Staked Ether (ETH), liquid derivatives – it’s a whirlwind of smart contracts and big-brained blockchain jargon out there. Still, there are a few trails through the ETH staking wilderness.
But remember, as the poet Antonio Machado said, “There is no path, paths are made by walking” – which is a fancy way of saying this is not financial advice, and make sure you do your own research.
Let’s start with the first personality type and type of ETH staking that might be appropriate.
The Ox: Slow and steady
The Ox archetypally has a strong, reliable personality, but can be stubborn and suspicious of new ideas. If this sounds like you, you might be interested in staking directly at Lido.
Lido Finance is not only the largest liquid staking derivatives (LSD) protocol, but also the largest decentralized finance (DeFi) protocol on the market in terms of total value ($9.5 billion) and market cap. Lido takes your ETH and deploys it through a team of vetted validators, pooling the earnings generated and distributing them to the validators, Decentralized Autonomous Organization (DAO) and investors.
Related: 3 tips for trading Ethereum this year
In exchange for providing ETH to Lido, the DAO issues “staked ETH” (stETH) tokens, which are like receipts (or “liquid derivatives”) that can be redeemed for your original ETH plus the accrued earnings. These tokens can be traded on the open market along with those of other LSD protocols such as Rocket Pool and StakeWise.
Risks include the fact that the smart contracts holding your ETH could have an undetected bug, the DAO could be hacked, or one or more of Lido’s validators could be penalized by Ethereum and have some of their stake removed. All of the following strategies contain these risks and more.
The dog: Honest, prudent and a little resolute
If this sounds like you, you might want to check out Auto-Compounder. For example adding liquidity to Curve Finance and locking the Liquidity Pool (LP) tokens.
When using Curve I like to use Frax based tokens as the two protocols are clearly best for each other and Frax pools often have the best rewards. I gave some of my ETH to Frax to stake and received their LSD called Frax ETH (frxETH).
It’s in Frax’ interest to maintain a highly liquid market for frxETH, so they run an LP on Curve that offers up to 5.5% APY on top of the fact that your frxETH also earns a similar return. Pretty.
ETH staked by companies. Source: Nansen
However, part of this APY is paid out in CRV tokens. No shade, but I’d rather have ETH, so I hopped over to Aladdin DAO’s Concentrator log and gave them my LP tokens, which is like a receipt for my share of the frxETH/ETH pool. They do a bit of magic and return 8% APY paid in the underlying assets. Pretty.
Of course, when you mix DeFi protocols into a crazy money pie, the risks compound with the rewards. There are three protocols involved here as opposed to one, which could mean risk is rolled – but I’m no mathematician.
The Tiger: Slim, sophisticated and always under control
This is perhaps the most sophisticated strategy on the list and should be considered by experienced investors with a large amount of money.
Essentially, the tiger can use a strategy similar to that of the dog; In fact, there are many LP pools and many compounders all over the DeFi world, so finding one that suits you shouldn’t be a problem. The question for tigers is how to hedge their risk.
A few option contracts might be in order. The basic approach would be to buy enough in-the-money put options to act as insurance in case ETH crashes. This might be all that is needed as the risk of a temporary loss is low as stETH tends to maintain its peg. (Those looking to hedge against a depeg event should check out the Y2K log on Arbitrum.)
A more optimal strategy would be a ‘bear call spread’ as this hedges against downside but also yields some profit in a sideways market.
The Frog: The Ponzi lover falling out of the air
The next strategy is very popular in some areas of the crypto world. In terms of risk, it’s about as safe as stocking up on peanut butter and running at a horde of vicious chimpanzees.
It involves “looping,” which refers to providing an asset, borrowing, exchanging the borrowed money for more of the original asset, and repeating the process.
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From my own research, I found an income farm that will give you around 2% returns if you deposit wstETH (same as stETH but with a harder bond) and allow you to invest USD Coin (USDC) against it for 3.5% interest to borrow.
You can then swap the USDC for more wstETH and repeat the process with a 75% LTV so you don’t get liquidated immediately. If you go through this process 5 times, you will end up with an APY of over 13% on your wstETH, which itself earns 5%.
Whatever your personality, it’s possible to find the strategy that works for you, and while it may sound complicated, if you have your own decentralized wallet or one on an exchange, most of them can be done with just a few clicks be implemented. While some bearish types might condemn the continuation of overly exuberant risk-taking, I see the trend in LSDs as part of the birth of a new high-yield asset: ETH.
One day, stETH could even compete with the traditional bond market. Because if governments can essentially run trillion dollar economies as derivatives of their own bond market, what are a few validator nodes among crypto friends?
Nathan Thompson is the senior technical writer for Bybit. He spent 10 years as a freelance journalist, primarily covering Southeast Asia, before turning to crypto during the COVID-19 lockdowns. He holds joint awards in Communications and Philosophy from Cardiff University.
This article is for general informational purposes and should not be construed as legal or investment advice. The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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