Lybra Finance

What is Lybra Finance?

Lybra Finance is a lending protocol built on Ethereum that utilizes liquid staking derivatives to allow users to borrow against their staked ETH. When depositors supply staked ETH, they can mint eUSD, Lybra’s interest bearing stablecoin, at zero cost, improving capital efficiency and providing interest income.

Investment Thesis

The investment thesis of Lybra is predicated on two main points:

• Lybra’s Product-Market Fit
• Growth of Ethereum Staking

Lybra Product-Market Fit

Lybra is not the first lending/borrowing protocol, nor is it the first to offer CDPs for staked ETH. Where Lybra sets itself apart is its innovation in providing users with an interest-bearing stablecoin, eUSD. When users borrow against their stETH, they mint eUSD, which pays a native 7.5% yield to holders. The yield comes from accrued ETH staking rewards and is paid via airdropping eUSD proportionately to holders.

The 7.5% yield on eUSD can be paid due to borrowers having to maintain a collateral ratio of at least 150%. The current yield on stETH is approximately 5%, so in a scenario where there is $100 of collateral deposited into Lybra, a maximum of $67 eUSD can be minted. The $100 worth of stETH will accrue $5 worth of staking rewards ($100 * 5% APY) enabling Lybra to pay an equivalent amount in eUSD rewards ($67 eUSD * 7.5% APY). This scenario assumes the maximum amount of eUSD minted whereas users will likely borrow at more conservative collateral ratios. Additionally, Lybra takes a 1.5% fee on all eUSD minted which effectively serves as the loan’s interest rate and the protocol’s main revenue stream.

Lybra offers ETH holders a way to leverage their holdings with no borrowing costs while simultaneously allowing them to earn interest income on eUSD or explore other opportunities across crypto. Lybra is still in its infancy as a protocol, and in the roughly four months since it was launched, it has found early semblance of product-market fit. Lybra has attracted over $362m of TVL, with over 198k stETH deposited, helping eUSD become the 15th largest stablecoin by market cap in four short months.

Lybra benefitted from being a first mover in the space and innovating with their interest bearing stablecoin. Lybra falls under the category of “LSDfi” which encapsulates the financialization of liquid staking derivatives. There is currently just over $700 million in TVL across LSDfi protocols and Lybra makes up more than half of that. Some of the other names in the space include Curve and Pendle, but they have failed to attract as much capital as Lybra.

Although Lybra is currently the market leader in LSDfi, their business model does not have a substantial moat, as other protocols can easily create similar models. Of note, Prisma Finance is a similar protocol backed by some large names in the crypto space, which may offer stiff competition to Lybra. Lybra will continue benefiting from being a first mover, but growth will be contingent on their ability to continue innovating.

On that note, Lybra Finance is only a few months old and is already planning to launch Lybra v2 at the end of August. Lybra v2 has a lot of upgrades that should attract additional deposits and improve the protocol’s profitability. Below is a summary of all the new features Lybra v2 will bring.

Important upgrades to highlight include multi-collateral and improved tokenomics. Lybra’s impressive TVL growth has occurred with a singular collateral option, Lido’s stETH. With the launch of v2, Lybra will enable other liquid staking tokens to be used as collateral, further accelerating Lybra’s deposit base, increasing eUSD mints, and driving more fees to Lybra.

Lybra is planning to go multi-chain, starting with Arbitrum. Users will be able to mint peUSD, which will be compatible with L2s, improving Lybra’s network effect. Additionally, Lybra v2 includes improved tokenomics, such as a dynamic liquidity provision (dLP), longer vesting periods of esLBR, an additional 1.5% fee on peUSD repayments, and bribes.

Lybra’s dLP mechanism is a unique way to enhance demand for the LBR token. If a user borrows against their staked ETH position and mints eUSD, they will now be required to maintain a dLP position (LBR/ETH LP position) equal to 5% of their loan amount if they want to be eligible for esLBR emissions. If the user’s dLP position falls below the 5% threshold, they will forfeit their allocation of emissions, which will simultaneously be offered up to other investors at a 50% discount, paid in LBR or eUSD. If the bounty is paid in eUSD, the eUSD will be strategically placed in Lybra’s stability fund, further supporting the protocol’s ability to maintain eUSD’s peg. The new and improved protocol is expected to go live on mainnet at the end of August and could provide a spark for LBR price action.

Growth of Ethereum Staking

With the completion of The Merge, Ethereum went from a proof-of-work network to a proof-of-stake network, enabling ETH holders to stake their tokens and become network validators. As a network validator, users are entitled to staking rewards. As a result, the Ethereum staking market – both independent operators and liquid staking providers – has grown substantially over the past year. ETH holders now have easy avenues to earn additional yield on their assets. The current yield for staking ETH sits at approximately 5%, making the return profile competitive with U.S. Treasuries. Looking at the chart below, the growth of Ethereum staking is apparent, with total deposited ETH surpassing 25 million and the number of validators approaching 800k.

Despite the clear uptrend in Ethereum staking, the number of staked ETH compared to its circulating supply (staking ratio) sits at approximately 21%. For comparison, other proof of stake networks have an average staking ratio of 58%.

It can be expected that the amount of ETH staked should continue to grow as Ethereum adoption scales. It can be assumed that Ethereum’s staking ratio will trend toward its peer group’s average. In this scenario, there will be a significant increase in assets eligible to be deposited into Lybra.

Extrapolating out the growth of Ethereum staking along with evaluating scenarios in which Lybra grows its portion of staked ETH deposits, the upside for Lybra’s TVL is extremely high. Lybra currently has 0.79% of all staked ETH deposited in its protocol, and that is with only one collateral option (Lido’s stETH). Using a base case of Ethereum’s staking ratio rising to 35% and Lybra capturing 2.5% of staked ETH, Lybra’s TVL would rise to $1.94 billion from its current $362m level.

Taking the analysis one step further, Lybra’s circulating market capitalization is currently 7.7% of its TVL. Holding that ratio constant and accounting for the potential TVL growth scenarios above, the investment case for Lybra can be quite compelling, with Lybra’s Circ. MC increasing 435% in the base case scenario. Granted, MC / TVL ratios usually compress as projects grow larger, but the room for deposit growth is significant.

It is important to note some caveats with the analysis above. For simplicity, the model above holds the percentage of liquid staking and Ethereum’s price constant. As we wrote in our Liquid Staking piece, we believe the amount of ETH staked with LSD providers is likely to increase over the long-term due advantages such as near-instant liquidity, less technical expertise, and obviously the ability to leverage assets by depositing liquid staking tokens in protocols such as Lybra.

Tokenomics, Liquidity, & Entry Suggestions

Tokenomics

LBR is the native token of Lybra Finance. It can be staked in exchange for esLBR which entitles holders to governance rights, fee share, and yield boosts. To unstake, esLBR is linearly vested over 30 days (will vest over 90 days once v2 launches). Holders can choose to lock their LBR for longer periods of time in exchange for increased yield boosts.

LBR has a total supply of 100,000,000, of which 13,362,685 have been emitted. Lybra has a significant portion of tokens left to be emitted, giving Lybra a fully diluted valuation (FDV) of approximately $210 million while only having a circulating market cap of roughly $28 million. A large portion of tokens have been allocated towards the Mining Pool (60%), which has likely contributed to attracting significant TVL in a short period. Looking at the unlock schedule, it is important to note there is a lot of supply that will unlock over the course of the next year.

With that said, improved tokenomics launching with Lybra’s v2 upgrade will increase the vesting period of esLBR to 90 days, mitigating the effects of large amounts of supply coming to market too quickly.

Liquidity & Entry Suggestions

There is currently $7.5 million in LBR liquidity on Uniswap and LBR got listed on OKX on August 16^th. As of 8.15.23, LBR is trading at $2.10, giving it a circulating market cap of $28.06 million and an FDV of $210 million. Liquidity for LBR is quite deep, representing approximately 27% of current circulating supply, one of the higher ratios we’ve observed.

When analyzing potential entry points, accumulating LBR in the range of $1.10 – $1.50 likely serves as a good level of price support and an excellent entry over the long term given the high upside discussed previously.

Risks

Peg-risk is always a factor when dealing with stablecoins or financial derivatives. In Lybra’s case, the risk is two-sided as users of the protocol are depositing staked ETH which has its own risk of de-pegging, but also the risk of eUSD losing its peg. Lybra requires a collateral ratio of at least 150% so all debt positions are fully collateralized, and the protocol has mechanisms to help support eUSD’s peg, but it is important to acknowledge the dual-sided peg risk.

Lybra has benefited from its innovation of an interest-bearing stablecoin and being a first mover in the space. Still, as with any industry, competitors can arise and steal market share. If Lybra fails to integrate eUSD across the DeFi ecosystem, users may be more inclined to borrow against their staked ETH elsewhere.

As with all DeFi platforms, smart contract risk is always a factor, and although Lybra has gone through code audits, there is always a chance that code vulnerabilities can be found.

Bottom Line

Lybra Finance is a lending protocol specializing in collateralizing users’ staked ETH in exchange for Lybra’s native stablecoin, eUSD. eUSD differentiates itself from other stablecoins in that it pays a native 7.5% APY to holders. Lybra has found product-market fit extremely quickly, evidenced by attracting over $362 million in TVL in the four months since launching. Lybra is well positioned to benefit from the broad growth of the Ethereum staking sector as Ethereum’s staking ratio (21%) is well below its peer group average (58%). An increase in this metric would drive significant TVL to Lybra and fuel price appreciation. At an approximate $28 million circulating market cap, Lybra presents an attractive investment opportunity when accounting for its product-market fit and positioning to capitalize on increased staking participation.