Staked Ether (ETH), liquid derivatives – this is the whirlygig of smart contracts and big brain blockchain jargon out there. However, there are several paths through the ETH staking desert.
But remember, anon, as the poet Antonio Machado said, “There is no road, the road is made by walking” – which is a good way to say this is not financial advice and make sure you do your own research.
Let’s start with the first type of personality and the type of ETH staking that might suit you.
The Ox: slow and steady
Ox, archetypally, has a strong and reliable personality but can be stubborn and suspicious of new ideas. If that sounds like you, you may be interested in direct staking with Lido.
Lido Finance is not only the largest liquid staking derivatives (LSD) protocol, but is currently the largest decentralized finance (DeFi) protocol in the market in terms of total value locked ($9.5 billion) and market capitalization. Lido takes your ETH and bets through a team of verified validators, aggregates the results obtained and distributes them to validators, decentralized autonomous organizations (DAOs) and investors.
related: 3 tips for trading Ethereum this year
In return for providing ETH for 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 proceeds earned. These tokens, along with other LSD protocols, such as Rocket Pool and StakeWise, can be sold on the open market.
These risks include the fact that the smart contract holding your ETH may have an undiscovered bug, the DAO may be hacked, or one or more Lido validators may be penalized by Ethereum and have some of their shares removed. All of the strategies below contain these risks plus others.
Dog: Honest, wise and a bit fierce
If it’s like you, maybe look for an automatic component. For example, add liquidity to Curve Finance and then lock your liquidity pool (LP) tokens.
When using Curve, I like to use Frax-based tokens, as both protocols clearly have hots for each other, and Frax pools often reward the most. I sent some ETH to Frax for shares and received LSD called Frax ETH (frxETH).
It is in Frax’s interest to maintain a highly liquid market for frxETH, so they open LP on Curve, which offers up to 5.5% APY on top of the fact that frxETH also achieves the same result. splendid.
But some of these APYs are paid in CRV tokens. No shade, but I prefer to have ETH, so I jumped into the Aladdin DAO Concentrator protocol and gave LP tokens, which are like receipts for the frxETH / ETH pool. They do some magic and generate 8% APY paid on underlying assets. splendid.
Naturally, when mixing the DeFi protocol into a screwy, money cake, risk compounds with yield. Here, there are three protocols that are different from one, which might be a risk – but I’m not a mathematician.
Tiger: Sleek, sophisticated and always in control
This is perhaps the most sophisticated strategy on the list and should be considered by experienced investors with large amounts of money on the line.
Essentially, tigers can use the same strategies as dogs; Indeed, there are many LP pools and many compounders across the DeFi world, so finding one that fits should not be a problem. The problem for tigers is how to protect against risk.
Some option contracts may exist. The basic approach is to buy enough in-the-money options to act as insurance if ETH takes a dive. This may be all that is needed as the risk of non-permanent loss is low, as stETH tends to keep pegs. (Those who want to block depeg events should check the Y2K protocol on Arbitrum.)
A more optimal strategy is the “bear call spread”, as it will ensure depreciation but also generate profits in a tilted market.
The Frog: The airdropping Ponzi lover
The next strategy is quite popular in some parts of the crypto world. In terms of risk, it’s about as safe as covering yourself in peanut butter and running into a pack of vicious chimpanzees.
This involves “looping,” which refers to providing an asset, lending it, exchanging the borrowed money for more of the original asset, and repeating the process.
related: 5 tips for investing during a global recession
From my own research, I found a yield farm that will give you about 2% yield when you deposit wstETH (same as stETH but with a harder peg) and allows you to borrow USD Coin (USDC) against it for 3.5% interest.
You can then exchange USDC for another wstETH and repeat the process, using a loan-to-value ratio of 75%, so that you are not immediately liquidated. If you play this process five times, you will get more than 13% APY on wstETH, which earns 5%.
Whatever your personality, it is possible to find a strategy that works for you, and while it may sound complicated if you have your own decentralized wallet or one in the exchange, most of them can be implemented with just a few clicks. While some bearish types may reject the continuation of excessive risk taking, I see the trend in LSD as part of the birth of a new yield-generating asset: ETH.
One day, stETH may rival the traditional bond market. After all, if a government can run a trillion-dollar economy basically as a derivative of its own bond market, what are some validator nodes among crypto friends?
Nathan Thompson is the lead technology writer for Bybit. He spent 10 years as a freelance journalist, mostly covering Southeast Asia, before turning to crypto during the COVID-19 lockdown. He holds joint honors in communication and philosophy from Cardiff University.
This article is for general information purposes and is not intended and should not be construed as legal or investment advice. The views, thoughts and opinions expressed here are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.