We want to get the absolute best staking rewards for our cryptos without taking any extra risk. That’s really the holy grail and there are certain strategies in place now that actually let’s do that. We are going to look at a strategy that lets you earn higher staking rewards for your crypto without taking any extra market risk. Minimal extra market risk and higher return is obviously what we want and we also need it to be a simple strategy. We can’t be managing this strategy actively because staking is supposed to be passive. With that said, using the Jet-Bot copy trading platform, you may automatically copy best traders to earn up to 2000% APY. Copy trading is the most effective approach to get passive money from your cryptocurrency and the platform is a Binance exchange official broker. You can connect your Binance account via API keys without having to deposit funds on the platform. Start to use the platform right now.
What are liquid staking derivatives
Firstly, we’ll go through a liquid staking derivative, otherwise known as an LSD. We are going to use We will use a service provider, where you can put your assets on here and they will stake them for you and pass the rewards back to you. So that’s obviously very good for us, but why wouldn’t we just go directly to the blockchain and actually stake our assets. Well, there are certain advantages we get with LSDs, liquid staking derivatives. I’m going to use ETH as an example, but you can use this on other changes with other assets as well. The strategy is the same, so Solana, MATIC, it’s actually working for as well. I’m going to stick to ETH because this is the chain where the strategy is kind of most robust and has been around for a while.
So, what is an LSD? Well, you take your ETH and you stake it on the blockchain. Now you can do this directly if you have 32 ETH, which is obviously a lot, so most people don’t do that. Most people will maybe stake it with Binance or they’ll go to something like Nexo, which you know gives them a yield by the way. Of course, if you want to do it in a decentralized way, then you can do it with Lido as well. So let’s go through. We can see Ethereum 2.0 staking the APY 3.5% stake. Now you can connect your wallet if you want to use the Ethereum blockchain right here, connect walletl stake it and that is staked in platform. They pass the yields back to you. They actually lock up your coins. So Ethereum is paying around 3.5% right now in east 2.0 rewards and so you know they get those rewards and they pass them back to you.
The big problem with staking Ethereum though is that there’s a lock up in ETH 2.0. Once you’ve put your coins in, you can’t take them out again until ETH 2.0 launches. They don’t call it ETH 2.0 anymore, but you get the idea. Until they go over to proof of stake, you will not get your coins. There’s a big lockup period after they move over to ETH 2.0. You give away access to your coins in exchange for those three and a half percent. You can’t trade them. You can’t access them. That’s obviously a big deal for a lot of people, because people want the choice of what to do.
When you give platform your coins, they actually give you a different coin called an LSD liquid staking derivative and for Lido they actually call theirs staked ETH or stETH. What you’d do is go and connect your wallet to them and then you can see this: you will receive stETH. stETH actually goes back into your metamask wallet.
So why is that important? Well, stETH is a liquid token and you can actually see it trading on coin market cap. You can trade stETH on many exchanges. It’s actually the 15th biggest asset right now stETH and you can see it trades around about the same value as Ethereum. So, you know, 2 380 ETH is trading just above 2 400 stETH. There’s a parity between them because stETH is essentially Ethereum being staked and it actually has more or less a one to one price, so you get staking rewards from ETH 2.0, about 3.5%, and you also get this stETH that you can trade.
What do the service get out of this? Essentially, they take 10%. So they take 10% of the staking rewards, so they take 10% of the 3.5%, or it’s actually a little bit more, basically you get 3.5%. So the rate is a little bit higher. They take 10% for this service of giving you the rewards but also giving you this staked ETH coin that is liquid that you can trade around. So the benefit to the user is that you get Ethereum staking rewards without having to lock up your coins, which is obviously good. You can sell them straight away if you want.
The other thing you can do is actually use those coins or the value of those coins in DeFi because state ETH is a liquid staking derivative. It’s a liquid coin. You can send it out of your wallet to a lending protocol. You can send it to an exchange to provide liquidity and get liquidity rewards. So there are many things you can do.
You can also use the value to leverage your returns, and that’s what we’re going to look at here. So the main benefit to everyone using something like Lido or, you know, other providers, is that for a tiny fee of 10%, you get a liquid staking coin that you can use around DeFi. That still gives you exposure to Ethereum and the staking rewards.
Crypto staking strategy
So here’s how people are using stake teeth across DeFi to actually earn extra income on top of the staking rewards that Ethereum gives you. Some of the things I’m going to go through are a little bit complex.
This is exactly how leveraged staking works and how people are using stake teeth across DeFi to earn extra income:
So usually, what happens is that someone has Etherium and they give it to Lido, and then Lido gives them the stETH, and that just accumulates at 3.5% in your wallet. The downside here is that you need Ethereum in a metamask wallet on the Ethereum blockchain, which means you’re paying crazy gas, and so you need a ton of this to work right to pay for all of the fees that you’re going to pay, and then you have a theorem in your wallet. You can’t move it out. It’s expensive. It’s kind of an issue. Instead of buying ethereum, they actually just go to an exchange and buy stETH, so you can do that now. Not every exchange has this. Essentially, people, instead of buying ETH if they want to buy it long term, just buy stETH instead because it can accumulate 3.5%. Some exchanges don’t accumulate that 3.5%, so you may have to move out anyway. If you do want to buy stETH FTX, just have that steak ETH right there, so you get 3.5%, which is great and for most people, you may think, you know what, I’m fine with that. It’s just the least risky thing. Obviously, you have leverage staking going on as well, which I’m going to explain now.
So what we can see is what we need to do for this strategy, or what this strategy does, is take that stETH. We have a value. So let’s say we bought a thousand dollars’ worth of stETH. We can now leverage that and essentially earn extra passive income. This strategy transfers ETH to Aave, which has a lending protocol. What you can do is use the value of your stETH to borrow more ETH. So you put the thousand dollars into Aave and that is obviously stETH and you have let’s say 750 dollars that you can borrow. You have a thousand dollars of stETH that you put into Aave. They won’t let you borrow against the whole value of it but maybe 75%, which is obviously $750. Then what you do is you put that back into Ethereum or wrapped Ethereum tokens and you put that back into lido and they give you even more stETH at 3.5%.
The way that this works out is because the percentage that you borrow from Aave is lower than the stake rewards that you get through stETH. So we can see the market right here on Aave:
This is wrapped around it, as you can see. And you can also have a look at the amount it takes to borrow this ETH from the platform. You can go to borrow information and see the APY. The variable APY is now 1.82%. What that means is I’m paying 1.82% to borrow Ethereum now, so we’ll put that down at 1.82%. You can already see the difference here. I’m paying 1.82% to borrow ether and I’m putting it into this. That’s paying me 3.5%. This is just a very simple interest rate arbitrage. You’re borrowing at 1.2% and getting 3.5%. It’s the simplest interest rate arbitrage you will ever witness between markets.
What you can see here is market participants finding this arbitrage and executing the strategy. As you can see, the amount borrowed was obviously quite low, and over time, every single day, the amount borrowed on the platform is increasing. Well, of course it is because traders are coming in and realizing that they can borrow at a lower rate than they get from the staking awards. So this is an interest rate arbitrage.
One of the downsides of this is that this will just keep going up until this arbitrage is taken away because it’s literally risk-free money. The reason why it’s risk-free is because you have ETH and you’re borrowing ETH with the same value, and you can very easily pay it back because you have the same value here. You’re not having price differentials in different assets. It’s an interest rate arbitrage between 1.82% and 3.5%.
Now what you can do is put that back in the strategy, get more stake teeth, and actually just go again like this, so you can create a leveraged position of around three times your original investment. The reason why this strategy is considered fairly low risk from the borrowing point of view is because you are both borrowing and using Ethereum or a derivative of that. It’s the same price, and so when you borrow 20 ETH from Aave, what you have to do when you pay it back is just give back 20 ETH. It’s not the value of the Ethereum that you borrow but the amount, so if you borrow 20 ETH and then you have it sitting in stETH, you know full well that you have Ethereum. Right, you can give back that 20 ETH, so you’re not taking any market risk with price movements. You’re just paying the interest that you’re getting, but you’re actually making that arbitrage. Anyway, that’s how it works.
How to enter
This is extremely complex for someone to physically do, and so there are service providers that actually do this for you, and there are some pros and cons to this. Also, this is not an advert for any of these providers. I’m not affiliated with them. And so, do your own research on these. There are pros and cons to using all of these strategies. So just take this for what it is, which is, you know, education, but we’re going to come over to essentially a dashboard right here that shows you exactly how the strategy works and how much it’s making over time. This is absolutely incredible to see this kind of information live.
This is an index called icETH. This is made by Index Coop. They essentially do this strategy automatically through smart contracts and manage all of the positions automatically through smart contracts so that no one has to do it themselves. You can get all of the information right here just to see how the strategy is working, so what you can see is the gross yield on ETH versus ETH, which obviously doesn’t pay staking, is 7.36%. So what we’ve got is Lido paying 3.5% and Index Coop with this strategy getting that 3.5% up to 7.36%. So that’s how the strategy is expanding that yield. Essentially over time, you can see the yield started very high at 10% and it’s been coming down.
Why is it coming down well that this strategy is becoming more popular? The arbitrage is sinking as more people go onto Aave and borrow ether. Obviously, the interest rate goes up because there’s more demand and so the arbitrage is getting smaller. That’s just absolutely what’s going to happen with an arbitrage like this, and it’s getting more popular in terms of who’s using the strategy.
The Lido stETH yield is actually coming down as well. This will happen because icETH 2.0 staking yields are going to reduce over time until the merge happens, and then they should actually increase a little bit. You can see the interest rate is going up. These two are obviously not good. We want the ETH borrowing rate to be as low as possible and the LIDO stake yields to be as high as possible. This is what arbitrage does. They reduce these yields because of the popularity of this strategy. So you can see the leverage ratio overall for ice. They kept it between 3% and 3.3%. You can see the amount of assets under management they have, and this is growing over time as people realize they can get 7% in icETH, which is the same value as ETH with a 7% yield. So that’s how that works.
You can see it on the left-hand side. It is simple and effective. You can buy icETH directly. This means that you don’t have to go through that strategy. You essentially just buy icETH and that’s it. They do the strategy. The way that they give the yield back to you is essentially like a fund. If you’ve ever heard of OIX, or open-ended investment companies, it’s not exactly that. Essentially that 7% is not paid into your wallet, that 7% is paid into the smart contracts, and the wallet that they own, the icETH strategy, and essentially the net asset value increases over time as the yield comes into that strategy in that wallet and then the fund. It’s an index fund. Basically, it should increase in value because the net asset value, the ETH plus the 7%, is in that wallet, and so that wallet should trade at a certain amount and it should increase in value over time as more ETH goes into that wallet. That’s how it works now.
You can buy that on UniSwap. The downside of that is it’s on ethereum. It’s going to cost some gas fees, which is obviously not great. The good thing about icETH is that it’s actually available on L2, or Ethereum L2, or something like zig-zag exchange. Again, this is not a promotion for zigzag exchange. If you want to buy icETH, you can use Ethereum. Sell Ethereum into ice. Basically, I see ETH and then what should happen is that the price of icETH just goes up over time as yield is put into the portfolio.
Now the downsides that I have seen with this are liquidity issues, especially on L2 if you use ZK Sync, Argent wallet, and Zigzag exchange. If you don’t know what those are, essentially there are big liquidity issues here. There’s just not enough liquidity if you’ve got a little more ethereum to really go and trade, so you’re still going to have to use probably L1 for that on UniSwap and the actual ethereum blockchain.
I got here with some discount issues. For example, during times of market turmoil, this is essentially an open market for icETH. That means that if there are more sellers that need to get out of icETH for some reason, they will start selling their ice and the bidders aren’t here right now, so what I’ve actually seen here is that I think it should be trading at around 1.08 or 1.09 because that’s the value of the wallet. That’s the value of the index, but it’s actually trading at 9.99 compared to ETH. So what’s happening is the icETH is trading below its net asset value, and that’s obviously frustrating.
What’s good about icETH is that you can at any point take your icETH and actually redeem it for the underlying means, meaning that the open market is not really an issue. You know, if you have a thousand dollars of icETH and you want to redeem that for the actual value that you have in your strategy, you can go and do that, but obviously if you have small amounts. Right now you’re not going to want to do that and you do want to do that in the open market and you get these kinds of days like this where this is trading below the net asset value, which is frustrating if you only want to sell a small amount, so that’s definitely a downside for icETH. As it gets bigger and more liquid, those problems might start to go away. Obviously, the other end of the scale is just literally buying stETH and getting 3.5% and just leaving it, so that’s obviously another strategy, and then the third type.
The third way you can do this is by using an application that does the strategy for you. It’s not a fund, you’re not investing in a fund, and that doesn’t change, but the actual strategy of lending and borrowing and then restaking is done for you automatically by an application. I’ve got an Instant here, which I’ll quickly show you again. The pros of this is that it’s simple and effective. It’s literally one click, which is really good. It is decentralized as well, because you’re just following the strategy through a smart contract, and you can withdraw instantly to your wallet, which is fine.
The downside to this is higher fees. Because this is a smart contract on InstaApp, you have to interact with Ethereum through smart contracts, and so each and every time you interact with it’s going to be like $50, $70, depending on how you know busy the blockchain is. Obviously, that’s a massive downside. You can’t be as tactical, but if you go on InstaDaily, they have a light version right here that you can see, and essentially what you do is just take your ETH, press start earning, deposit it in, and then it starts paying those staking awards, 7.5%, but this is a smart contract. InstaApp uses this exact same strategy with bitcoin as well, and each time you want to interact, send in or take out, there is a huge fee, which is obviously not great.
Also, interestingly enough, InstaApp uses this exact same strategy with bitcoin as well, so if you want exposure to bitcoin as well but you want to earn passive income, what they don’t do is essentially let you deposit wrapped bitcoin into their system. They take the value of your wrapped bitcoin and then put it into borrowed ethereum off the back of that and then put it through that strategy and they actually yield around 4.36% for bitcoin, which comparatively is actually really good. Most platforms will not give you anywhere near that. It’s probably slightly more risky because you’re using two different assets now, both bitcoin and ethereum, but you know bitcoin again. If you’re borrowing against bitcoin, you’re just simply returning that amount of bitcoin when you exit the strategy. They do bitcoin and ethereum using ethereum staking rewards.
[This article is a transcription of a video made by MoneyZG]
Original video: https://youtu.be/YRYAuhZkc60 ]