LSDAI Shows Promise in Furthering Ethereum Financial Innovation


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Popular DeFi applications like Maker, Compound, and ChainLink continue to command a lion’s share of attention and hype. Smaller dApps haven’t been able to garner much awareness, but the sheer level of financial innovation is proving to be the real selling point for Ethereum’s DeFi ecosystem. In a community call with Maker, Market Protocol and LSDAI engineer Dan Matthews described how anyone can take a synthetic position in Ethereum or lock in their current yields on Compound, October 22, 2019.

Hedging Risk, Betting with Intuition

In the traditional financial system, there are loans and investment products that allow customers to guarantee a fixed interest rate. A floating loan consists of a floor and a cap; interest rates will be able to fluctuate between the two depending on market rates, but it can never go above the cap or below the floor.

In the same way, banks offer fixed duration deposits (CDs), where the customer earns a yield above that of a savings account for depositing their money over a certain period.

LSDAI is, more or less, a modern iteration of the above on Ethereum. People actively lending or borrowing on Compound can take an opposite position on LSDAI based on the interest rate they were given upon the inception of the loan/deposit.

For example, someone who lent 100 DAI on Compound at 7.5 percent APR can hedge their position on LSDAI by entering a short position based on the amount they lent. All they have to do is enter the details of their initial Compound position, and LSDAI’s UI takes care of the rest. Additionally, users can also bet on whether they expect Compound yields to move up or down in the near future.

An interesting name for an interesting project; befitting.

Continuous Building Cycle

Just over a month ago, there was a proposal to build SwanDAI to hedge against the risk of the DAI peg collapsing. Today, we have the ability to lock in interest rates on Compound, despite it being a variable rate market.

Ethereum is championing permisionless finance beyond a doubt, and the mere magnitude by which new applications and use cases are emerging is – frankly – quite surprising.

As scaling comes into the picture with ETH 2.0 and Proof of Stake, there is much more room to widen the scope of these applications and pave the road for many more to come along.

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