Staking Yield Boost – leveraged ETH staking with recursive lending
Learn more about leverage ETH staking with wstETH on Aave.
Leveraged staking is a yield farming concept in DeFi to multiply your staking yield on ETH through the yield spread between staking ETH and borrowing ETH using a liquid staking token (LST) like wstETH as collateral.
How to leverage ETH staking
The basic concept is quite simple:
- Deposit ETH into Lido to receive wstETH (wrapped Lido staked ETH) or swap it on DEXes
- Deposit wstETH on Aave and enable High Efficiency mode (E-mode) which allows you to borrow correlated collateral with higher limits and lower liquidation thresholds
- Borrow ETH from Aave at a higher collateralisation ratio
- Stake or swap ETH for more wstETH and repeat
What you've essentially done is leverage staked your ETH, pocketing the difference between staking yield and the borrowing cost of ETH on Aave.
While this method is relatively low risk because the price of wstETH and ETH moves in tandem, it is not risk-free. There are several risks that you should consider.
Risks of leveraging using wstETH/ETH
Increase in borrow rates
ETH borrow rates have trended up since wstETH's listing. Prior to listing, borrowing ETH on Aave (Ethereum) would cost 0.67% annually. Today, the variable borrowing cost has 1.96% – almost 3x higher.
Decrease in staking yields
Ethereum’s staking yield is typically determined by four variables: ETH issuance, transaction fees generated per day by Ethereum, burning rate and the amount of ETH being staked.
With more ETH staked as the popularity of Ethereum staking grows, we may expect a decrease in staking yields over time, although one could argue the reverse is also true as high demand for ETH would lead to lower overall ETH staked.
There is a risk that the Curve pool becomes unbalanced from a large sell order of stETH due to FUD or lack of incentives, causing the wstETH peg to temporarily depeg from its true value. It has occurred several times causing a slight discount.
In this case, there is a risk of liquidation of your collateral on Aave if you are highly leveraged.
Automate this with DeFiSaver or InstadApp Lite
DeFiSaver allows you to fully automate the above leveraged staking process by using a recipe on its Smart Wallet.
Using 6x leverage wstETH position on Aave v3 will result in 60 wstETH collateralised and 50 WETH borrowed, giving almost 30% APR on 2% borrow rates on ETH.
Similarly, you can achieve a similar outcome using InstadApp Lite.
Instadapp Lite stETH Vault takes stETH deposits and supplies it to various lending protocols, borrows ETH for more stETH to achieve a leveraged position and increased interest rates.
Overall, we think leveraged staking works better since Shanghai allowed staking withdrawals, as the position can be properly deleveraged and any pricing discrepancies can be quickly arbitraged away.
This means that you can expect ETH borrowing rates to rise over the next few months as more traders start leveraging up their staked ETH.
Buy ETH on Binance or Bybit and get up to 20% discount on trading fees when you trade cryptocurrencies.
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