Greetings,
I hope you all are doing well, I am here to share my participation for Steemit Learning challenge season 23 week 3. I will try my best to answer all questions according to challenge requirements
What is Liquid Staking?
This is another advance way of assets staking. Unlike traditional staking here the users create liquidity through derivative token. In this staking method tokens which can be traded are issued, representing the staked asset. It can freely be used in decentralized finance (DeFi) applications.
Liquid Staking Vs Traditional Staking
Traditional Staking: The aim of traditional staking is supporting a blockchain network’s security and consensus mechanism. These staked tokens are untradeable for many days or weeks, as per policy. They receive reward in return according to the amount they stake.
Liquid Staking: Here traders go through a liquid staking provider option to stake their assets. They receive rewards in the form of derivative tokens (rETH from Rocket Pool). Bonus point here is that, these tokens can be freely traded in lending protocols, or in DeFi.
Bounce points of Liquid Staking
- Users can maximizing their yield by choosing liquid staking over traditional one. You can earn through derivative tokens and will get your old staking too.
- This is more accessible compared to traditional staking. You can participate with less amount either.
- The derivative tokens can further be used for more yield. Example Lido’s stETH; at Aave it gives additional profit.
Risks involved in Liquid Staking
- It relays on smart contracts which are exposed to the risk of hacks and exploitation.
- Sometimes centralization concerns are related to it, in case of holding a significant share of staked by a single person.
- In market down trend sometimes the value of derivative tokens depeg from the original price. Example; stETH & ETH price difference in real market down trend.
- Their is a risk of slashing too incase of mis behave by the validators.
Major examples of Liquid Staking Platforms are:
- Lido Finance (stETH), stake ETH and receive stETH.
- Rocket Pool (rETH), stake minimum ETH Upto 0.01 to receive stETH.
- Frax ETH (sfrxETH & frxETH), a dual-token staking platform.
How Tokenization of Real-World Assets is Changing DeFi ?
The major advantage of Tokenization of Real-World Assets is to minimize the gap between traditional financing and blockchain technology. It creates a bridge between these two. Traditional finance assets such as real estate, commodities, bonds, or invoices enhances more liquidity and accessibility in financial markets when they are represented as blockchain-based tokens.
Some key changes
- Investors worldwide can get access to these costly assets even with low amount.
- These traditional assets (real estate or fine art) when traded on DeFi platforms, will improve market efficiency.
- RWAs are more reliable and stable compared to highly volatile crypto assets.
- Blockchain technology ensures transparent ownership records (less fraud or scam chances).
Examples of Platforms Enabling RWA Tokenization
Centrifuge: It tokenized real-world assets using DeFi lending protocols like MakerDAO to provide liquidity in the market. Example, invoices and trade finance.
Ondo Finance: This gives exposure to U.S. Treasuries and bonds worldwide to DeFi investors.
RealT: It Tokenized real estate properties. The investors are given rent on their blockchain-based fractional ownership.
Potential Benefits of RWA Tokenization in DeFi
- The tokenized assets can be used as collateral, minimizing the chances of trapped which may happen in traditional markets.
- Their is too much transaction cost for it. It reduces the fees associated with asset transfers and management, which is high in traditional way.
- without geographic restrictions all the investors worldwide can get accessibility to it.
Some Challenges related to RWA Tokenization in DeFi
- It has some legal complexities such as ownership rights, securities and compliance.
- Consistency in assets valuation could be a great challenge too.
- Some assets might not get enough liquidity though they have increase accessibility. E.g, private debt or fine art.
- It works on smart contract, so high security is associated to it.
In liquid staking we stake the real ETH in reward we get the liquid staked token such as stETH, rETH. These tokens can then be transferred to DeFi protocols and trade on it. This brings liquidity into a specific commodity (e.g ETH) and also users can increase their yield through liquid staking.
Example how to use stETH in Yield Farming
- A users deposit ETH in Lido ( a liquid staking protocol). He will receive rewards in the form of stETH over time.
- In this next step user will now use stETH to earn additional yield and receive borrowing power. He will transfer stETH to a lending protocol like Aave.
- A user can use stETH for borrowing stable coins like USDC, DAI, etc.
- These stable coins can now be used for yield farm on platform such as Curve, Convex. It will help them earn through trading fees and incentives.
- A user can multiply his capital through looping. He can by more ETH, convert it into stETH, get stable coins for it and repeat the process again.
Risk related to it
- Vulnerabilities on such platforms may result in assets lost.
- Their is a depeg risk, especially in volatile market (sharp downtrend).
- Their is liquidity problem for small or unpopular assets or even for ETH too if it’s price is sharply decreased.
- Interest rate risk is involved. It might be higher than the yield.
- Some uncertain activities may result in slashing of assets.
liquid staking and real-world asset (RWA) tokenization can be used in combination to maximize yield. We can adapt to market conditions by managing risk keeping these two things parallel. Let’s dive into my strategy for it.
Strategy Overview
- first thing is to maintain a balance between yield staking rewards. Diversify the return you get from tokenized RWAs.
- Optimize the yield by re investing the rewards you get from liquid staking in tokenized RWAs such as real estate, and government bonds.
- To reduce risk diversify your asset to on-chain and off-chain commodity.
- Based on market condition shift allocation between liquid staking and RWAs.
How to manage portfolio?
Allocate 50% in liquid staking ( for stETH, rETH). It will help you in yield generation plus creating liquidity. Allocate 40% in tokenized RWAs (Real estate, and bonds). It will give you passive income plus create stability. Put the remaining 10% in stable coins (DAI, USDC, USDT) to mitigate risk and creating liquidity buffer.
Yield Optimization Mechanism
- Use ETH in very first step for liquid staking. Platforms like Lido, Rocket Pool, or Frax ETH support it. You will receive in the form of stETH, rETH. We call them liquid staking tokens (LSTs). Use these LSTs in DeFi protocols.
- In second step, for additional yield Lend LSTs on platforms like Aave or Morpho. You can use LSTs here as collateral for borrowing stable coins like DAI and USDC.
- In third step, target best yield-generating RWAs. Put the borrowed stable coins or staking rewards in it. Platforms like Ondo Finance, Maple Finance can be used to buy tokenized U.S. Treasury Bills. We can also buy Tokenized Real Estate for passive rental income.
- Step four, play according to market conditions. In bull market play in liquid staking, in bearish market allocate more portfolio in RWAs and stable-coins and reduce LST exposure and in highly volatile market maintain a stable coin buffer.
Risk Management Strategy
- use authentic and worldwide accepted platforms such as Lido, Aave, Centrifuge.
- Diversify your RWA investments.
- To counter market down trend maintain a stable coin buffer.
- Monitor global interest rate for better yield.
Real-Life Scenario:
How liquid staking play a Role in a Trader’s Success.
A trader name Ali has leveraged liquid staking derivatives (LSDs). He is a Defi trader and he wanted to maximise his capital significantly. He has done all these before 2021-22 Bull run. Alex played wisely. He preferred using stETH (Lido’s liquid staking token) as collateral on Aave to borrow stablecoins instead of directly exposure to locking up real ETH. Ali has reinvested the stable in various DeFi protocols.
In ETH bullrun, Ali’s deposited fund in yield farming strategies given him additional yield. The reason was liquid staking tokens capital inefficiency was reduced. At lower cost Ali multiplied his capital using this strategy.
This is just a hypothetical situation where a trader multiplied his capital using this strategy. To be honest I don’t know anyone in person who is trading in this field, nor i have tried it. The situation will be in contrast, if Ali would have faced bearish market trend instead of Bullish.
Key Takeaways for Investors
- Capital efficiency is available here, the traders future can use the staking rewards ( stETH, rETH) for trading by borrowing stable coins on Aave. Single investment gives you multiple opportunities of trading and maximising profit.
- Risk management is important because highly volatile market can liquidate those traders using high leverages. Buffer should be maintained for safety.
- Diversification is another option to play safely while managing risk. The traders can enchance the return by combining staking rewards with yield farming or lending strategies.
- In some cases their may be a liquidation concern. Sometimes RWAs provide too much less liquidity compared to it’s equivalent assets (crypto assets) though they are more stable.
- Portfolio should be balanced between liquid and illiquid assets. It helps preventing cash flow bottlenecks.
- Must watch the market conditions as RWAs is highly dependent on global finance news and activities.
This was all about my participation. I would like to invite my friends @drhira, @yahnel, @m-fdo to share their participation. Best of luck to all participants.