Leverage Staking with Liquid Staking Derivatives (LSDs): Opportunities and Risks

Xihan Xiong; Zhipeng Wang; Xi Chen; William Knottenbelt; Michael Huth

Paper 2023/1842

Leverage Staking with Liquid Staking Derivatives (LSDs): Opportunities and Risks

Xihan Xiong, Imperial College London

Zhipeng Wang, Imperial College London

Xi Chen, University of Sussex

William Knottenbelt, Imperial College London

Michael Huth, Imperial College London

Abstract

Lido, the leading Liquidity Staking Derivative (LSD) provider on Ethereum, allows users to stake an arbitrary amount of ETH to receive stETH, which can be integrated with Decentralized Finance (DeFi) protocols such as Aave. The composability between Lido and Aave enables a novel strategy called “leverage staking”, where users stake ETH on Lido to acquire stETH, utilize stETH as collateral on Aave to borrow ETH, and then restake the borrowed ETH on Lido. Users can iteratively execute this process to optimize potential returns based on their risk profile. This paper systematically studies the opportunities and risks associated with leverage staking. We are the first to formalize the stETH-ETH leverage staking strategy within the Lido-Aave ecosystem. Our empirical study identifies 262 leverage staking positions on Ethereum, with an aggregated staking amount of 295,243 ETH (482M USD). We discover that 90.13% of leverage staking positions have achieved higher returns than conventional staking. Furthermore, we perform stress tests to evaluate the risk introduced by leverage staking under extreme conditions. We find that leverage staking significantly amplifies the risk of cascading liquidations. We hope this paper can inform and encourage the development of robust risk management approaches to protect the Lido-Aave LSD ecosystem.

Metadata

Available format(s): PDF
Category: Applications
Publication info: Preprint.
Contact author(s): xihan xiong20 @ imperial ac uk
zhipeng wang20 @ imperial ac uk
History: 2024-01-14: last of 5 revisions; 2023-11-30: received; See all versions
Short URL: https://ia.cr/2023/1842
License: CC BY

BibTeX

@misc{cryptoeprint:2023/1842,
      author = {Xihan Xiong and Zhipeng Wang and Xi Chen and William Knottenbelt and Michael Huth},
      title = {Leverage Staking with Liquid Staking Derivatives (LSDs): Opportunities and Risks},
      howpublished = {Cryptology ePrint Archive, Paper 2023/1842},
      year = {2023},
      note = {\url{https://eprint.iacr.org/2023/1842}},
      url = {https://eprint.iacr.org/2023/1842}
}