❓Why lpETH
DeFi isn't built for staked assets
The current paradigms and strategies used within DeFi aren't really suited for liquid staked ETH derivatives. We've seen unnecessary loss of capital and high friction in capital markets as a result.
The existing paradigm treats LSTs and LRTs as a primary asset, using a floating market price to determine their exchange rate for ETH. This exchange rate is subsequently used to trigger liquidations in lending protocols, but this ignores the underlying backing of ETH.
Instead of determining a market price, an LST should be valued based on its underlying backing of ETH. "lpETH" uses this approach, and charges a premium based on the demand for getting instant liquidity for a particular LST.
Fragmented Liquidity
Currently, LSTs and LRTs all have their own isolated liquidity pools that all require individual incentives for sustainable liquidity. Liquidity providers find themselves split between various pools, despite all these LSTs and LRTs representing ETH underneath (homogenous assets).
"lpETH" allows for the unification of all this liquidity and volume. This creates a much more attractive opportunity for liquidity providers, but also removes the cold start problem for new LSTs coming to market.
Capital Ineffciency
Current liquidity pools, such as those on Uniswap or Curve, necessitate liquidity to be provided in pairs, such as stETH/ETH. This requirement is capital inefficient because the primary goal is to facilitate the exchange of LSTs back into ETH, while the reverse transaction is rarely used except for arbitrage purposes.
Moreover, LSTs can always be minted at a 1:1 ratio for ETH. Consequently, this portion of liquidity is redundant and could be more effectively allocated elsewhere by liquidity providers.
"lpETH" frees up the LST capital for liquidity providers to deploy elsewhere and provides a much simpler liquidity provision opportunity.
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