Changes in the LSD stake market behind the decline of frxETH TVL

In the past 3 months, as the highest-yielding ETH liquid staking derivative (LSD), Frax Finance's frxETH has seen a decrease of about 100,000 ETH in TVL. This phenomenon reflects the fierce competition in the current ETH staking market and also mirrors the challenges faced by Frax Finance.

frxETH is an Ethereum stablecoin launched by Frax Finance, generated directly by staking ETH. It adopts a dual-token design with (frxETH and sfrxETH), making sfrxETH the current highest-yielding ETH LSD product. Since its launch in November 2022, the yield of sfrxETH has significantly exceeded that of similar products like stETH and rETH.

So why did the TVL of frxETH drop significantly despite the high yield? The main reason is the re-staking frenzy in the LSD market. A certain re-staking protocol offers points rewards to users who lock up ETH, attracting a large amount of TVL. Data shows that February 5th, the time when this protocol opened deposits, coincided with the peak point of frxETH's TVL.

From the user's perspective, Frax Finance provides two yield paths for frxETH: first, depositing frxETH into a certain DEX's frxETH/ETH liquidity pool to earn yields; second, staking frxETH again as sfrxETH to obtain additional yields. These two options will create a dynamic arbitrage balance due to the difference in yield rates. As of June 12, the yield rate for the former is 2.72%, while the latter is 3.42%, with both shares being close.

In the LSD competitive landscape, points serve as a temporary incentive to attract investors' participation, but they are not a long-term sustainable strategy. Points will eventually be converted into other assets, leading to user attrition. However, re-staking itself is an effective technical narrative that can provide additional returns to users. Frax Finance plans to directly offer native re-staking services in frxETH v2.

Frax Finance has also designed the Flox mechanism as an incentive program for block space on its new L2 network, Fraxtal. Flox checks user assets and on-chain activities, and holding frxETH on Fraxtal allows users to earn FXTL rewards. Fraxtal is a modular Rollup blockchain with features such as EVM compatibility and modular design.

frxETH v2 will introduce new features such as decentralized validators, higher node capital efficiency, and performance incentives for node operators. Additionally, Fraxtal will use frxETH as Gas fees, and burning frxETH will increase the annual yield of sfrxETH.

With the launch of these new features, whether frxETH can rise again in the Ethereum liquid staking space is worth close attention.