New exploration by Hope.money: Experimenting with using LSD as a stablecoin reserve.

23-08-02 22:21

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Source: Hope.money

Continuous innovation and rapid adaptation are the lifeline for the continuous development of DeFi products. Hope.money has always been committed to improving our products and bringing more value to the community.

Recently, we have been exploring the possibility of integrating liquidity staking derivatives (LSD) into our ecosystem. Before diving into the details, let's take some time to understand what LSD is and why it has become a hot topic.

LSD - DeFi New Frontier

With Ethereum's shift towards Proof of Stake (PoS) model, Liquidity Staking Derivatives (LSD) have played an increasingly important role in the DeFi space. Users can stake assets on PoS blockchains to earn stable, low-risk passive income and/or liquidity tokens (LST) corresponding to their staked assets. These tokens can be used in a wider DeFi ecosystem to provide liquidity to various protocols and earn profits.

The Shanghai upgrade of Ethereum has sparked interest in the community for liquidity staking derivatives (LSD). Who would refuse to get more ETH while still having Ethereum liquidity? As of July 27, 2023, the total locked value (TVL) of ETH LSD reached 10.58 million ETH (approximately $19 billion), an increase of 130% compared to the previous year and over 1220% compared to two years ago. Among all ETH LSD, Lido's stETH has the largest share, accounting for 74% of TVL, followed by Coinbase's cbETH and Rocket Pool's rETH.

Except for ETH and LSD, holders of major PoS blockchain tokens such as SOL and DOT are also utilizing staking platforms to generate passive income by staking their native tokens.

Among all DeFi applications, stablecoins face the "impossible triangle" or "stablecoin trilemma", which is the challenge of achieving stability, capital utilization, and decentralization at the same time.

· Centralized stablecoins like USDC and USDT, which are backed by fiat currency, perform well in terms of stability (as long as they can ensure a 1:1 USD collateral) and capital utilization, but have low decentralization.

· Stablecoins like DAI, which are over-collateralized, remain stable in the absence of a collateral asset crash and also have decentralized characteristics as they are typically backed by other cryptocurrencies. However, their capital efficiency is low, requiring more than $1 of capital to create a stablecoin pegged to $1.

· Algorithmic stablecoins like UST (RIP) have certain advantages in decentralization and capital utilization, but often lack the support of stable collateral. Once a systemic confidence crisis occurs in the community, it often leads to a death spiral.

In response to the challenge of capital utilization, more and more stablecoins supported by LSD are emerging, including Lybra Finance and Raft. This strategy allows stablecoin holders to earn native returns by collateralizing their assets (ETH) while minting stablecoins, reducing opportunity costs and maintaining the core features and uses of stablecoins. Of course, this approach also brings some special challenges, including LSD decoupling risk and security risks associated with collateral contracts.

HOPE's LSD Experiment

In the development path of HOPE becoming a true decentralized stablecoin, we hope to address different challenges of the "impossible triangle" at different stages:

· In the early stages, HOPE focused more on fund utilization efficiency (with a reserve price starting at $0.5, providing potential for future appreciation for holders), stability (HOPE's reserve price fluctuates with the prices of BTC and ETH), and decentralization (HOPE adopts a three-layer distributed design instead of complete decentralization to ensure system stability and maintain attractiveness to traditional investors), making some compromises.

· With the growth of the market and the HOPE ecosystem, HOPE will have better stability (as the reserve asset price rises, the reserve price of HOPE will eventually stabilize at around $1) and decentralization (veLT holders will jointly participate in DAO governance).

At this stage, our top priority is to optimize the utilization of funds and bring more returns to holders. Therefore, integrating ETH LSD into HOPE seems like a natural development direction. We are currently conducting experiments with several partners to try to incorporate ETH LSD into the HOPE reserve pool. This move will enhance the value of HOPE and the entire ecosystem, providing users with more opportunities for returns and higher fund utilization rates.

Of course, we are fully aware of the potential challenges and risks involved in this experiment. Therefore, we will conduct comprehensive research and rigorous testing, and we will fully involve the community in relevant decision-making. The final decision on this direction will be made by you - members of the Delicious community - through the HOPE ecological governance voting.