The derivatives of Ethereum staking to maximize ETH staking yields

Ethereum staking currently yields 4–5% annually. Read about how derivatives can help increase these yields.

The derivatives of Ethereum staking to maximize ETH staking yields

Ethereum staking currently yields 4–5% annually, and users who stake their ETH can earn rewards in newly issued ETH (Ether) for helping the network reach consensus.

Staking is a public good for the Ethereum ecosystem. Any user with any amount of ETH can help secure the network and earn rewards in the process.

There are several ways to stake Ethereum, and technically speaking, staking by operating as validator requires a minimum of 32 ETH. You are responsible for operating the hardware needed to run these clients.

This minimum amount, at today’s prices, is currently close to US$100,000. Not only that, it requires technical know-how to setup and operate a validator node.

However, it is possible to stake less than 32 ETH and achieve higher yields with the use of both financial intermediaries such as staking pools and other derivatives.

Staking pools

Staking pools are a collaborative approach to allow many with smaller amounts of ETH to obtain the 32 ETH required to activate a set of validator keys.

They are seen as infrastructure services that abstract the deposit from the process of running a validator node.

Similar to cloud IaaS models, staking pools have backend infrastructure to help with the creation of new validator nodes, maintenance, backup and shutdown all in a fully automated manner, allowing anyone to start staking ETH without any technical knowledge.

Using staking pools, a user can simply deposit ETH into a pool, and let a group of people can operate the validator nodes in return for a service fee. This service fee might be split several ways, including validator nodes and the DAO.

In return, the staking pool service returns a token representing your stake in the staking pool.

This token is fully backed by the ETH deposited and your pro-rata share of staking rewards accumulated by the staking pool. At any time, after The Merge, your pool token can be redeemed for accumulated ETH.

Examples of staking pool services include Lido Finance, Rocket Pool, etc.

Lido Finance ETH staking front-end

Ethereum stakers can stake ETH on Lido Finance for instance, and receive stETH in return, a transferrable and liquid token that can be traded or lent out. Lido ETH stakers will receive 90% of the staking rewards, 10% will be split between operators and the DAO treasury, managed by LDO token holders. stETH is a rebasing token and the yield is reflected immediately in the form of higher quantity.

Similarly, on Rocket Pool, Ethereum stakers can stake ETH and receive rETH back. rETH is similar where the staking rewards earned by staked ETH are directed to ETH stakers, and yield received is reflection in the higher price of the rETH token.

However, unlike Lido, there is a minimum stake of 16 ETH required on Rocket Pool and there is a variable fee component to it. Rocket Pool’s operations is more decentralized.

Collateralization of staking deposits rETH and stETH

Since rETH and stETH are standard ERC-20 compatible tokens, they themselves can be lent, borrowed or liquidity pool against. The financialization of these derivatives offer interesting ways for ETH stakers in these staking pools to either extract more value out of their staking services or leverage against their ETH stake.

Lending out stETH on Aave

stETH market on Aave (Ethereum)

Leverage by borrowing ETH against stETH

We could use the stETH as deposited in Aave as collateral to borrow more ETH against it, and then take that ETH and deposit it back in the staking pool.

One way to achieve this is to do it manually yourself, although this can be rather time-consuming to do. An alternative is to use a tool like DeFi Saver that already has a recipe built-in to automate this process at a service fee cost of 0.25%.

DeFi Saver stETH-ETH automation

The leverage strategy above flash loans 2 ETH for every 1 ETH, then stakes the 3 ETH into Lido for 3 stETH, which is then deposited into Aave, 2 ETH is borrowed from Aave and used to repay the flash loan.

The LTV for the above strategy is 67% (3 stETH deposit / 2 ETH loan), which is relatively safe. However, there are risks involved. For instance, borrowing rates could go up to make the borrowing cost too close to the staking yield. Lido validators could get slashed and the value of stETH could fall.

For a tokenized version of this strategy where you can save gas fees, Index Coop’s Interest Compounding ETH Index (icETH) does that automatically by building on Set’s battle-tested leverage token infrastructure. Token holders retain spot exposure to ETH and amplify staking returns up to 2.5x. It capitalizes on the difference between ETH borrow rates (~0.9%) and staking yields (~4%). icETH’s service fee is 0.75% but has a 0.25% withdrawal fee.

We could go a step further and create an icETH/ETH LP on Uniswap to further increase yields by ~4% through liquidity provisioning.

Another alternative exists using ETHMAXY (ETH Max Yield Index), launched by Galleon DAO. It is a structured product built on the Ethereum network to enable traders to gain 3x leveraged staked ETH yield exposure via stETH, through Lido and Aave. There is a service fee of 1.95% but 0% withdrawal fee with ETHMAXY.

With the above strategies, there are simply many ways to amplify your staking yields without too much additional risk. However, caution is advised as every additional layer adds risk to the position, which could absolutely blow up.

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