How to get extra yield from staked tokens
Staking is one of the easiest and most risk-free opportunities that generate yield. There are two approaches to staking: 1. Regular staking - staker locks up tokens with validators to secure the network and receive rewards.
2. Liquid staking - staker locks up tokens with validators just like regular staking but receives liquid tokens in return that represents their staked balance. For example, Lido allows you to deposit Ether and receive stETH in return, which is a token representing your deposit onto their staking platform. 1 stETH is backed by 1 ETH. This way, you can continue to spend your tokens as if it was liquid.
Between the two staking approaches, regular staking has the lowest risk since using liquid staking services adds an additional layer between you and the native staking smart contract. Despite that, liquid staking has been gaining significant traction in the staking sphere. In fact, almost $13 billion has been deposited into the ETH2 deposit contract, with the major share coming from Lido liquid staking.
Source: The Block
Liquid staking provides some additional benefits compared to regular staking. But, these benefits come at a cost of generally lower rewards (e.g. 7.2% APY compared to 9.8% on AVAX, 5.2% compared to 5.74% on SOL). Instead of having locked liquidity, you get a staked or yield-bearing token representing your staked asset, which you can freely use like you would any other token. This enables you to participate in different DeFi protocols to generate additional yield through activities such as liquidity providing, yield farming, and borrowing with yield-bearing tokens as collateral.
Below is a deep-dive into liquid staking and the different possibilities it opens up for users who take on additional, albeit small, risks.
What is Liquid Staking?
Liquid staking is the process of participating in the validation of Proof-of-Stake (PoS) networks by staking and then receiving an interest-bearing asset––this asset reflects your total staking and rewards balance. Many blockchains have an unbonding period, which keeps the asset locked for a specific period of time without earning rewards when users unstake. This inconvenience is somewhat alleviated due to users being able to sell the staked tokens on the market, although the price of a staked token and a native token (e.g. sAVAX and AVAX) can differ. Many networks also have a minimum staking requirement, which may exclude people from being able to participate.
Liquid staking allows stakers to earn rewards while retaining liquidity through the tokenized version of the staked funds, which can be traded or used to earn additional rewards.
There are many liquid staking providers, among which some are widely used - Lido, Benqi, Rocket Pool, Ankr. The mechanisms and processes of liquid staking differ from one another which is why staking through versatile software wallets like Omni makes sense for users staking several assets.
Through Omni, you can stake more than 15 assets across multiple chains, as well as liquid stake ETH, SOL, and MATIC via its integration with Lido. At the same time, you can also stake AVAX on Omni through Benqi.
3 factors to consider before implementing a yield-generating strategy:
Position Size Depending on the chain you are transacting on, pay attention to the amount of gas fees in relation to the amount that you want to deposit. For smaller investments, fees can eat up all of your returns.
Deposit Time Period If you are only looking to lock your funds for a few months, pay attention to withdrawal fees in relation to APY.
Risk Tolerance DeFi projects are often vulnerable to security breaches. Decide the amount of risk you are willing to tolerate before choosing your strategy.
How Can Liquid-staked Assets Be Used?
Yield-bearing or liquid-staked tokens can be used as one would use any other token, allowing you to earn staking rewards whilst benefiting from bonuses like earning additional yields across decentralized finance products.
Liquidity pools are one of the cornerstones of decentralized exchanges. Liquidity providers are users who deposit a combination of two different coins to a DEX smart contract in order to provide trading liquidity for traders. In exchange for locking the tokens and taking the risk of impermanent loss, they receive a percentage of the generated trading fees paid by traders and in some cases, rewards from protocol incentives.
When a person locks their tokens into such pools, they receive LP tokens that represent their share of the pool along with corresponding rewards. These LP tokens can then be used further in yield farming to generate extra yield or sometimes, even used as collateral to earn you interest.
For example, you can easily liquid stake SOL and earn 5.22% APY at the moment. However, since you received stSOL tokens in return by liquid staking, you can now use the tokens in other DeFi dApps to earn extra yield. An example would be Raydium, which is a DEX on Solana. On Raydium, you can find a stSOL-USDC pool, into which you can deposit your stSOL and USDC tokens to earn an additional 7% APR. This is the process of providing liquidity. In return for providing liquidity, you would get LP tokens, with which you can redeem the tokens in the pool. However, these LP tokens can also be further used for yield farming: You can deposit your LP tokens on Raydium’s farms to earn incentive rewards from Lido and Raydium, which would net you an additional 26% APR.
Of course, such strategies are riskier than simple staking but present a great opportunity for those who can stomach the risks.
Get Crypto-backed Loans
DeFi lending and borrowing platforms like AAVE, Compound, Yeti Finance and Solend allow users to leverage their on-chain exposure or get exposure to other tokens, without having to sell their assets. On top of that, they are a great tool for passively earning extra yield on assets by simply lending them through these platforms and earning the base yield.
Most loans in DeFi space are over-collateralized, meaning you need to put up more collateral (usually at least 100%-150% depending on the asset you're using as collateral) than you are borrowing. However, it enables you to get quick and easy access to other assets and plays a key role in implementing more complex strategies.
A simple example of such a strategy can be done with sAVAX. AVAX liquid staking currently yields 7.20% compared to regular staking’s 9.8%. By utilizing different DeFi tools, you can generate even higher returns. Yeti Finance allows you to take a YUSD (Yeti’s stablecoin) loan on many assets, one of them being sAVAX. You can take out a loan by first depositing sAVAX into a Yeti Finance smart contract and then picking your collateralization ratio, with 120% being the minimum. However, if your risk tolerance of loan liquidation is lower, set a higher collateral level. Once the transaction is confirmed, you’ll receive YUSD in your wallet which you can use to farm in Yield Yak’s YUSD farm to generate an additional ~10% APY on your borrowed asset.
Access Funds Quickly
Another benefit of liquid staking is the ability to gain access to funds quickly. In general, regular staking includes a lengthy un-staking process or penalties for un-staking prematurely. Gaining access to funds quickly can be helpful in times of market turbulence or for any unexpected payments. Liquid staking makes that possible. Instead of waiting for the unstaking period to pass, you can simply go to any decentralized exchange and sell the liquid staking token as you would another token.
For example, let’s say you are staking SOL. You might be persuaded to stake SOL due to higher APY on regular staking. However, you are locking up funds, and it will take you at least 4 days for unstaking to be completed. Meanwhile, you could be liquid staking and have the ability to get out of your position at any given time.
What is impermanent loss?
During periods of high volatility, liquidity providers can experience impermanent loss. This occurs when the price of a token in a liquidity pool changes, subsequently changing the ratio of tokens in the pool to stabilize its total value – changing the ratio of an investor’s tokens in the pool as well.
What is the risk of loan liquidation?
Due to volatility in crypto your collateral might quickly change in value. If the value of your collateral falls below the borrowed value or gets extremely close to it, you might lose your collateral due to the liquidation of your position.
What are APY and APR?
They are measurements for expected annual yields or returns. Annual percentage rate (APR) and annual percentage yield (APY). APR does not account for compounding — reinvesting gains to generate larger returns — but APY does.