With the coming move to Spool V2, combined with the recent success of the Shanghai upgrade to Ethereum, DeFi Liquid Staking Derivatives (LSDs) enter a new era of potential for institutional investors.
As we see continued growth in ETH staking, and the LSDs available as a result, Spool V2 will offer a new way for investors to invest these in a risk-managed and easy-to-use solution.
What are LSDs?
Liquid Staking Derivatives are tokenised representations of staked assets in the crypto ecosystem, which provide liquidity and flexibility to staked capital. Essentially, if you stake your funds, they would typically be inaccessible for a certain period of time. However, if you use a solution that involves LSDs for staking, you will receive a token that represents your stake instead.
This, in turn, becomes a tradeable asset which provides liquidity and flexibility to staked capital, allowing you to leverage your otherwise unavailable assets.
The move by Ethereum from Proof of Work to Proof of Stake, and more recently the “Shanghai” and “Capella” upgrades which allowed for the removal of staked ETH has brought the role of LSDs to the fore recently, with reports suggesting over three times the Volume of ETH was staked during April as during the previous month.
Much of this has been staked via “validators” who replaced “Miners” in the proof of work model. In exchange for staking via their protocols, these validators issue their own tokens representing that stake.
How does Spool V2 work with LSDs?
With Spool V2 there are a number of changes occurring which will improve the viability for both private investors looking to utilise their LSDs, and for institutions looking to create financial products leveraging them.
We’ve already covered Entry and Exit Guards, and Actions which add increased control and flexibility for institutions that create products using Spool V2. However, as part of the new infrastructure model V2 represents, there are also changes occurring in the range of strategies available themselves.
More Volatile Assets and Complex Strategies
One of the major improvements in Spool V2 is the ability to support more volatile assets and complex strategies within Smart Vaults. In V1 investors and Smart Vault creators were limited to strategies that allowed investment in Stablecoins on Ethereum and Arbitrum. While this did create a range of investment opportunities by combining these strategies, there is a desire among investors to access more volatile assets while still maintaining the non-custodial risk-managed approach that Spool offers.
To begin with, strategies using ETH, CRV, GMX and many others will give Vault Creators increased flexibility in how they build products for their investors. The increased risk inherent to these more volatile assets can be offset by the diversification, automation, and risk models built into the Spool V2 model.
This gives institutions looking to cater to clients with differing overall risk appetites the required flexibility in the products they choose to create.
In addition, as LSDs continue to grow in popularity, the range of strategies using them will grow and Spool V2 provides the ability to support these strategies. This will enable creators to build products using multiple LSD-based strategies, ideal for investors looking to add them to their portfolio while still maintaining diversification.
Tokenised Vault Deposits
In addition to supporting strategies using LSDs, Spool V2 also introduces Tokenised Vault Deposits as a new solution for investors using the platform. While Spool V2 remains non-custodial, as previously discussed with the “Time Locks” function within Entry and Exit Guards, investors can now be held to a minimum term within a Smart Vault.
In those instances, where funds become unavailable for a fixed time, or where they can be withdrawn and the investor does not wish to, Vault Tokenisation is available to provide them with liquidity.
This new solution means any depositor will be issued a Deposit NFT (dNFT) representing their holding within the Smart Vault, much as an LSD represents a staked holding. In turn, these tokens can be broken down into smaller fungible tokens, allowing for increased flexibility in how they can be used.
This creates a new tradeable asset for the depositor which can be held to withdraw their funds at a later date or can, in turn, be invested into further DeFi strategies once they emerge.
Ethereum Staking Derivatives Yield Farming
These combinations create a new way for institutions to create DeFi Smart Vaults that act as the next generation of Staking Derivatives Yield Farming solutions. Investors will be able to invest in Vaults that include a selection of LSD-based strategies, and automatically allocate funds between them based on specific risk models and the yield they provide at any given time.
In turn, these Vault holdings will also be tokenised allowing for the creation of new yield-bearing assets which, can be traded and become DeFi assets of their own.
As Spool moves into the release of V2 with a number of upcoming partnership announcements around Liquid Staking Derivative platforms, combined with the growth of LSDs in Ethereum, this is likely to be an area of huge interest, both for institutional product creators and investors looking to utilise them.
To find out more about creating products using Spool V2, visit enterprise.spool.fi.
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Spool is a permissionless DeFi platform that connects Capital Aggregators with DeFi Yield Generators. Funds are dynamically and efficiently allocated to ensure optimized yields, for custom strategies, managed by DAO-curated Risk Models.
Spool was established as a DAO, with a selection of founding contributors representing a diverse cross-section of the blockchain community.
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