Lodes at Stake: Lodestar Unveils New Staking Product

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Table of Contents

1. 🌟 Introduction: Lodestar 101

   1. Protocol Quick Stats

2. 🔐 New Staking Feature in Lodestar V1

3. 🤝 Partnerships

4. 📋️ Analysis & Conclusion

_{Disclosure: This piece is sponsored by Lodestar. We only work with projects we believe in and use ourselves. This is not financial advice, do your own research.}

Welcome to the Lodeyo 🤠

🌟 Introduction: Lodestar 101

The intent of this article is to provide you, our dear readers, with an introductory overview of the Lodestar protocol after release of their new staking product on Thursday (August 17th).

So, what exactly is Lodestar?

Lodestar Finance ($LODE) is a decentralized money market built on the Arbitrum network. In simpler terms, it is a lending and borrowing protocol. Lending protocols play a crucial role in growing DeFi ecosystems by enhancing capital efficiency - they allow asset holders to unlock liquidity without selling their assets, thereby reducing sell pressure, creating leverage, and stimulating trading activity. Lodestar’s North Star (🥁 *ba dum tss*) is to bring this liquidity unlocking mechanism to the Arbitrum ecosystem, catering to the widest possible range of yield-bearing assets (not just blue-chips, but longer-tail assets too).

While there are other prominent lending and borrowing protocols on Arbitrum such as Aave, Radiant, and Compound, Lodestar’s strategy is to differentiate themselves by specifically targeting Arbitrum-native communities. This enables Lodestar to cater to a wider range of assets (albeit with greater risk) then protocols like Aave, which are constrained by strict risk management policies regarding collateral assets. The Lodestar team has deep roots within these communities and, in fact, the inspiration for the protocol itself originated from the desire to unlock liquidity for their own staked Arb assets. They’re passionate OGs just like the protocols they serve (GMX, Dopex, Magic, Plutus, etc), and are on a mission to build a liquidity hub for derivative assets present within the Arbitrum ecosystem (such as pvGLP).

However, Lodestar’s journey to reach this point has been far from smooth sailing. First was the timing of the protocol’s launch, just one day after the FTX collapse in November ‘22 - I think it’s safe to say Lodestar was “born in the bear”. Later that same month, Lodestar fell victim to a price manipulation attack, resulting in an exploit of $6.4 million.

For most projects, a market meltdown and a seven-figure exploit would be enough to sink all hope. The way the team navigated these circumstances is noteworthy, and in my opinion provides reliable insight into their values. Eventually they managed to recover and relaunch, whilst returning one-third of the exploited funds in back to its users in GLP. Furthermore, in preparation for the release of their staking product, Lodestar allocated 750k $LODE tokens to compensate the victims of the exploit in the form of esLODE tokens. Once claimed by an affected wallet, esLODE must be staked to initiate a 12-month linear vesting period, converting it into $LODE.

Having learned from the past, Lodestar’s shown an increased focus on protocol security, undertaking three different code reviews and audits:

Audit #1 (Dec 2022): Solidity Finance Lodestar Audit

Audit #2 (March 2022): Hats Finance Lodestar Audit

Audit #3 (ongoing): Halborn Security Lodestar Audit

Protocol Quick Stats (August 19th)

Source: @shogun Lodestar Dune Dashboard

These Dune Analytics figures contrast slightly with the metrics on DefiLlama, reason being DefiLlama doesn’t include the total amount borrowed in their TVL figures. Nevertheless, according to DefiLlama’s TVL metrics, Lodestar currently ranks as the #6 lending protocol on Arbitrum, and thus the largest native money market (all protocols ranked higher are multi-chain).

Regardless of the TVL calculation used, these are promising numbers in the middle of a bear market. They demonstrate that Lodestar has built a dedicated user base and enjoys strong community support. Further, it highlights that the gap between Lodestar and third-ranked Compound actually isn’t that large. To break out from the pack, Lodestar must prioritise growing its user-base. The team is pursuing this growth by focusing on two key strategies:

1. Staking (implementing a new staking feature with attractive incentives to bring in new users, projects and assets)

2. Partnerships (actively establishing collaborations and platform integrations to tap into new markets)

🔐 New Staking Feature in Lodestar V1

Lodestar V0: Prior Functionality

To generate revenue, Lodestar applies a "reserve factor" on all interest payments made by borrowers and this percentage fee is directed towards protocol reserves. These funds are then added to POL (protocol-owned liquidity), and facilitate minimum liquidity levels for lending markets, providing stability and reliability for users. Deposited funds also generate interest income, further fueling the protocol's flywheel and propelling revenue growth.

The reserve factors, which vary across assets, can be explored within Lodestar’s documentation: Reserve Factors.

Lodestar V1: New Functionality (Staking)

Lodestar V1 officially launched on July 27th, kicking off the liquidity migration process and introducing new markets for GMX, wstETH, and native USDC (hint: V2 may enable LSDs as collateral 👀). However, the defining feature of V1 is the rollout of its new staking module.

By leveraging Solidly-inspired (3,3) veTokenomics, the staking feature aims to align interests and incentivize long-term participation in the protocol. It also represents a significant step towards decentralization, granting more power to $LODE holders to influence emissions, share in protocol revenue, and engage in governance.

When staking $LODE, there are a few important considerations:

• The staking module introduces optional timelocks and relock multipliers.

• Holders can choose to lock their tokens for three or six months, earning a 1.4x or 2x multiplier, respectively, on yield and voting power.

• At the end of each staking period, stakers have the option to relock their stake. For a three-month or six-month relock, stakers can earn an additional 0.05x or 0.1x multiplier, respectively.

These multipliers offer substantial boosts in yield and voting influence, strongly incentivising $LODE holders to maximize their token lock periods. Longer-term stakers will earn far greater shares of protocol revenue (paid in ETH) and gain disproportionate sway in directing emissions (50% of total emissions).

This influence is especially valuable at this early stage, before the flywheel gains momentum. With current circulating supply around 4.78M $LODE and monthly emissions of 300K, emissions represent a significant portion of supply. Long-term stakers right now have an opportunity to capture outsized power in shaping incentive structures across different markets. With $LODE price currently at $0.33, this $100K monthly emissions could drastically increase the APYs of pools receiving vote, creates a compelling incentive to maximize staking lock periods early on…

$LODE Wars, anyone?

Ultimately, the intention of the staking module is to play an important role in ensuring the sustainability of the lending protocol, by aligning the incentives of stakers, Lodestar, and other third-party protocols:

• Stakers earn passive income through a revenue share from the protocol, have the ability to influence emissions through governance power, and receive bribe rewards in exchange for voting power.

• Lodestar benefits from revenue growth, an increase in TVL, and grows its protocol-owned liquidity.

• Third-party protocols can utilize Lodestar as an additional source of liquidity, vote for their own pools, or even earn $LODE rewards themselves

The first epoch for the emission gauge begins on Monday.

🤝 Partnerships

Partnerships and integrations are well underway with other communities native to Arbitrum. Here are two particularly exciting ones:

Partner 1: Poison Finance

Poison Finance, a synthetic asset Protocol built on Arbitrum, opens up intriguing possibilities for Lodestar and DeFi users. Poison’s integration of lUSDC, Lodestar’s interest-bearing version of USDC, allows users to earn deposit interest while utilizing the receipt token to mint synthetic stocks (like pTSLA or pAMZN), or synthetic assets like pGOLD. This strategic collaboration empowers users to engage in long, short, and liquidity provision strategies with their assets, and enables easy international exposure to markets which might otherwise be unavailable in some countries.

Partner 2: Factor DAO

Factor DAO acts as a middleware solution, simplifying access and interaction with multiple DeFi products. Leveraging their expertise, Factor DAO is constructing a delta neutral vault on top of the Lodestar Protocol. This unique vault enables users to deposit plvGLP and borrow ETH/BTC for shorting purposes. Additionally, by staking $LODE, Factor DAO can contribute to boosting emissions for ETH/BTC deposits, thereby reducing the borrower's APY. This partnership enhances the value proposition of using Lodestar for DAOs in general, increasing the likelihood of additional partnerships in the future.

Lodestar is also exploring partnership with Dubble and Synthex.

📋 Analysis & Conclusion

Lodestar Finance is very much alive and kicking after experiencing what could have been a death blow. Their response to these setbacks demonstrates long-term thinking, which is reinforced by their new staking product and the incentives it generates for long-term alignment. Their approach and mechanics are reminiscent of Curve and Aave - although at the time of writing, this may or may not be seen as a positive thing.

Currently, Lodestar has established a solid user base within the Arbitrum DeFi community, despite facing competition from other lending platforms such as Compound, Aave, 3xcalibur, Sentiment, Dolomite, DForce, and Granary. While some of these competitors have similar staking and emissions mechanisms or governance forums, what sets Lodestar apart is the trust that they have earned through their perseverance and the supportive community that stands behind them. Although Compound and Aave have an advantage as early entrants, this advantage can potentially be overcome by outcompeting them with more innovative products and cultivating a cult-like following.

With alleged plans to expand to multiple chains, Lodestar appears to have a broader vision beyond being just a lending/borrowing platform. The main challenges to the protocol’s success include further security breaches, fragmented liquidity, and the task of corralling the most influential DAOs and liquidity providers in DeFi to use their platform.

Until next time,

Sending Alpha 🥂

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