Exploring New Horizons: Experimenting LSDs as Stablecoin Reserves
The ability to innovate and adapt is the lifeblood of the ever-evolving world of DeFi. At Hope.money, we are perpetually committed to enhancing our products and delivering the best to our community.
Recently, we’ve been delving into the potential of integrating Liquid Staking Derivatives (LSDs) into our ecosystem. But let’s first take a moment to understand what LSDs are and why they’ve become the new hot thing.
LSDs — A New Frontier in DeFi
Liquid Staking Derivatives (LSDs) have emerged as a significant player in DeFi, with Ethereum’s shift to a Proof-of-Stake (PoS) model. Users can stake their assets on a PoS blockchain for a consistent, low-risk source of passive income while receiving a liquid, tokenized representation of their staked assets. These tokens can then be utilized within the broader DeFi ecosystem, providing liquidity and earning yields across various protocols.
Ethereum’s Shanghai Upgrade has sparked a surge of interest in LSDs. Who will say no to getting more ETH while still having the liquidity of ETH? As of July 27, 2023, the total value locked (TVL) in ETH LSDs stands at 10.58 million ETH (or US$19bn) — a staggering increase of 130% from the previous year and over 1,220% from 2 years ago. Among all ETH LSDs, stETH by Lido holds the lion’s share with a TVL of 74%, followed by cbETH by Coinbase and rETH by Rocket Pool.
Besides ETH LSDs, holders of SOL, DOT, and other major PoS blockchain tokens are also utilizing staking platforms to generate passive income for their holdings.
Stablecoins and LSDs — A Powerful Combination
At the core of all DeFi applications, stablecoins grapple with the “Impossible Trinity” or the “Stablecoin Trilemma” — the challenge of achieving Stability, Capital Efficiency, and Decentralization simultaneously.
- Fiat-backed, centralized stablecoins like USDC and USDT are stable (as long as 1:1 USD collateralization could be ensured) and are capital efficient but lack decentralization.
- Over-collateralized stablecoins, like DAI, are stable (as long as there is no flash crash in collateral) and decentralized (given they are often backed by other cryptocurrencies) but lack capital efficiency (more capital than $1 is needed to create $1-pegged stablecoin).
- Algorithmic stablecoins, like UST (RIP), offer both decentralization and capital efficiency but often have no collateral backing them, often resulting in a death spiral once faith in the system disappears.
In response to the capital efficiency challenge, an increasing number of LSD-backed stablecoins, including Lybra Finance and Raft, have begun to emerge. This strategy allows stablecoin holders to earn native yields on their underlying assets (ETH), reducing their opportunity costs while maintaining the core features and use cases of stablecoins. Of course, this approach presents unique challenges, including the risk of LSDs de-pegging and security risks associated with staking contracts.
$HOPE’s Experiment with LSDs
Designed to become a distributed stablecoin, $HOPE addresses different aspects of the “Impossible Trinity” at different stages of development.
- In its early stages, $HOPE compromises stability (the reserve price of $HOPE floats with the prices of BTC and ETH) and decentralization ($HOPE has a tri-layer distributed design rather than a fully decentralized one to ensure system stability) to pursue capital efficiency (reserve price starts from $0.5, offering holders with the potential of future appreciation).
- As the market and the HOPE community grow, $HOPE will have greater stability (a pegging event will take place once the reserve price of $HOPE is steadily above $1 as the price of its reserves soars) and decentralization (though DAO governance by veLT holders).
At the current stage, our priority is to optimize capital efficiency and benefits to our holders. As such, integration of ETH LSD seems like a natural progression for $HOPE. We are currently in the midst of experimenting with incorporating ETH LSDs into the $HOPE Reserve Pool with a few partners. This move will enhance the value proposition of $HOPE and the entire ecosystem, providing our users with greater yield opportunities and capital efficiency.
However, we are also fully aware of the potential challenges and risks involved. As such, we will be conducting comprehensive research and rigorous testing and will also fully involve our community in decision-making. In fact, the final decision will be made by you, the community, through the HOPE Ecosystem governance process.
Stay tuned for more updates regarding this exciting experiment, and we encourage you to join the community for more discussions! Your input is invaluable as we continue to innovate and enhance the HOPE Ecosystem.
