The State of Lybra

Assessing the Protocol's Performance and Future Prospects in DeFi

Introduction

In the dynamic world of decentralized finance, the Lybra Protocol emerges as a noteworthy platform, particularly for its use of Ethereum Liquid Staking Tokens (LST) as collateral for stablecoin borrowing. This analysis delves into the protocol's performance metrics, providing a comprehensive evaluation of its operational efficacy. Crucially, our calculations are based on the assumption that Ethereum LSTs locked in the protocol yield a 3.75% APY, a key factor influencing the protocol's financial dynamics and user returns. As of the start of October, a significant shift in activity towards Lybra Protocol V2 has been observed, with approximately 90% of the platform's operations migrating to this updated version. This article focuses exclusively on the data and performance metrics of Lybra V2, acknowledging that while most activity has transitioned, a smaller yet persistent segment continues to operate on the original Lybra platform.

Our exploration encompasses several core aspects of the Lybra Protocol's functionality. We assess the volume of Ethereum LSTs used as collateral, linking it to the stablecoin borrowing activities and the overall liquidity of the platform. The holders of these borrowed stablecoins offer insights into their attractiveness and potential yield for users. Additionally, the protocol's fee structure is scrutinized for its impact on revenue generation and long-term sustainability.

Concluding this analytical journey, we present a detailed overview of the Lybra Protocol's performance. This assessment aims to provide readers with a nuanced understanding of the protocol's operational health, and the potential financial returns for its users. Our objective is to offer an insightful resource for those considering engaging with or investing in the Lybra Protocol, enabling informed decision-making in the evolving landscape of decentralized finance.

Locked Ethereum (LST)

The Lybra Protocol, showcases a robust accumulation of assets, with a current collateral value nearing $330 million. This collateral predominately comprises stETH and WstETH, two liquid staking tokens, which represent over 98% of the total locked value within the protocol, signifying their crucial role in the ecosystem's stability and user confidence.

The journey of locked-in value within the Lybra Protocol reflects a story of resilience and growth. Since mid-September, there has been a notable liquidity uptrend, indicating a growing trust and utility in the protocol's offerings. Despite this positive momentum, it's important to recognize that the protocol is only now approaching the threshold of its historic peak levels. The introduction of Lybra Protocol V2 in early September marked a period of volatility with a significant drawdown in total locked value as users adapted to the new system. However, the protocol has demonstrated a strong recovery, and the locked-in value is ascending back to its all-time highs, signaling a return to its former strength and potentially setting a new benchmark for liquidity and user engagement.

Stablecoin Supply

Within the Lybra Protocol, the interplay between collateral deposits and stablecoin issuance is a critical driver of its vibrant economy. The current stablecoin supply stands at roughly $145 million, with a distinctive composition that mirrors the protocol's diverse offerings. Yield-bearing eUSD stablecoins, borrowed against rebasing liquid staking tokens, form about 75% of this supply. These tokens are appealing because the rebasing rewards—usually the privilege of the collateral holders—are instead distributed to the stablecoin borrowers, incentivizing the utilization of the protocol's lending features.

The remaining quarter of the stablecoin supply comprises peUSD, which are non-yield-bearing but benefit from the compounding staking rewards of the collateral baked into the liquid staking token’s value. This differentiation in stablecoin types caters to varied user preferences, balancing yield generation and asset appreciation.

The protocol's borrowing activity has expanded by 50% since mid-October, a testament to the high collateral utilization rate. This correlation indicates an active user base that is keen to leverage their deposits. A particularly compelling incentive for this engagement is the structure surrounding rebasing collateral. When users deposit rebasing liquid staking tokens, they are motivated to borrow stablecoins against them to capture the staking rewards that are otherwise forgone if the collateral simply sits idle. By borrowing stablecoins, users effectively transfer the benefit of staking rewards from the collateral to themselves, ensuring they do not miss out on the returns their assets can generate. This mechanism not only provides liquidity to the user but also enhances the attractiveness of holding stablecoins, creating a dynamic environment that boosts the protocol’s activity and liquidity.

Stablecoin Holder

The stablecoin landscape within the Lybra Protocol, featuring eUSD and peUSD, showcases a compelling scenario in terms of ownership and market activity. Despite a substantial market cap close to $145 million, the holder base is relatively narrow, with just over 400 individuals holding eUSD and a little over 300 holding peUSD. This suggests that those minting the stablecoins are predominantly using them as savings instruments or for their yield-bearing capabilities, particularly the eUSD, which currently offers a notably attractive APY of 6.30%.

This high APY, notably independent of the federal funds rate, positions eUSD as a potentially more appealing asset, especially in scenarios where traditional interest rates are falling. This yield advantage could be a key selling point to prospective holders, as it represents an opportunity for earnings that are not directly affected by the fluctuations of conventional monetary policy rates.

However, the current holding pattern indicates that these stablecoins are not extensively used as mediums of exchange but rather are retained by those within the protocol's ecosystem, indicating a preference for investment growth over transactional utility. The minimal movement of these stablecoins in secondary markets, like those facilitated by AMMs, hints at a limited outreach to non-collateral depositing users.

For the health of the Lybra Protocol, diversifying the use cases of eUSD and peUSD beyond the current holders is essential. A thriving stablecoin ecosystem is typically characterized by a broad distribution and active use across various transactions, much like the DAI stablecoin from MakerDAO, which has achieved widespread adoption for payments and savings by a diverse user base.

To replicate such success, the Lybra Protocol might consider implementing strategic initiatives aimed at bolstering the appeal of eUSD and peUSD. These could include marketing the stablecoins' attractive yield potential, independent of traditional interest rate benchmarks, and emphasizing their use in everyday transactions. By enhancing the utility of these stablecoins and integrating them into a wider array of transactional frameworks, the Lybra Protocol can promote greater adoption and stability within the larger DeFi market, ensuring a more robust and resilient ecosystem.

Fee Structure and Revenue Generation

The Lybra Protocol has established a fee mechanism that directly influences its revenue stream. A 1.5% annual fee is levied on all stablecoins borrowed from the platform, which has become a steady source of income. As of the current metrics, the protocol garners approximately $1.4k daily from peUSD fees and a more substantial $5k from eUSD fees. This translates to an estimated annual revenue of around $2.32 million from fees alone, assuming the borrowing rate remains constant.

The revenue generated from these fees is intrinsically linked to the circulating supply of eUSD and peUSD in the market, which in turn, is highly dependent on the value of the Ethereum liquid staking token collateral backing them. This relationship underscores a fundamental dynamic within the protocol: as the price of Ethereum fluctuates, so too does the value of the collateral, which then affects the supply of stablecoins and consequently, the fees accrued by the protocol.

This fee-based income model highlights the protocol’s reliance on the health and stability of the Ethereum market, as well as the engagement level of its users in borrowing activities. An increase in the price of Ethereum or an uptick in the amount of Ethereum staked could lead to a higher supply of stablecoins in the market, amplifying the protocol's fee revenues. Conversely, a downturn in Ethereum's market performance or a decrease in staking could result in reduced fee intake.

LBR Token

LBR is the native token of the Lybra ecosystem, serving as a critical component of its economic model. Stakers of LBR are the beneficiaries of the fees generated from the borrowing of stablecoins within the protocol. With the current distribution, there are slightly over 2,000 holders of LBR across the Ethereum and Arbitrum networks. This is in the context of a maximum potential supply of 44.8 million tokens, of which only 16.7 million are currently in circulation, roughly one-third of the total possible supply.

The valuation of LBR is an essential indicator of the protocol's financial health and investor sentiment. The current market price of LBR places its fully diluted market capitalization at approximately $67 million. When juxtaposed with the protocol's fee revenue, which stands at an annual rate of $2.32 million + %10 (~ Lybra v1 revenue), we derive a Price-to-earnings (P/E) ratio of 26.15, based on the fully diluted market cap.

In traditional markets, a P/E ratio of around 15 is considered average, whereas technology and high-growth sectors may command higher P/Es due to their growth potential. In the rapidly evolving DeFi sector, a P/E ratio of 26.15 might be seen as relatively high, implying that investors have strong expectations for the protocol's future growth and profitability. However, it’s also crucial to consider the volatility and speculative nature of cryptocurrency markets, where P/E ratios can vary widely and may not always align with those from more established industries.

Conclusion

The Lybra Protocol stands out in the DeFi landscape for its innovative use of Ethereum Liquid Staking Tokens (LST) as collateral, offering a dual utility in the form of stablecoins eUSD and peUSD. Our analysis, based on the Ethereum LSTs yielding a 3.75% APY, provides a detailed perspective on the protocol's health, highlighting the recent migration to Lybra V2 and its implications on the platform's liquidity and user engagement.

The protocol's performance metrics, such as the locked-in value of collateral and the supply and distribution of stablecoins, tell a story of resilience and strategic utilization. The increase in borrowing activity and the high collateral utilization rate reflect a deepening trust in the protocol's mechanisms and its ability to meet user demands for both yield and liquidity.

However, the concentration of stablecoin holdings among a relatively small number of users points to a need for broader adoption. For the protocol to mirror the success of established stablecoins like DAI, it must expand its reach beyond current users, potentially by emulating strategies that incentivize the use of eUSD and peUSD for everyday transactions and savings.

Financially, the protocol demonstrates a solid revenue stream through its fee structure, with the price of LBR reflecting a market sentiment poised for growth, as indicated by a P/E ratio of 26.15. This figure, while high compared to traditional markets, is a lens through which investors view the potential of DeFi protocols in a rapidly changing ecosystem.

In conclusion, the Lybra Protocol's current trajectory is promising, but its long-term success and health will depend on its ability to increase the adoption of its stablecoins and maintain the efficacy of its economic model. With strategic adjustments and a focus on market integration, the Lybra Protocol has the potential to not only sustain but also elevate its standing in the DeFi space, contributing to the broader vision of decentralized finance.

Sources

All data referenced in this article were sourced from our Flipside Crypto dashboard, which can be accessed directly through the following link: Dashboard Link