Before we get started, this is not a recommendation or endorsement to buy any token mentioned.
During another rough week in the crypto markets, we saw a surge of activity in DeFi and hence more demand to transact among DeFi users, raising gas prices on Ethereum Mainnet and other L1s and L2s. Normally during a market drawdown, traders will scramble to deleverage or make other moves to capitalize on the market volatility. As markets reacted to the fall of FTX and SBF’s criminal collapse, the gas price on Ethereum rose to the highest median price in the last 90 days.
Source: Dune Analytics
Since The Merge, there’s been a revamping of economics of how Ethereum transactions are settled. MEV (maximal extractable value) is still focused on the insertion of transactions (ordering, censorship, hijacking). However, there are new actors involved in the process. While miners secured the network under Proof-of-Work before The Merge, Proof-of-Stake Ethereum relies on validators.
To participate as an Ethereum validator, one needs 32 ETH to stake. Validators propose new blocks, submit attestations (votes), and monitor for any slashable offenses (penalties). Validators are who ensure the Ethereum network is secure and healthy.
Validators receive ~1700 ETH per day split between them, which varies based on the total amount staked by all validators and thanks to EIP-1559, they receive the Priority Fees that are “tipped” via transaction activity. While the majority of MEV used to accrue to miners under PoW, now with PoS, this MEV is captured by validators.
As markets panick and gas goes higher, there’s been a surge in MEV, which is calculated in the APY of liquid staked ETH like stETH by Lido. The 7-day moving average for yield on stETH is currently ~9%, up over 3.5% the last week, getting as high as 10% APY.
Source: SimpleStakers.info
Given the state of crypto markets with rampant fears of contagion from the FTX collapse, I will show once again how I might choose to market-buy a discounted ETH liquid staking token like stETH. This felt like a timely reminder, as we can avoid counterparty risk with liquid staking, assuming I don’t hold cbETH by Coinbase.
How to Earn ~9% APY with MEV Rewards in Liquid Staked ETH
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 post-Merge
Here’s how I get started!
- First off, I can assess the following options on SimpleStakers.info for liquid staking ETH by:
- Market price of the token (bigger discount = better choice)
- Staking APY yield
- Effective APY (annualized return considering the staking APY + the assumption that the derivative is redeemed for 1 ETH on the date of staking unlocks in 9 months (for this example)
- Is the token controlled by a decentralized protocol or a centralized staking service?
- For this example, I will market-buy Lido’s stETH…
DeFi Dad is one of the earliest power users of DeFi, having worked with early Ethereum startups going back to 2018, including Zapper.
