Source: Joseoramas30 Source: medium Translation: Jinse Finance, Shan Ouba

In this short article, I want to discuss OpFi and LSDfi, two narratives with their own solutions.

In Cointelegraph’s Q3 report on DeFi, I mentioned the need for a token economic model that incentivizes user participation, rather than the typical monopoly token holder capitalist model.

In short, more participation should translate into more liquidity, as participants are more willing to deposit and spend their funds within the protocol or ecosystem.

New DeFi Narrative

Let’s start with some background: A lack of liquidity and proper incentive models is why many DeFi services and features don’t take off or sustain themselves in the long-term, especially options trading, despite protocols like dYdX gaining traction in the derivatives market Leading.

Many DeFi protocols have tried to come up with narratives and solutions to solve liquidity problems. Despite hundreds of ideas, only a handful of models have proven to be a viable solution in some way, even temporarily or partially.

What is OpFi? Simplify DeFi with complex products

OpFi, short for Options Finance, is a new DeFi narrative in which options power DeFi protocols by bringing new products that enhance liquidity, capital management, and new incentive models.

This narrative is largely driven by Dopex, a decentralized options exchange that built and offered OpFi products such as Atlantic Options (OP), Single Collateral Options Vault (SSOV), and call options as incentives.

It seems to me that one of OpFi's goals is to bring specific TradFi tools on-chain that might be useful in some way, so you'll see some parallels to TradFi in a lot of DeFi narratives today. place.

Let's take the option incentive model as an example. Dopex introduces call options as an incentive mechanism, similar to the typical option incentive model used in TradFi to promote stakeholder participation:

• The protocol distributes purchased call options to its community, rather than fixed token emissions that can be dumped immediately. This means that users have an incentive to deposit the protocol's tokens into liquidity pools/products to generate profits.
• Deposit assets to generate returns in a structured manner; call option issuers can customize strike price and expiration date.
• When the value of the protocol's native token soars, users can sell call options and generate a profit, while the protocol benefits from the accrued liquidity.

In theory, this model reduces sell pressure and incentivizes token participation, while potentially generating liquidity in the long-term for sustainability. But with the dumping/easy money part removed, DeFi's perverts may shy away.

The complexity of liquidity management

This incentive model somewhat reminds me of Solana's Kamino Finance, a relatively new protocol that provides automated market-making vaults for CLMM optimization. Its treasury strategy pursues the best yields and best price ranges on liquid DEXs and compounds them to improve capital efficiency and reduce volatility.

CLMM models, although helpful for liquidity optimization, have the problem of time-consuming manual work, so automated management has so far been a viable solution. Likewise, options trading, which is far more complex than stock trading, is often cumbersome due to the management of option Greeks.

Going back to OpFi, the main idea behind this narrative is not to educate users, but to make options trading, as well as other functions in DeFi, easier by putting complex infrastructure behind the scenes. As more and more protocols try to integrate this incentive mechanism, we will have to see how it rolls out.

But this is especially challenging because they are using complex derivative products to reshape the already complex DeFi landscape.

#LSDfi: Speculation with Yield Protocols

In my opinion, LSDfi is pure greed. This is a protocol ecosystem designed to generate as much yield as possible from an ecosystem designed to unlock the yield on staked assets that have already yielded. In other words, it's just derivatives on top of derivatives.

It all starts with the Shapella upgrade.

• When Ethereum transitioned to PoS, a large amount of ETH was locked until the Shapella upgrade, which created a liquidity crunch for ETH-based projects and exposed stakeholders to potential losses due to market conditions.
• solution? Create tokenized versions of these pledged assets, such as Coinbase's Wrapped pledged ETH, and then use them for various DeFi activities. This allows stakers to generate income while staking their assets.

This has sparked a boom in the liquidity staking ecosystem, with TVL now exceeding $20 billion, of which Lido Finance is a major player.

Is LSDfi playing the old financial game?

In a nutshell, LSDfi refers to protocols that seek to profit by speculating with liquid collateralized derivatives. To me it's reminiscent of the secondary market that was created 15 years ago when banks got greedy and started buying tons of worthless loans and packaged them into CDOs and overleveraged after the Fed eased lending standards its positions, speculative payers and defaulters.

Likewise, in LSDfi you are speculating on LSD and its products. You can borrow LST (Liquid Staking Token) to generate additional yield, or even speculate or hedge against other LSD tokens, LSD Index, etc. We are creating a secondary market with a lot of money to profit from a growing trend, thus creating another growing trend.

While LSD offers an innovative solution to unlock staking liquidity, LSDfi - with layers of speculation on top of the existing system - in my opinion, we are just blindly imitating and repeating the old and existing A flawed financial playbook that raises key questions about the goals of certain DeFi communities.

final thoughts

DeFi can be fun. You can create tokenized versions of tokens, build on top of derivatives, and many things that can serve a useful purpose or just be the next speculative pool. In other words, LSDFi is injecting a lot of liquidity into the DeFi ecosystem, but be wary of explosive growth and exponential surges, especially over-leveraged systems built on top of multiple layers.

OpFi, on the other hand, is an emerging ecosystem that has certain advantages but seems to lack certain fundamental concepts. However, the idea of using complex products to facilitate DeFi structures by putting them in the background is very appealing.