Yearn contributor explains why protocol is launching token backed by basket of Ethereum LSDs

Yearn Finance is gearing up to launch a token called yETH that’s backed by a basket of Ethereum liquid staking derivatives.

Yearn’s goal with yETH is to provide similar exposure to the yields offered by LSDs while reducing the risk of exposure to any specific one. This could make it more attractive to hold than any specific LSD, and Yearn also intends to sweeten the deal by providing additional sources of yield.

LSDs are derivative tokens given out proportionally to those who stake ether with liquid staking protocols. The idea is to free up the capital that’s being staked and make it usable within the crypto ecosystem, while still earning the rewards.

“The aim is to make yETH the most pristine yield-bearing collateral on Ethereum, a valuable tool for other yearn-branded products," said the pseudonymous Yearn developer known as 0xJiji (whose official title is "Broom Stick Travel Companion"). "The diversified approach taken by yETH enables greater yields at lower overall risk.”

0xJiji said that the product came as a result of demand by other contributors to Yearn that found themselves holding multiple LSDs to hedge against individual failure and to maximize staking yield.

Keeping tabs on the risks

The developer claimed that the basic yield is a better risk-adjusted yield, given that the risk is spread among multiple LSDs. They said that beyond this, yETH users will have additional sources of yield, but that more details on this will be provided when it goes live.

“One of the features of yETH is that it limits exposure to the underlying assets. Thus, if there is an issue with one of the LSDs, the impact on yETH is contained,” they said.

As for the risk of introducing another derivative token, they acknowledged the additional smart contract risk but claimed that this is small compared to the various risks associated with LSDs.

0xJiji said that the token will work with both rebasing and non-rebasing tokens. They added that details on the initial composition — the proportions of the LSDs in the basket — will be released when the token launches. Once it’s live, yETH holders will be able to adjust the composition of LSDs over time.

“As more projects launch LSDs, convincing yETH holders to include their tokens as part of the yETH composition will be a powerful go-to-market strategy for growing liquidity,” they added.

The token will have competition though. In January, Index Coop — known for building tokens that represent baskets of assets — launched its token called the Diversified Staked ETH Index. It’s made up of three LSDs initially, but this may be expanded down the line.

As for when yETH will go live, 0xJiji replied with just “soon.”