Chi Protocol
  • Background
    • Chi Protocol
    • The World of LSTs
    • The Stablecoin Landscape
    • Governance Token with LST Yield
    • Size of the Opportunity
  • Overview
    • Introduction to Chi Protocol
    • What is USC and How Does USC Work?
    • Yield Generation Mechanism for Staked USC
    • How is USC Stability Achieved?
    • LST Yield Parameters and Collateral Composition
    • Dual Stability Mechanism: Minting and Redeeming USC
  • CHI & VECHI
    • Understanding CHI & veCHI
    • Staking CHI and LST Yield
    • Governance and Boosted LST Yields with veCHI
  • Tokenomics
    • CHI Tokenomics
    • CHI Token Utilities
  • Supplement
    • Frequently Asked Questions
    • Audits
    • Roadmap
  • Documentation
    • Technical Resources
    • Deployed Contracts
    • Community Resources
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On this page
  • Introducing LSTs
  • Understanding LSTs
  • LST Market Breakdown
  • Categorising Liquid Staking Tokens: Yield Distribution
  • Categorising Liquid Staking Tokens: Decentralisation
  • Unleashing the Unexplored Possibilities of the LST Market
  1. Background

The World of LSTs

Unlocking the Potential of Liquid Staking Tokens

PreviousChi ProtocolNextThe Stablecoin Landscape

Last updated 10 months ago

Introducing LSTs

Whether you're an occasional cryptocurrency investor or an experienced DeFi enthusiast, you've likely noticed the mounting excitement around one of this year's most intriguing emerging asset categories: Liquid Staking Tokens (LSTs). LSTs mirror the value of a user's staked ETH, granting them access to liquidity and the potential for enhanced returns.

Understanding LSTs

LSTs function as tokens that mirror the value of a user's staked ETH, preserving liquidity and opening up avenues for enhanced yield potential. They represent participation in Ethereum's staking pools. This effectively addresses the longstanding dilemma of having to make a choice between staking ETH to earn rewards and preserving its liquidity for other yield-generating activities.

Given that LSTs are fully tradable, users can stake their ETH to generate passive income while using their LSTs in multiple DeFi applications that generate income. This innovation effectively resolves the liquidity challenge associated with staked ETH and ushers in a new era of high-yield investment opportunities for a trusted asset in the digital asset domain.

LST Market Breakdown

As of September 28th, 2023, the LST market is primarily controlled by three major players:

Lido (stETH): Lido commands the largest portion of the market, holding a substantial 70.93% share. Lido's stETH token represents 8.75 million staked ETH, amounting to a Total Value Locked (TVL) of $14.2 billion.

Coinbase (cbETH): Coinbase has a 10.51% market share with its cbETH token, representing 1.3 million staked ETH and contributing to a TVL of $2.2 billion.

Rocket Pool (rETH): Rocket Pool's rETH captures 7.68% of the market, staking 947,160 ETH, translating to a TVL of $1.54 billion.

*Please note that all data mentioned in this document is based on information available as of September 28th, 2023.

Categorising Liquid Staking Tokens: Yield Distribution

From a yield distribution perspective, LSTs can be divided into two broad categories:

Rebase LSTs (e.g., stETH and sETH2) provide holders with increasing LST tokens as their staking rewards accumulate over time.

Non-Rebase LSTs (e.g., rETH and swETH), on the other hand, see the value of the tokens held by their owners grow as staking rewards accumulate, eliminating the necessity to distribute additional LST tokens.

It's worth noting that currently, only two out of the top 10 LSTs by TVL use the rebase model. Nevertheless, rebase tokens remain dominant within the ecosystem, primarily due to stETH's significant 71% market share.

Categorising Liquid Staking Tokens: Decentralisation

Non-Custodial LSTs (e.g., stETH) are governed by DAOs (e.g., Lido DAO). The staking pools of these protocols distribute the deposits uniformly (round-robin) to differing node operators based on the remaining capacity in each validator's slot. Moreover, DAOs are transparent and make quarterly reports on validators and node metrics.

Custodial LSTs (e.g., WBETH) are unilaterally governed by an institution (e.g., Binance). These companies typically do not publish information about their node operators, and all nodes are likely operated by the same entity, increasing the system's exposure to counterparty risk.

Unleashing the Unexplored Possibilities of the LST Market

LSTs present exciting opportunities for DeFi investors by enabling passive income from staked ETH and further yield opportunities through DeFi composability. However, the question remains: Is the LST market truly realising its full potential? Current data suggests otherwise.

Only 21% of ETH is staked, leaving an astonishing amount of ETH sitting idle. To put this in perspective, over 70% of Solana's tokens are staked. This discrepancy implies that, despite the ongoing excitement, there remains substantial untapped potential within the LST market.

To unlock greater Total Value Locked (TVL) in staked ETH, it is imperative to enhance the utility of LSTs. While the liquidity offered by LSTs holds immense promise in theory, the existing avenues for generating yield and the ability to create new assets on top of LSTs are somewhat limited.

This is where Chi Protocol steps in with USC - a scalable stablecoin backed solely by rebase and non-rebase non-custodial LSTs

This provides an overview of the current state of the LST market, highlighting the dominant players and their respective market shares. For a more detailed landscape, please refer to the compiled by CoinGecko.

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Source: Chainlink