Aave v3 stETH
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StETH/ETH AAVE yield multiple e-mode is an Earn strategy that allows you to increase the yield received from StETH by increasing your exposure to it by borrowing ETH.
StETH is a token that represents 1 to 1 ETH staked in the beacon chain, it’s the most used liquid staking derivative in the market. Made by Lido it helps users stake their ETH while leaving the hard part for Lido node operators and retaining liquidity.
StETH is a tradable token that can be integrated with DeFi enabling users to do much more on their stake. AAVE, one of the prime lending protocols, integrated wrapped StETH as collateral and one powerful strategy that we are now offering on Earn has appeared: multiplying the StETH yield. With the release of AAVE v3 and the efficiency mode(E-mode) you can multiply the yield of stETH up to x10 times.
Upon opening a position, a flash loan for Dai is taken from Maker and deposited into the Aave V3 Protocol. Then ETH is borrowed until it reaches the desired multiple level. Next, the loaned ETH as well as the user’s initial deposit is exchanged to StETH via 1Inch. Following this process, the total StETH, minus fee, is deposited back into the Aave V3 Protocol where it then reaches its final position. Finally, the borrowed Dai is withdrawn from Aave and paid back to Maker and the Free Flash Loan is settled.
The process to exit these positions is quite similar, however users will now need to sell the StETH from the trade to pay back the ETH loan before withdrawing the remainder.
The return comes first from the ETH staking yield provided by StETH. That yield is multiplied by increasing exposure to StETH by borrowing ETH. An ongoing cost of the variable ETH borrowing rate in AAVE must be continually paid. This means that the strategy remains profitable as long as the borrowing cost of ETH is lower than the returns from StETH.
This Earn position uses 3 protocols and the power of Summer.fi smart contracts: All capital is deposited to AAVE v3 protocol and held there for the strategy to work. StETH represents ETH held by Lido, which in turn gives it to the node operators that perform the validator duties for Lido.
With the release of AAVE v3, users get access to E-mode. This functionality allows users to go up to 10x multiple on the stETH yield and get increased returns beyond what is possible in AAVE v2. This also has a lower penalty risk for users at 1% vs 5% in AAVE v2.
The Summer.fi fee is 0.07% of the amount swapped to close or decrease the risk down in your position. The fee is waived on setup; you can start earning as soon as you start. This strategy pays interest on the ETH borrowed from AAVE. This variable fee is accounted for in the net APY, but it changes continually as the market demands more or less ETH. Users must consider gas costs related to the Ethereum network, which vary with congestion and ETH price.
Liquidation risk: If the price of stETH measured in ETH decreases, the position will be at risk of liquidation. This could happen for multiple reasons, for example, users selling their StETH for ETH to pursue other strategies, perceived or realized Lido execution risk, and lower general liquidity. The position will be liquidated if the price goes below the liquidation ratio. To understand more about the pricing of stETH in relation to ETH, you can read more in our blog. The liquidation penalty for AAVE v3 E-mode is 1% vs 5% for AAVE V2.
Lower than expected returns: The strategy assumes that the returns from ETH staking minus the Lido fee will be higher than the cost of borrowing ETH in AAVE, allowing users to multiply this exposure. This assumption might not hold in all circumstances, and you should monitor the position to measure the profitability and desired risk. This is shown in the app, allowing you to follow the health of your position.
Governance Risk: As AAVE is a DAO, its governance is in charge of adjusting the parameters. We will communicate the major changes, but if you want to be more informed, check AAVE Forum periodically to be updated on the decisions involving risk parameters for the assets. A proposal takes a total of 7 days to come online, which gives you time to adjust your position in case the change negatively affects your Earn strategy
Oracle Risk: Lending protocols like Aave rely on price oracles that convey asset prices external to the blockchain to the protocol. These are used for marking the value of outstanding loans and estimating which ones are in default. Manipulation of oracle price feeds or errors in reported prices can force the protocol to liquidate loans that are not in default, causing a loss of customer funds.
Systemic risk: Smart contract bugs, and fatal errors in any of the protocols being used such as AAVE, LIDO, and Summer.fi.
Read more about AAVE V3 risks
Read more about Lido stETH
Read mode about Lido collateral risk monitoring