft and Lybra threshold.
Overall, Gravita has a unique multi-collateralized design, with each position having one type of collateral, but all tied to the same stability pool:
Vessel is a designated place (or vault) where collateral can be deposited, against which GRAI can be borrowed. Each Ethereum address can only have one Vessel for each type of collateral. The Vessel holds information about the balances of the asset pledged as collateral and the balance of the GRAI lent out. It is possible to post additional collateral or redeem GRAI, which alters the Loan-to-Value (LTV) of each Vessel.
Collateral can be added to a Vessel (a single-use deposit vault per Ethereum address) in the form of wETH, rETH, wstETH, or bLUSD, which adjusts the Loan-to-Value (LTV) ratio. The collateral requirements are 110% for wETH, 115-120% for rETH and wstETH, and 100% for bLUSD. bLUSD, a derivative of Liquidity's LUSD stablecoin, carries no liquidation risk. Chainlink is the chosen oracle, which, despite arguably being more reliable than Raft's two proprietary oracles, may bring third-party risks. Gravita has two tokens:
GRAI is a stablecoin that can be minted against other assets. The mechanism for maintaining its peg to USD is standard - arbitrage, given that the maximum natural ceiling for borrowing GRAI is set at 1.1 USD. If the GRAI stablecoin exchange rate exceeds this level, borrowers can make instant profits by borrowing the maximum amount against collateral and selling GRAI at a price higher than 1.1 USD, which will drive the price down. For instance, if 1 GRAI is worth more than $1.2, a user can take out a secured loan of, say, $10,000 in an LST asset, receive 9,000 GRAI, sell it for $10,800, repay the $10,000 loan, and still profit $1,800, without waiting for the price of GRAI to return to $1. If the user waits for the GRAI to return to $1, the profit will be $2,800 less the loan interest.
Conversely, if the price of the GRAI falls, borrowers can simply buy the GRAI and repurchase the collateral (because the value of the collateral is tied to the GRAI). These mechanisms allow for "natural arbitrage".
GRVT is the native token of the Gravita protocol, used for governance. However, there is currently no further information available about it.
Additional Information
Despite having a Twitter account since September 2022, Gravita's social media presence and TVL remain relatively low. The Twitter account of the protocol has seen growth from 4994 followers as of was18th July to 5451 (July 30th). Similarly, the Discord channel has increased its membership from 1113 members (18th July) to 1252 members at July 30th.
As per the data from DeFiLama, the current total value locked (TVL) stands at $25.83 million, displaying a generally upward trend at the present time. Inflows are observed to be more prominent than outflows, with transaction volumes appearing to be in the normal range. Additionally, the price of the GRAI stablecoin has predominantly hovered around $0.98:
Lybra Finance
Lybra resembles Raft, focusing mainly on a stablecoin protocol with less focus on complex strategies or a wide array of LST assets. However, the forthcoming V2 will support additional LSTs like rETH and wbETH.
eUSD issuance occurs through ETH and LST assets like stETH. The eUSD is over-collateralized at a minimum of 150%, prompting liquidation if it falls below this. Optimal collateral stability is achieved with a collateral rate above 160%. eUSD holders are not charged interest at minting and they benefit from an automatic yield of about 8%. The yield is generated as the protocol sends the staked ETH to Lido, or directly receives the yield from the stETH staked by users. This yield converts into eUSD and is credited to users.
How is the rate peg regulated? It's actually quite similar to the mechanism described above in Gravita with one exception: since Lybra's Collateralization Ratio is much higher, there will be no so-called "natural arbitrage".
If the eUSD exchange rate is above $1, users can mint it, which already creates an excess of supply over demand. Also, in the example described above with Gravita, users have arbitrage opportunities, albeit more limited. For example, if the eUSD exchange rate is $1.2, the user can deposit stETH worth $10,000 with 150% collateral, giving him 6,600 eUSD, which he can exchange for 7,920 USDC. Once the eUSD rate goes back to 1$, the user can get 7,920 eUSD and take back his collateral, returning 6,600 eUSD and making a profit of 1,320$. And the profit will be net, given that the interest on the loan is 0%.
If the rate of eUSD is below $1, firstly, users won't be able to mint it, which will cause the supply to drop. And secondly, since the value of eUSD will be below USDC, it will be possible to buy more eUSD for USDC and redeem the collateral.
Lybra recently announced the V2 version of the protocol, which will implement support for new LSTs - rETH and wbETH and introduce peUSD - an omnichain version of eUSD. A Peg Stability Mechanism will also be added, which will increase the profitability of eUSD (peUSD) due to the fact that when eUSD goes up, the protocol will automatically buy USDC and sell it back for eUSD (peUSD) when the peg returns, and the resulting profit will be distributed among users. And to support the LBR governance token, a dynamic Liquidity Providing (dLP) mechanism will be launched, which will require users to maintain a minimum threshold of 5% in locked-in dynamic liquidity in addition to the total value of their credit. If this threshold falls - users will forfeit their esLBR issuance rights and the forfeited issuance will be redeemable at a 50% discount in LBR or eUSD. By reducing vendor pressure and stimulating demand, the dLP mechanism helps maintain the value of LBR tokens and incentivises participation in the Lybra ecosystem.
In addition to the eUSD stablecoin, Lybra has a native LBR token with a Total Supply of $100m $LBR, which is used for:
managing the protocol via esLBR
generating revenues from the protocol in eUSD.
The esLBR is a governance token that can be obtained by staking the LBR. Holders of esLBR, in addition to voting rights (based on the weight of the stake), also receive 100% of the protocol revenue with an increasing percentage of yield depending on the time of lock-in (but the exact parameters are not yet available in the documentation). Notably, Lybra has very democratic conditions for the conversion of a governance token into a utility token compared to other LSDfi-protocols: once the process is started, esLBR is converted into LBR within 30 days (In V2 this will be changed to 90 days).
Additional information
As for Lybra's online presence and community, as of July 18, they had 11.9k followers on Twitter and had a community of 2,776 members on Discord. As of 30 July - 16.8k subscribers and 3182 members respectively, which may reflect the growing interest and participation in the project.
There's an interesting timeline of events worth exploring. A significant influx into Lybra's TVL was recorded on May 29, right before the token's listing on Poloniex. In the aftermath of this listing, outflows started to outstrip inflows for a certain period. This trend was interrupted by a substantial outflow of $34 million on June 29, only to be superseded by a massive inflow of $78.79 million the very next day, June 30. This record-breaking inflow was unmatched by any previous activity.
Despite the high TVL, it's worth noting that the number of unique depositors is relatively low. As of July 18th, the number stood at 700 addresses, rising only slightly to 752 addresses by July 30th.
Turning our attention to the token dynamics, we notice an interesting fact: the peak value of the token (around $5) was achieved prior to the Poloniex listing on May 29. Following this listing, the price of the token embarked on a downward trajectory.
Prisma Finance
PrismaFi will enable users to issue a stablecoin (acUSD) that is fully backed by LSTs. The distinguishing feature of this stablecoin, compared to those offered by other LSDfi protocols, is that it will be incentivized by Curve and Convex Finance. This creates an economic cycle where users can earn trading fees and rewards in CRV, CVX, and PRISMA, on top of their Ethereum staking rewards.
It's worth noting that PrismaFi's codebase is also based on Liquity. Initially, they will support LSTs such as wstETH, cbETH, rETH, sfrxETH, and wbETH. Interestingly, wbETH is not supported by other LSDfi protocols, and PrismaFi's positioning emphasizes its commitment to offer a unique value proposition for those LSTs that may not be supported by other LSDfi protocols.
Unlike Raft and Gravita, PrismaFi will have a native PRISMA token that can be used for governance by locking it into vePRISMA. Owners of vePRISMA will have the ability to incentivize, for example, the creation of acUSD using their own LSTs, as well as manage PRISMA emissions. Additionally, vePRISMA owners will be eligible for a boost to the rewards received in PRISMA, up to a 2x increase.
While there is currently no detailed information on tokenomics, the protocol is already quite popular compared to other LSDfi, as evidenced by the number of followers on social media.
The Twitter account of the protocol has seen growth from 13,3k followers as of as of 18th July to 13,6k as of July 30. Similarly, the Discord channel has increased its membership from 8,5k members as of 18th July to 8,86k members as of July 30.
Conclusion
In conclusion, this brief synopsis has provided a general understanding of LSDfi projects that utilize LST-backed stablecoins, including Raft, Gravita, Lybra Finance, and PrismaFi.
In our subsequent discussion, we'll expand on this base knowledge to explore additional LSDfi projects with diverse functionalities like Pendle, Flashstake, Eigen Layer, UnshETH, among others.
Hope you enjoyed, and stay tuned for the next (third) part of our LSD series.