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Exploring the Market Dynamics of Liquid Staking Derivatives (LSDs)

Xihan Xiong, Zhipeng Wang, Qin Wang

Abstract

Staking has emerged as a crucial concept following Ethereum's transition to Proof-of-Stake consensus. The introduction of Liquid Staking Derivatives (LSDs) has effectively addressed the illiquidity issue associated with solo staking, gaining significant market attention. This paper analyzes the LSD market dynamics from the perspectives of both liquidity takers (LTs) and liquidity providers (LPs). We first quantify the price discrepancy between the LSD primary and secondary markets. Then we investigate and empirically measure how LTs can leverage such discrepancy to exploit arbitrage opportunities, unveiling the potential barriers to LSD arbitrages. In addition, we evaluate the financial profit and losses experienced by LPs who supply LSDs for liquidity provision. Our results show that 66% of LSD liquidity positions generate returns lower than those from simply holding the corresponding LSDs.

Exploring the Market Dynamics of Liquid Staking Derivatives (LSDs)

Abstract

Staking has emerged as a crucial concept following Ethereum's transition to Proof-of-Stake consensus. The introduction of Liquid Staking Derivatives (LSDs) has effectively addressed the illiquidity issue associated with solo staking, gaining significant market attention. This paper analyzes the LSD market dynamics from the perspectives of both liquidity takers (LTs) and liquidity providers (LPs). We first quantify the price discrepancy between the LSD primary and secondary markets. Then we investigate and empirically measure how LTs can leverage such discrepancy to exploit arbitrage opportunities, unveiling the potential barriers to LSD arbitrages. In addition, we evaluate the financial profit and losses experienced by LPs who supply LSDs for liquidity provision. Our results show that 66% of LSD liquidity positions generate returns lower than those from simply holding the corresponding LSDs.
Paper Structure (19 sections, 7 equations, 19 figures, 1 table)

This paper contains 19 sections, 7 equations, 19 figures, 1 table.

Table of Contents

  1. Introduction
  2. Backgroud
  3. Blockchain and DeFi
  4. From Pow Mining to PoS Staking
  5. Staking Options on Ethereum
  6. Liquid Staking Derivatives
  7. Rebasing Model
  8. Reward-Bearing Model
  9. Dual-token Model
  10. LSD Price Discrepancy and Arbitrages
  11. LSD Price Discrepancy
  12. LSD Arbitrages
  13. Arbitrage Measurement
  14. Arbitrages of Rebasing LSD
  15. Arbitrages of Reward-bearing LSD
  16. ...and 4 more sections

Figures (19)

  • Figure 1: Illustration of LSD token mechanisms.
  • Figure 2: The primary and secondary markets for LSD.
  • Figure 3: $\xspace\texttt{stETH}$ price on different platforms over time. This figure is adapted and extended from xiong2023leverage.
  • Figure 4: rETH price on different platforms over time.
  • Figure 5: $\xspace\texttt{stETH}$ price discrepancy and realized volatility.
  • ...and 14 more figures