Before we get started, this is not a recommendation or endorsement to buy any token(s) mentioned. DeFi Dad has disclosed he was an angel in the seed round for Prisma Finance.
This summer, LSTfi took off as a new sector of DeFi focused on optimizing for ETH LSTs (liquid staking tokens). As liquid staking is still in a nascent stage, given less than 10% of all circulating ETH is in LST protocols and only 21% of the total ETH supply is staked (worth $40.5B in ETH), there’s a huge opportunity to create DeFi that serves this large pool of capital. Previously, we’ve covered emerging CDP-borrowing protocols for ETH LSTs like Gravita, Raft, and Lybra Finance. Lybra has maintained the largest deposits of liquid staked ETH with just under $130M so with Raft at $35M and Gravita just over $30M, this space looks ripe for competition!
On September 1st, a new CDP-style LSTfi protocol launched called Prisma Finance. Prisma aims to support a non-custodial and decentralized Ethereum LST-backed stablecoin. In just 8 hours, the Prisma debt cap of $20M filled as users deposited LST collateral to mint their new flagship mkUSD. This Friday September 15 at 12 pm UTC, Prisma will raise the mkUSD debt cap another 10M which is why this tutorial should be timely to prepare!
mkUSD is fully collateralized by 4 popular ETH LSTs: wstETH, rETH, cbETH, and sfrxETH, with a minimum collateral ratio (MCR) of 120%. The mkUSD stablecoin is already incentivized on Curve and Convex Finance “to create a capital-efficient flywheel where users can receive trading fees, CRV, CVX, and PRISMA on top of their Ethereum staking rewards.”
Aside from Liquity, Prisma protocol is inspired by facets of Curve, Convex, and Frax. Given the cofounders of Convex, the founder of Curve, and the Frax DAO have all backed Prisma Finance, the greater Convex, Curve, and Frax communities have demonstrated an immediate intent to grow and use Prisma Finance. (see below). The deep roots and allies as long time founders and contributors in DeFi is part of the reason I invested as an angel with Prisma.
This new LSTfi protocol should be very attractive to LST holders who wish to make their assets more productive, by using them as collateral to mint the mkUSD stablecoin for use across DeFi.
With Prisma, issuers of ETH LSTs can incentivize actions on Prisma which help to deepen the liquidity of their own LST such as:
- Incentivize minting mkUSD with their LST
- Redirect token emissions toward minting with a certain collateral
- Redirect token emissions to keep an active borrow with a certain collateral
- Redirect token emissions to any LP tokens staker
As a modified fork of Liquity V1, Prisma’s codebase allows for more favorable and flexible collateral parameters. Once the PRISMA token begins distribution, Prisma DAO will be in charge of the protocol parameters, emissions, and fees. For example, there is a one-time minting fee at the time of borrowing, like Liquity. The fee rate is between 0.5% and 5% and is multiplied by the amount of liquidity drawn by the borrower. Prisma also has a Stability Pool for liquidations, very similar to Liquity. The stability pool serves as a primary safeguard to ensure the solvency of the system. Its role is to…
DeFi Dad is one of the earliest power users of DeFi, having worked with early Ethereum startups going back to 2018, including Zapper.
