DeFi has been a dominant sector within blockchain ecosystems, largely due to the increasing demand for investment/asset management as cryptocurrencies have gradually become a recognized asset class that has brought significant value to investors, and its permissionless nature has democratized financial access, allowing people from across the world to participate in this new financial market.
In this article, we would like to take the opportunity to explain a few common investment/wealth management strategies that investors typically utilized in the DeFi space.
PoS Staking
Staking is the backbone of Proof-of-Stake(PoS) blockchain networks, where blockchain users choose to stake the native token of the blockchain to help secure the network and validate transactions. In return, they receive extra native tokens as rewards for their participation. This staking model has provided PoS token holders an incentive to secure the network they support, while also allowing them to generate extra yield from their token holdings.
Below is the comparison of staking rewards rates across major PoS blockchains. ETH stakers currently can earn around 3.3% rewards pa. while SOL stakers can earn roughly 7% pa.
Source: stakingrewards.com
*Reward rate represents the current annualized reward rate across the network.
Currently most of the wallets offers embedded staking solutions for users to easily stake their PoS tokens on-chain. Take Metamask, the most commonly used crypto wallet with over 30mn monthly active users as an example, small ETH holders can delegate their ETH via the "MetaMask Pool" , and earn 2.5% APY for their staked assets.
Source: Metamask
And if users hold more than 32 ETH, they can choose the second option "MetaMask Validators" to become a validator, and earn a net of 3% APR.
Source: Metamask
Lockup Periods
When users stake their tokens on a PoS blockchain, there is often a mandatory lockup period before they can withdraw those tokens. This lockup period can range from a few days to several weeks depending on specific protocols of the PoS network. This lockup period is designed to incentivize long term participation and commitment to network's security, but it can present a challenge for users who need immediate liquidity or flexibility with their staked assets.
To address this liquidity issue, a few innovative protocols such as Lido.Finance, Rocket Pool have emerged to offer liquid staking solutions. Users stake their PoS tokens in these liquid staking platform, in return receive a derivative (liquid staking) token to represent their staked assets, and this token then can be used in lending, borrowing or providing liquidity and earn extra rewards on decentralized exchanges (DEX).
Below shows the third option "Liquid staking" on Metamask, where users can choose to stake with either Lido or Rocket Pool, in return, users will get stETH or rETH to represent their staked assets.
Source: Metamask
Liquid staking tokens offer more than just the 2.65% or 2.98% pa. base staking rewards as it can be used within other DeFi protocols.
For example, Pendle.Finance is a leading yield-trading protocol built on Ethereum mainnet. It wraps yield-bearing tokens including liquid taking tokens into SY (Standardized yield token), and split the SY into a principal token (PT) and a yield token (YT) respectively, which then been offered as fixed yield (senior tranche) and enhanced yield (junior tranche) products, where users can choose their preferred risk-reward profile based on their risk appetite.
For example, Lido's stETH token holders can convert their stETH token to PT stETH tokens on Pendle, and earn 3.6~4.7% APY depending on different maturities. On the other hand, YT tokens generates variable yields that fluctuates with the ETH price, investors looking to maximize returns with YT tokens will need more advanced skills/knowledge of ETH fundamentals.
Source: Pendle.Finance
By leveraging Lido and Pendle platforms, users can potentially amplify their ETH returns, comparing to holding spot ETF positions, as currently both US SEC and HK SFC prevent ETF issuers from using staking services.
*Please note that DeFi protocols are subject to smart contract risks.