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7th March 2023 > > Degens only.

Updated: Apr 17, 2023

tl;dr

A DeFi (decentralised finance) opportunity for the die-hard degens.


Market Snap








Market Wrap

With apologies for being absent from your inbox for the last few days (sometimes life responsibilities take precedence over even the CCC) the market snap suggests we haven’t missed anything. A $400 trading range since the Silvergate inspired sell-off suggests a degree of calm most unexpected.


Curious Cryptos’ Commentary – For degens only

On the 6th of December 2022 the CCC looked at different options for staking ETH, including using Lido Finance (https://lido.fi/).


To recap, you can deposit your ETH into the Lido DAO (decentralised autonomous organisation) who will stake the ETH on your behalf. In exchange you receive stETH (staked ETH), the notional for which increases to reflect your staking rewards.


stETH is a liquid coin that can be sold, exchanged back for ETH, invested in other DeFi projects, or simply held in your personal cold storage option, preferably a Ledger Nano X.


It is the third of those options we will be looking at today.


Aave (https://aave.com/) recently started offering the opportunity to deposit stETH into the protocol against which you can borrow ETH.


Having done so, that ETH can then be deposited with Lido finance to receive stETH.


I think you know what comes next.


That stETH can be redeposited with Aave to borrow more ETH.


Rinse and repeat, as much as you like.


In theory, and on paper, it might appear that this could lead to unlimited gains. Though this isn’t true (for the reasons described below) degens are sorely tempted to push this trade as far as it can go.


So, what’s the catch?


There are transaction costs.


There is a one-off fee for interacting with Aave V3, the latest update which offers the option of borrowing ETH against stETH.


There are fees for each transaction with Lido and Aave, but these are relatively small.


Aave offers ETH loans at 90% of the notional value of stETH deposited as the collateral, a restriction that means that even the most degenerate amongst us cannot rinse and repeat forever. A deposit of 1 stETH could go through maybe 10 cycles before it becomes uneconomic. A deposit of 10 stETH probably 100 cycles, which is tasty.


What of the risks?


The most important one is that one or other or both of Lido and Aave could have flaws in the code. If so, a malicious actor might be able to steal funds from the protocol. Both protocols have been around for some time, they are open-source, and they are constantly monitored and audited. This risk is therefore largely mitigated but cannot be ignored entirely.


There is the risk that the peg of stETH to ETH is broken. If stETH fell to 90% of the value of ETH, the loans would be called, and you would lose the stETH that you had deposited as collateral. If you had gone down the degen route of rinsing and repeating, you would be looking at a 90%+ loss of capital.


In that context, the price of stETH vs ETH looks like this:


The price of stETH has never dropped to 90% of ETH but it hasn’t been far off in the past. Perhaps a 50% or 60% loan might be considered more sensible.


There is a mitigating factor here – the stETH deposited as collateral will continue to grow to reflect the accrued staking rewards. The probability of the loan being called recedes daily into the distance.


Finally, there is an interest cost for borrowing ETH from Aave. This rate is currently less than the yield from staking rewards, but that situation could change. This is a trade that would need close monitoring.


None of this is investment advice. It is purely for education. But if you are tempted to get involved, I would be delighted to hear how you get on.

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