How to maximize ETH staking income?

Ethereum staking investments currently yield 4-5% per year, and users can receive rewards in newly issued ETH (Ethereum) for helping the network reach consensus.

Staking is a public good for the Ethereum ecosystem. Any user with a certain amount of ETH can help protect the network and get rewarded in the process.

There are several ways to stake Ethereum, and technically, staking as a validator requires at least 32 ETH. We are responsible for operating the hardware required to run these clients.

At today’s prices, its lowest price is close to $100,000. Not only that, it also requires specialized technical knowledge to set up and operate a validator node.

However, by using staking pools and other derivatives financial intermediaries, it is possible to stake less than 32 ETH and earn higher returns.

Staking Pool

Staking pools are a collaborative method that allows many people with small amounts of ETH to collectively obtain the 32 ETH needed to activate a set of validator keys.

They are considered infrastructure services that extract deposits in the process of running validator nodes.

Similar to the cloud IaaS model, the staking pool has backend infrastructure that helps create new validator nodes, perform maintenance, backups, and shutdowns in a fully automated manner, allowing anyone to start staking ETH without any technical knowledge.

In a staking pool, users can simply deposit ETH into a pool and have a group of people operate validator nodes to earn service fees. This service fee can be distributed in several ways, including validator nodes and DAOs.

In return, the staking pool service sends back a token that represents our staked share in the staking pool.

This token is fully backed by the deposited ETH and a pro-rata share of the staking rewards accumulated in the staking pool. At any time after the merger, our pool token can be redeemed for the accumulated ETH.

Staking pool services include Lido Finance, Rocket Pool, etc.

Lido Finance’s ETH staking frontend

For example, Ethereum participants can stake ETH on Lido Finance and receive stETH in return, a transferable liquidity token that can be traded or lent. Lido ETH stakers will receive 90% of the staking rewards, and 10% will be distributed between the operator and the DAO treasury managed by LDO token holders. stETH is a rebased token, and the gains are immediately reflected in the form of higher volume.

It’s similar on Rocket Pool, where Ethereum stakers can stake ETH and receive rETH back. rETH is similar, with the staking rewards from staking ETH going directly to ETH stakers, and the gains are reflected in the higher price of rETH tokens.

However, unlike Lido, Rocket Pool requires a minimum stake of 16 ETH and has a variable fee. Rocket Pool is more decentralized.

Collateral for staking rETH and stETH

Since rETH and stETH are standard ERC-20 compatible tokens, they can themselves be lent, borrowed, or used as collateral in liquidity pools. The financialization of these derivatives provides interesting ways for ETH stakers in these staking pools to extract more value from their staking services or leverage their ETH stake.

Lending stETH on Aave

stETH Market on Aave (Ethereum)

Leverage stETH by borrowing ETH

We can use stETH deposited in Aave as collateral, borrow more ETH against it, and then put that ETH back into the staking pool.

One way to achieve this is to do it manually yourself, although this can be quite time-consuming. Another option is to use a tool like DeFi Saver, which already has a built-in method to automate this process, but it requires a 0.25% service fee.

DeFi Saver’s stETH-ETH Automation

The leverage strategy above is to borrow 2 ETH for every 1 ETH, then pledge these 3 ETH to Lido to obtain 3 stETH, then deposit it into Aave, and borrow 2 ETH from Aave to repay the flash loan.

The above strategy has an LTV of 67% (3 stETH deposits / 2 ETH loans), which is relatively safe. However, there are risks. For example, borrowing rates may rise, making the borrowing cost too close to the staking yield. Lido validators may be slashed and the value of stETH may drop.

For a tokenized version of this strategy, we can save on gas fees, and Index Coop's Compounding ETH Index (icETH) can do this automatically through leveraged token infrastructure built on Set. Token holders retain spot exposure to ETH and amplify staking returns up to 2.5x. It exploits the difference between ETH borrowing rates (~0.9%) and staking yields (~4%). The service fee for icETH is 0.75%, but there is a 0.25% withdrawal fee.

We can go a step further and create an icETH/ETH LP on Uniswap to further increase the yield by about 4% through liquidity provision.

Another alternative is to use ETHMAXY (ETH Maximum Yield Index) launched by Galleon DAO. This is a structured product built on the Ethereum network that enables traders to gain 3x leveraged exposure to ETH yields through stETH, Lido, and Aave. ETHMAXY charges a 1.95% handling fee, but has a 0% withdrawal fee.

There are many simple ways to amplify our staking returns without too much additional risk. However, be cautious because with each additional layer, you increase the risk of holding a position, which can definitely get blown up.

Source: https://medium.com/@stakingbits/the-derivatives-of-ethereum-staking-to-maximize-eth-staking-yields-576928f1ae47