Deep Dive into DeFi Trends: Perps, Liquid Staking and RWAs

Perpetuals, liquid staking derivatives (LSDs) and tokenized real world assets (RWAs) such as bonds, are the key trends in DeFi in 2023. All of them heavily employ leverage to boost the rewards.

While total value locked (TVL) in DeFi is at the two-year level low, some protocols are doing better than others. The winner of the crypto winter is liquid staking. Within months, it became the largest category in DeFi with over $20b2n TVL (source: DeFiLlama). Lido, the first liquid staking protocol, became the largest DeFi protocol (ca $14bn TVL), and its liquid staked Eth (stETH) is the 7th largest crypto-currency, larger than Cardano, Solana and other notable blockchains.

What will be the next major development in the crypto space? My bet is on perpetuals (perps), and as I discovered at the recent ETHWarsaw event, I'm not alone in this prediction. Some are placing their bets on tokenized real-world assets (RWA) as well. The appealingly high coupons offered by government bonds are attracting not only traditional finance (TradFi) investors but also those in the crypto sphere. With the emergence of more tokenization projects, also within DeFi, it becomes possible to capitalize on these lucrative bond coupons.

Perps: Next Big Thing?

Perpetuals, often referred to as 'perps,' are futures contracts with infinite maturity. In the crypto futures landscape, this structure is preferred, as it is more efficient for market makers.

One of the most prominent examples of a perpetual platform is dXdX. This platform is particularly interesting because it operates based on a limit order book and offers blockchain settlement. You can easily create a text account at dYdX and start playing with “test“ 1000 USDC.

Engaging in market making on perpetual platforms presents intriguing opportunities, especially given the low volumes in AMM-based DEXs, where the rewards from liquidity farming tend to be limited.

LSD: Liquid Staking Derivative

There are two types of LSDs; rebase (stETH from Lido) and reward-based (wstETH from Lido, rETH from RocketPool, sfrxETH from Frax, cbETH from Coinbase). If you just want to benefit from staking rewards without re-using your tokens in DeFi, or leverage, go for a rebase token. Although, you will regret it. With a rebase token such as stETH, you keep the token in your wallet and get daily airdrops with staking rewards.

Reward-based LSDs work differently. They accumulate the staking rewards constantly in the token value. This means that the value of the token (denominated in ETH) increases every day by daily staking rate (ca 4%/365 today), for example, if you have 1 rETH, the next day you still will have rETH (there is no airdrop-like for rebase tokens), but the value of rETH next day is ca 4%/365 higher.

How is it possible? LSDs function similarly to stablecoins; they build the reserves (of staked ETH) to ensure that their token always has a redemption (backing) value. And similarly to stablecoins, the biggest risk of using LSD is the de-peg risk.

Looping LSDs

While staking ETH typically provides a consistent return of approximately 4% today, leveraging can potentially boost this return to 10-15%.

There are two primary strategies to achieve this:

Strategy 1

The first strategy involves using a lending protocol. I personally prefer Compound due to its more attractive parameters compared to Aave.

• Buy wstETH at the exchange (e.g. Curve, Uniswap)
• Repeat the following step 2-3 times at Compound or other lending protocol- Put your wstETH as a collateral- Borrow ETH- For the borrowed ETH, buy new wstETH

As the value of wstETH is higher than the value of ETH, and every day increases (over 1 ETH), your leverage becomes less risky every day. The major risk is, however, sudden de-peg of wstETH that might lead to the liquidation of the entire position.

Strategy 2

The second strategy utilizes flash loans. A flash loan is an uncollateralized loan that you can borrow and repay within the same transaction block.

• Flash loan 2ETH (0% at Balancer)
• Stake 3 ETH with Lido to receive wstETH
• Supply wstETH in Compound as collateral
• Borrow 2 ETH
• Repay Flashloan

Regarding the second strategy, it is automated by ETHSaver, and I recommend taking a closer look at it.

Tokenized Real World Assets (RWAs)

Tokenization has opened up possibilities for virtually everything, from art and cars to real estate. However, one of the most intriguing aspects is the tokenization of financial instruments, especially debt. Tokenized bonds, for instance, offer SMEs access to new sources of capital that might not be attainable in traditional finance (TradFi).

More and more DAOs are incorporating tokenized financial instruments into their treasuries. MakeDAO serves as an excellent example, with 80% of its revenue stemming from tokenized real-world assets (RWAs), particularly U.S. Treasury bills. Now, you can also benefit from this trend through the Spark Protocol, which issues sDAI. By holding sDAI, you can earn 5% today (compared to 8% previously), much like holding reward-based LSDs.

However, the real value of sDAI shines when you leverage it with GHO on Aave. GHO is a stablecoin pegged to 1 USD. By utilizing this strategy, you can potentially achieve returns in the range of 10-15% from tokenized U.S. Treasury bills.

• Deposit DAI at Spark Protocol to mint new DAI
• Repeat the following step 2-3 times at Aave- Put your sDAI as a collateral at Aave- Borrow from Aave GHO?- For the borrowed GHO, buy new sDAI

Conclusions

Liquid staking derivatives (LSD) and tokenized real-world assets (RWA) are currently experiencing a surge in popularity. Their primary advantage lies in the ability to utilize leverage to enhance performance, potentially increasing returns by 3-4 times, reaching levels in the range of 10-15%.

Perpetuals (perps) are still on the horizon, but I believe they will emerge as the next major trend in the crypto space. The key benefit here is the leverage, which allows you to amplify gains on correct predictions while also increasing losses on incorrect ones.

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Thank you for reading From PhD Research in DeFi. Let me know your thoughts in the comments, or contact me directly if you have any questions.

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