DeFi’s Latest Star: Prisma Finance Draws Traders with Liquid Staking Tokens (LSTs)

In the ever-evolving world of decentralized finance (DeFi), a new lending protocol named Prisma Finance is rapidly gaining traction among traders. Prisma Finance offers a unique proposition, presenting a stablecoin that is exclusively backed by liquid staking tokens (LSTs), and this innovation is driving a surge in demand.

Prisma Finance launched on September 1, adopting a cautious approach by progressively increasing the borrowing limit for its stablecoin, mkUSD. This staged approach ensures that the fledgling protocol operates smoothly as intended. On September 15, Prisma Finance raised the borrowing cap from $20 million to $30 million, a milestone achieved in less than two hours.

One of the primary attractions for DeFi traders is the “stability pool” module, which has already attracted over $21 million worth of mkUSD. This stability pool plays a crucial role in settling debts that require liquidation. In return, the pool receives collateral from users whose positions have been liquidated. This innovative mechanism bears similarities to Liquity, the issuer of the LUSD stablecoin, which ETH fully backs.

Its creators’ involvement influenced Prisma Finance’s development in DeFi. One of the anonymous core contributors shared, “We, as co-founders of the protocol, are building it with ourselves as users in mind. We all participate in DeFi. We all hold LSTs. We all use collateralized debt protocols.”

Prisma Finance capitalizes on two key narratives that have remained resilient in crypto. The first is the emergence of liquid staking tokens (LSTs), representing staked Ether (ETH). The sector has grown significantly since Ethereum introduced staked ETH withdrawals earlier this year, with nearly 12 million ETH, valued at over $19 billion, deployed in LSTs.

The second narrative is stablecoins, with DeFi giants like Aave and Curve launching their stablecoins this year, joining established players like Frax and Maker.

Furthermore, Prisma Finance is introducing “veTokenomics” to its PRISMA token, a model pioneered by Curve. Holders of vePRISMA can direct additional PRISMA rewards to various aspects of the protocol, such as minting mkUSD debt, the stability pool, certain collateral depositors, or liquidity providers on Curve.

Despite the ambitious approach, Prisma Finance strongly focuses on community governance. The project’s anonymous co-founder emphasized the degree of control PRISMA holders have over the protocol, making it a community-driven endeavor.

However, it’s worth noting that despite its initial success, Prisma Finance is entering a competitive space within the DeFi landscape. Users already have alternatives for minting DAI against leading LSTs like stETH and rETH using Maker, and they can also borrow various stablecoins against LSTs through Aave, the largest DeFi money market platform. Prisma Finance’s journey in this competitive field will be closely watched as it aims to solidify its presence in the DeFi ecosystem.

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