The Change in the LSD Market Behind the Decline of frxETH TVL

Recently, as the highest yielding frxETH in the Ethereum liquid staking derivative (LSD), its total locked value (TVL) has suddenly decreased by 100,000 ETH in the past three months. This article will delve into the reasons behind this phenomenon and its impact on the highly competitive ETH staking market.

Introduction to frxETH

frxETH is an Ethereum stablecoin generated by directly staking ETH. It employs a dual-token design (frxETH and sfrxETH), making it the highest-yielding ETH LSD product currently available. Since its launch in November 2022, the annualized yield (APY) of sfrxETH has not only exceeded that of stETH by 24% but even surpassed rETH by 40%.

Reasons for the Decline in TVL

Although frxETH offers a higher yield, its TVL has seen a significant decline. The main reason is the rise of the re-staking craze, especially with the launch of Eigenlayer. Eigenlayer provides reward points to users who lock ETH, attracting a large influx of funds. Data shows that on February 5th, when Eigenlayer opened for deposits, it coincidentally marked the peak of frxETH's TVL.

Arbitrage Balance of frxETH and sfrxETH

frxETH provides users with two yield paths:

1. Stake ETH for frxETH, then deposit it into the frxETH/ETH liquidity pool to earn rewards.
2. Stake ETH as frxETH, then stake it as sfrxETH to earn additional rewards.

The dynamic arbitrage balance formed by the difference in yield between these two options keeps the yields of both methods at a similar level. As of June 12, the yield of Curve's frxETH/ETH liquidity pool is 2.72%, while the yield of the secondary staking (sfrxETH) is 3.42%.

The Impact of LSD Points War

In the LSD competitive landscape, points are a temporary incentive measure. Although this strategy is helpful for project launches, it is not sustainable in the long run. Users tend to turn to other projects once points are converted into other assets.

However, re-staking itself is an effective technical narrative that can provide users with additional收益. Frax Finance plans to directly offer native re-staking services in frxETH v2.

Strategies of Frax Finance

In response to market changes, Frax Finance has launched the Flox mechanism as its block space incentive program for the new L2 network Fraxtal. Users holding frxETH can easily earn FXTL tokens on Fraxtal.

Fraxtal, as a modular Rollup blockchain, has the following characteristics:

• EVM compatibility
• Modular Rollup Design
• Block space incentive measures ( Flox )
• Use frxETH as a Gas payment token

New Features of frxETH v2

frxETH v2 will introduce the following new features:

• Decentralized Validator
• Improve node capital efficiency
• Node Operator Performance Incentives

In addition, Fraxtal will use frxETH as Gas fees, and burning frxETH can increase the annual yield of sfrxETH.

Despite facing challenges, frxETH still has the potential to occupy an important position in the Ethereum liquid staking market. Its future development is worth continuous attention.