definikola on Warpcast

Content pfp

0 reply

0 recast

0 reaction

definikola pfp

Following recent developments in the ETH staking ecosystem, including: - Ethereum (minority) client bug - Protocols using primary LST price (1:1) instead of market price - Introduction of @eigenlayer and restaking Decided to write a revised leveraged ETH staking risk analysis.

1 reply

2 recasts

5 reactions

definikola pfp

Agenda: - The strategy and historical performance. - Sustainability analysis: squeezing the spread (min spread at 0.2%). - Risk analysis. - Liquid restaking strategy. - Minority vs majority client bug risks. - Managing lev-staking positions: http://ethsaver.com. - Summary.

1 reply

0 recast

0 reaction

definikola pfp

The strategy for boosting the ETH staking yield via lending protocols has become quite popular since the last write-up, so I'll give just a short overview of it here. Increased yield comes from leveraging the spread between ETH borrow rates and ETH staking APY. 👇

1 reply

0 recast

0 reaction

definikola pfp

Before delving into the risks, it's worth mentioning that the profitability of the leveraged staking strategy has increased in the last couple of months, with the average APY being over 10% despite the recent LSTs' drop in average yield (from ~5% to 3.5%).

1 reply

0 recast

0 reaction

definikola pfp

The sustainability of the leveraged staking strategy has been questioned many times ever since the first additions of LSTs as collateral. One of the main concerns was that the spread between borrow rates and staking yield was going to be arbed away. https://dune.com/queries/2235238/3665104

1 reply

0 recast

0 reaction

definikola pfp

As it turned out, the spread has not been squeezed at all. With the max leverage for LST/ETH positions being increased across all money markets (up to 18x on Blue), the required spread got down to a minimum. Even 0.2% is now enough to perform better than simply holding an LST.

1 reply

0 recast

0 reaction

definikola pfp

The conclusion is that there are just enough people wanting to earn mild APY (<3%) on their vanilla ETH, alongside people longing ETH or just using it as collateral to short other assets (not interested in the supply rate), to make this strategy sustainable (long-term).

1 reply

0 recast

0 reaction

definikola pfp

Alongside new underlying protocols and LSTs enabling this kind of strategy, the associated risks have also evolved in the meantime. Some are fully mitigated, but there are new ones, too. Let's explore those below.

1 reply

0 recast

0 reaction

definikola pfp

Revised risk analysis of leveraged ETH staking strategy. 1. Borrow rate spikes. 2. LST provider (big) slashing event. 3. LST depeg & liquidation hunting. 4. SC risks. 5. Governance risks. 6. Restaking. 7. Ethereum execution client bug. Breakdown of each point.👇

1 reply

0 recast

0 reaction

definikola pfp

Borrow rate spikes. Users can end up having negative net APY in case of high ETH market utilization on the underlying lending protocol (i.e. borrow rates > staking yield). However, this needs to be severe or very long-lasting to have an impact (which depends on the leverage).

1 reply

0 recast

0 reaction

definikola pfp

Protocols like Compound v3 and Morpho Blue (can) avoid having huge rate spikes after hitting the optimal utilization since no collateral is lent out guaranteeing liquidity for potential liquidations. Those are thus deemed to be less risky for borrowers in this regard.

1 reply

0 recast

0 reaction

definikola pfp

LST depeg. LST market price represented a significant risk factor because of their use as collateral especially after the stETH/ETH Curve pool 'depeg' in 2022, *but it's not anymore*: 1. Can redeem 1:1 in a few days (withdrawals enabled). 2. Protocols now using primary rate. 👇

1 reply

0 recast

0 reaction

definikola pfp

Shanghai upgrade (enabling withdrawals) resulted in the 'peg' tightening since stakers can now unstake at a 1:1 ratio anytime by waiting a few days in the exit queue. However, the market price is still trading at a small premium since it provides an instant exit.

1 reply

0 recast

0 reaction

definikola pfp

While withdrawals have improved the peg, this is not of much help (apart from liq. risk) when it comes to unwinding the leveraged LST/ETH positions since it needs to be atomic (in 1 tx). It can be a factor if one has enough ETH for the whole debt repayment (withdraw + unstake).

1 reply

0 recast

0 reaction

definikola pfp

Currently, the only unwinding option is to sell an LST back to ETH (can't wait 3 days), which implies potential swap fees and trade size impact. Partial unwinds combined with waiting for pools to rebalance can be a solution for some, of course.

3 replies

0 recast

0 reaction

definikola pfp

Find the full risk analysis and comparison of using primary vs secondary LST rates by BA below. TLDR: Using primary rates shifts the risk from market manipulation (e.g. liquidation hunting) to the health of Ethereum infra (less volatile). https://blockanalitica.substack.com/p/analysis-of-market-price-vs-exchange

1 reply

0 recast

0 reaction

definikola pfp

Lending protocols switching to LST primary rates.❗ Another (arguably) positive impact on the liquidation risk for lev-staking positions is the switch from price feed using the market price of LSTs to the primary LST rates to assume a 1:1 LST/ETH peg.

0 reply

0 recast

0 reaction

definikola pfp

Therefore, on-chain LST liquidity is definitely a significant risk measure one wants to keep an eye on when deciding to ape into the lev-staking strategy. Not sure if technically feasible, but it'd be cool to have a protocol matching the entry queue with the unwinding liquidity.

0 reply

0 recast

0 reaction