Research on Leveraged Staking
What is Leveraged Staking
In Leveraged Staking, a user mortgages rTokens to lend out Native Tokens through a lending protocol, and then stakes Native Tokens through the StaFi rToken App to do the double staking. This effectively results in multiplied staking rewards.
Let’s take the Liqee lending platform as an example to give you a clearer picture:
1) Alice stakes 10 ATOMs through the StaFi rATOM App, and she obtains 10 rATOM Tokens (assuming the exchange rate is 1:1 then), with a corresponding staking APY of 8.08%. The rATOM Tokens are anchored to the 10 ATOM principal that Alice deposited, and the staking rewards are annualized at 8.08%.
2) If Alice wants to increase the staking APY with the same 10 ATOM, she can stake 10 rATOM in Liqee and lend a certain amount of ATOM, say, 5 ATOM tokens. The liquidation risk is extremely low since the value of her rATOM Tokens will increase as the staking rewards are generated continuously, which make the LTV ratio very healthy.
3) Alice can re-stake the 5 ATOMs she lent out through the StaFi rATOM App again. In this manner, Alice uses 10 ATOMs to get staking rewards of 15 ATOMs.
Of course, in this process, Alice needs to pay the interest for the 5 ATOMs she lent out, but when that interest is lower than 8.08%, Leveraged Staking is guaranteed to provide a long-term, stable profit method with relatively high yields for stakers like Alice.
Leveraged Staking Profit Model
Let’s go back to the above example. Assuming that Alice’s initial ATOM is M, the rATOM/ATOM Exchange Rate in the StaFi rATOM App is R, and the ATOM staking APY is X, then the amount of rATOM that can be obtained is M/N.
Assume the LTV cap of rATOM on Liqee is 𝛃, and the loan interest of ATOM is Y.
In this scenario, when Alice finds that X is greater than Y, Leverage Staking is profitable, and the benefits of Leveraged Staking are as follows:
1.Calculating the income obtained when the principal M is deposited in the StaFi rATOM App: M*X
2.The maximum net income of Re-Staking the ATOM acquired by depositing rATOM into Liqee: M/R*𝛃*(X-Y)
3.The maximum net income of Re-Staking the income for the third time: M/R*𝛃/R*𝛃*(X-Y)
4.The cycle goes on…
In step N, the maximum net income of rATOM that is obtained through rATOM App pledge for the Nth time: M*(X-Y)*(𝛃/R)^N
Therefore, when Alice has staked for the Nth time following this process, without considering her transaction gas cost, the total Leveraged Staking Rewards (LSR) is.
The above formula applies not only to rATOM, but also to other rToken assets. It helps users understand the core factors that impact the Leveraged Staking Profit Model. In the formula, the maximum lending coefficient 𝛃 is set by the lending platform and is a constant smaller than 1.
So, assuming that the exchange rate R of a certain rToken remains stable in the short term, in the extreme case, we can take the limit as N goes to infinity. The total LSR and the APY of LSR that Alice can obtain after infinite times of Leveraged Staking cycle are:
It is worth noting that rToken’s staking yield X and the loan interest Y of Native Token on the lending platform may change over time.
Ideal Amplified Staking Rewards
As of now (12PM UTC, Sept 3, 2021), StaFi rATOM App’s Staking Reward APY is 8.08%. That is, X=8.08%; the current exchange rate R of rATOM/ATOM is 1.025715; and Liqee’s rATOM maximum borrowing coefficient 𝛃 ratio is 65%.
Substituting the above coefficients into the formula, we can calculate the maximum LSR APY that Alice can obtain through StaFi rATOM App and Liqee lending platform under different ATOM borrowing interests on Liqee, as shown in the following table (see Calculator):
Please note that the above value is provided assuming that the cycle goes on infinitely, which is an ideal scenario. In real cases, the greater the positive interest rate difference between the underlying rToken APY X and the native token borrowing APY Y on the lending platform, the greater the LSR APY value.
Assuming that the borrowing APY of the native token on the lending platform is 0, the maximum LSR APY that Alice can obtain through cycle staking will be 273% of the underlying Staking APR.
When the borrowing interest of the lending platform starts rising, the LSR APY will shrink accordingly, but as long as the interest rate gap (X-Y) value is greater than 3%, the LSR APY can theoretically be doubled. This proves that Leveraged Staking, which combines StaFi’s rToken and lending platform, can create stable, long-term, and high-yield returns for stakers.
What’s more, StaFi and Liqee have also launched generous incentive schemes for Leveraged Staking users. Apart from leveraged staking rewards, stakers can also win FIS, LQE, and DF token airdrops. For details, please see: https://smartliquidity.info/2021/08/26/liqee-genesis-liquidity-mining/
StaFi is the first DeFi protocol unlocking liquidity of staked assets. Users can stake PoS tokens through StaFi and receive rTokens in return, which are available for trading, while still earning staking rewards. rToken is a synthetic staking derivative issued by StaFi to users when users stake PoS tokens through StaFi rToken App (https://app.stafi.io). rTokens are anchored to the PoS tokens staked by users and the corresponding staking rewards. rTokens can be transferred and traded at any time.
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