Before we get started, this is not a recommendation or endorsement to buy any token mentioned.
Last week, Ethereum completed a monumental engineering feat, successfully upgrading the network from Proof-of-Work to a Proof-of-Stake consensus. Prior to this milestone, anyone running an Ethereum validator has been locking up ETH in 32 ETH increments, in order to contribute to this PoS consensus in exchange for staking yield denominated in ETH.
The most popular liquid staking solutions such as Lido and Rocketpool provide a simple and secure way to earn interest on ETH by allowing individuals to stake ETH with value that’s still liquid and can be used across a range of DeFi applications, such as lending, overcollateralized borrowing, and liquidity provisions.
Since the launch of the Beacon Chain in December 2020, those running validators have been unable to withdraw ETH and so there’s been an reasonable liquidity discount when market-buying liquid staking tokens, which will be redeemable for 1 ETH eventually in the future. Staked ETH is expected to stay locked up within the network for 6-12 months after The Merge (September 15, 2022). At that point, those who have staked ETH will be able to withdraw their stake, along with whatever rewards it has accrued.
While The Merge remained unconfirmed and the expected date pushed out earlier this year, it was common to see liquid staking tokens like stETH trade at a larger discount to ETH due to its illiquidity, most notably in June when stETH traded to as low as 0.93 ETH, reflecting a bearish sentiment about The Merge happening in 2022 (and a lack of liquidity as 3AC, Celsius and others got blown up in the crypto market crash and sold off their stETH).
Source: Coingecko
Since the Merge, the discounts on liquid staked ETH have already begun to shrink, with growing confidence we’ll be able to redeem liquid staked ETH for 1 ETH in 6-12 months. Meanwhile, the clever team behind Cryptofees.info kindly created this free resource at SimpleStakers.info for tracking different yield rates on liquid staked ETH, including what they refer to as Effective APY, which is a calculated annualized return if one buys the liquid staking token at the current market price + the derivative is redeemed for 1 ETH on the date staking unlocks, while the current ETH staking rate remains constant.
Source: SimpleStakers.info
Today, I will show how I might choose to market-buy a discounted ETH liquid staking token, with plans to hold it for at least 6-12 months until staking withdrawals unlock, and I can retrieve 1 ETH along with whatever staking rewards I’ve accrued, netting me the Effective APY.
How to Earn Up to 9.74% Effective APY with ETH Liquid Staking Tokens
Before we get started, please be aware of these risks.
- Smart contract risk in any associated liquid staking protocol
- Systemic risk in DeFi composability
- Pegged assets such as liquid staked ETH can trade for larger discounts
- Front-end spoof attack on any associated staking dApp website
- Exploits in economic design
- Governance attacks or admin key compromise
- Counterparty risk if I end up holding cbETH by Coinbase
- Estimated yield can go up or down depending on how many stake ETH and how long before staking unlocks happen…
DeFi Dad is one of the earliest power users of DeFi, having worked with early Ethereum startups going back to 2018, including Zapper.
