stETH-Leveraged Staking Strategy

CIAN
6 min readNov 25, 2022

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Overview

The stETH/ETH leveraged staking strategy enables users to safely leverage stETH’s staking rewards. This strategy is powered by CIAN, an automation platform for web3, which primarily focuses on staking derivatives and protection/optimization tooling. LIDO and CIAN have established a strategic partnership a while ago, aiming to accelerate the evolvement of stETH’s ecosystem while working toward building a safe haven for long-term holders.

What are the benefits of stETH in DeFi?

stETH is the ETH’s staking derivative provided by LIDO, the biggest liquid staking protocol in DeFi.

On POS networks like Ethereum, users can stake native tokens (ETH) to increase network security in exchange for a staking reward. The rise of liquid staking on LIDO now allows users to stake native tokens through them to the network for extra benefits: no constraints in the number of tokens & hardware, most notably, receiving staked assets (stETH) for increased flexibility and extra yield.

What are the steps involved in leveraged staking?

This strategy supports AAVE V2 as the main lending platform.

When applying CIAN’s leveraged staking strategy, the following steps will be executed simultaneously within one transaction:

For this example, let’s assume that the leverage is 3x, that we have 10 ETH, and that the exchange rate between stETH and ETH is of 1.

1. Stake 10 ETH in LIDO to receive 10 stETH & passive staking yield, or swap ETH for stETH on 1inch (CIAN will automatically select whichever approach is more cost-effective) ;

2. Deposit stETH in AAVE V2 lending market;

3. Flashloan 20 ETH from Balancer (leveraged 3x);

4. Stake (or swap) the flashloaned 20 ETH in LIDO to receive stETH, thus extra staking yield;

5. Deposit the extra 20 stETH in AAVE V2 lending market;

6. Using 30 stETH as collateral, borrow 20 ETH to repay the flashloan.

Leveraged staking supports both stETH & ETH as a principal. If users deposit stETH, the system will automatically skip the first step listed above.

How to calculate the leveraged staking strategy’s APY?

The positive return rate comes from stETH staking rewards (LIDO). The negative return rate comes from ETH’s borrow interest on AAVE. Here is the formula:

Assuming that the:

· Principal: ETH

· Exchange rate ETH/stETH: R

· Leverage: 3x

APYtotal = 3 x R x (APYstaking rewards) — 2 x APYETH borrow

What are the different costs related to leveraged staking?

1. CIAN will charge no fee during the promotional period (up to 6 months);

2. When executing a leveraged staking strategy, 0% of the total ETH flashloaned will be charged since the system is using Balancer;

3. Normal gas fees incurred by each transaction on AAVE and LIDO;

4. ETH borrow interest rate on AAVE;

5. When closing a leveraged staking strategy, users might lose a certain % of their initial position due to exchange fees, and stETH/ETH exchange rate on DEXes (variable).

It is quite important to understand that, when using such leveraged strategy, it’s highly advised to intend on holding that position for a while. By doing so, users will give enough time for the high APY to cover their entry & exit costs.

How to use leveraged staking on CIAN?

Step by Step

1. Select the Ethereum chain. Connect your wallet (e.g. Metamask). Create your CIAN smart wallet.

2. Go to Settings. Select EIP-2612. Enter a period (days) for which you allow CIAN to automate your tasks. Sign.

3. Click on Automated strategies and select “stETH/ETH Leveraged Staking”.

4. A) Deposit some ETH (location: “gas contract”) to cover all automation-incurred gas fees (minimum deposit of 0.1 ETH). We recommend keeping at least 0.2 ETH in your “Gas Contract” for security purposes.
B) Select the principal: stETH or ETH. Select the source: MetaMask Wallet or Smart Wallet. Finally, enter the amount.
C) If you want to receive notifications concerning your strategy (e.g. changes in APY, gas fees warning, strategy updates, etc.) you may enter your E-mail address and enable the option. Click on execute.

5. Go to “My Strategies” to check your position status.

6. To permanently close your position, you can, at all times, click on “Withdraw”. Your principal and earned yield would then be redirected to your Smart Wallet. Please be aware that some external costs will apply: exchange fees, and stETH/ETH exchange ratio on DEXes (variable).

What risks are related to leveraged staking, and how can they be mitigated?

1. Increase of ETH’s borrowing rate
If the demand for ETH in AAVE increases, the borrowing rate might also increase. Assuming that the borrowing rate was to drastically surpass the staking rate, users may suffer losses over time.

Solution: If users notice that the leveraged staking strategy’s APY is slowly approaching zero, they may choose to close their position. (CIAN’s notification system can help prevent this event)

2. Liquidation
As the price of stETH on AAVE is influenced by stETH/ETH exchange rate, liquidation events are not exactly impossible in case of severe depeg. Additionally, if the loan interest increases as time goes by, we could see the LTV rising which may ultimately cause a liquidation.

Solutions:
a) CIAN’s automation primitive — Flash Repay.
Assuming that the interest rate was to rapidly rise, thus slowly increasing the LTV close to the liquidation limit, Flash Repay would automatically deleverage the strategy and return the principal to users’ smart wallets, thus avoiding liquidation.

b) When executing the strategy, CIAN will always limit the maximum leverage in order to maintain a safe health factor.

About Lido

Lido is the leading liquid staking solution — providing a simple and secure way to earn interest on your digital assets. By staking with Lido your assets remain liquid and can be used across a range of DeFi applications, earning extra yield.

1. Staking pool. Protocol to manage deposits, staking rewards, and withdrawals. A separate one for every supported network.

2. st[token]. Unlike staked assets, the Lido st[token] are freely transferable instead of locked as in the case of native staking. Lido lets users operate with staked assets to gain yield on top of yield by leveraging collateral, lending, yield farming, and other kinds of Defi protocols.

3. DAO. Lido liquid protocols management entity, is responsible for picking node operators, configuring the protocol parameters and much more.

4. Node Operators. entities that manage a secure and stable infrastructure for running validator clients for the benefit of the protocols. They’re professional staking providers who can ensure the safety of funds belonging to the protocol users and correctness of validator operations.

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About CIAN

CIAN is a decentralized automation tooling/utility platform. Through large-scale integration of blockchains/protocols and advanced automation, CIAN is defining a set of automated primitives that turn complex manual execution of typical onchain tasks/strategies into a simple 3-step task definition process for no-code users. CIAN’s objective — 80% reduction in operational complexity, and up to 60% increase in capital efficiency.

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