Fixed Rate Yield with ETH
Element Finance launched their fixed-rate platform over the summer, and the design of their protocol opens the door for some interesting opportunities.
Element works by effectively splitting interest bearing tokens into two tokens: a principle token (PT) and a yield token (YT). The PT holds the same value as the coins a user stakes in the protocol, the base asset, while the YT accrues value over time and represents the interest your base asset would have otherwise received. Because your base asset generates a floating rate, so do the related YTs. As of now, Element supports the staking / minting of nine tokens:
- Non-LP tokens: DAI, USDC, xBTC
- Curve LP tokens: LUSD v2, allUSD v2, MIM+3CRC, 3Crypto v2, stETH v2, EURS v2
Once minted, PTs & YTs are fungible, and Element hosts an exchange for each. YT markets are still very thin, with just over $1m in liquidity total across all pools. But there is decent depth in the PT pools with over $120m in liquidity across the USDc and steCRV pools.
You can read Element’s construction paper to learn more, or check out this dashboard on Dune Analytics. Some of the possibilities Element’s protocol enable are in development by their partners, including auto-compounding yield tokens to see 60x increase in spot stablecoin yield, with no liquidation risk, but here I will just focus on increasing yield on holding spot ETH.
By using Curve and Element, we can build a position in spot ETH that yields 7% or more. While some of the steps introduce only incremental increase it yield, hopefully this also highlights the composability potential native to most of DeFi.
Trade
Buy & hold ETH for 12 months with 7.8% yield.
Given
- stETH trades at a discount to ETH, currently ~0.9825
- stETH yields 4.8% on Lido, the largest staking service
- Curve stETH / ETH pool yields 3.13%
- Element Finance fixed-rate yields 3.65% (for stETH swap)
Assumptions
- Beacon Chain merge is complete and ETH2 is live in 12 months
- Element fixed rates remain above LP vault / floating rates
- Fees are ignored
Mechanics
1) Purchase stETH/ETH on Uniswap, which has traded in a range between .09725 and .09825 over the last month. Owning stETH yeilds 4.8% after fees, so effective stETH yield is at least 1.75% + 4.8%, or 6.55%.
2) Stake stETH in the Curve stETH/ETH pool. Do not stake steCRV, the LP tokens. The Curve stETH/ETH pool currently yields ~3.12% with over $4.5bn in liquidity. However, the Curve pool will split your stETH 50/50 into stETH/ETH, halving the Lido rewards rate in step one above.
3) Because fixed rates are currently higher than the underlying, it makes sense to swap the steCRV for a fixed rate token on Element. Go to Element.fi and swap steCRV for ePyvcrvSTETH, the PT’s representing staked steCRV on the Element platform. The PT maturing April 15, 2022 trade around 0.9889 ETH, representing a yield of 3.67%. Most terms on Element are about six months, so at least one rollover will be required as the Apr 15 term expires. Because this is a swap, you will not receive Curve seETH/ETH LP fees.
(Note: if the yield on the Curve stETH/ETH pool is greater than the fixed rate notes on Element, then the above would result in a loss of yield. In that case, you can continue to collect Curve LP fees by splitting your steCRV into PT and YT and stake each in the Element pools, which would be additive. Volumes, and therefore fees, are still very small at only 0.05% for the PT pool, but should improve over time.)
4) At the end of 12 months, claim the full value of the steCRV you had swapped at a discount on Element. Unwinding the trade would require redeeming your stETH from Curve then redeeming ETH.
Risks
- Execution Risk: Beacon Chain migration execution, leading to longer wait to receive full stETH
- Market Risk: ETH price risk; minimal impairment loss on Curve stETH/ETH pool
- Interest Rate Risk: Element fixed rate rollover
- Competition Risk: decrease in staked ETH rewards, caused by increase in total ETH staked on the Beacon Chain; decrease in Curve stETH/ETH fees due to higher yielding alternatives
- Smart Contract Risk: This strategy relies on smart contracts from Lido, Curve, and Element. All three have been audited and backed by highly regarded, and active, investors.
Alternatives
There are other ways to find yield on ETH, but I wanted to highlight one way you could capture decent fixed rate returns just by holding spot and leveraging existing, and safe, decentralized protocols. You could easily layer leverage or derivatives on this strategy to increase returns, but if you wanted to explore different opportunities to earn yield on ETH, here some alternatives:
- Ribbon.finance Weekly covered call strategy on stETH. Currently yielding ~16%, but the protocol charges a 2% management fee and a 10% performance fee. Options come with a different risk profile as well.
- Notional.finance Notional offers fixed rate notes, like Element, but only accepts spot deposits of DAI, ETH, USDC, and wBTC (instead of interest bearing assets like Element). Fixed rates are lower for ETH (2.66% currently) or you could provide liquidity for the ETH pool, which yields 4.53% (variable).
- Alpha Homora Leveraged yield farming.
- Spot Lending Most decentralized lending options, like AAVE or Compound, offer very low rates on ETH deposits. Currently, AAVE is pays 0% while Compound pays 0.08%. Centralized exchanges offer better rates, but max out at 8.78% on BitFinex, with Celsius runner up at 5.35%. BitFinex and Celsius are, of course, centralized organizations.
References
Element construction paper
Excellent summary of the Curve stETH/ETH pool, from the perspective of a MakerDAO governance proposal: https://forum.makerdao.com/t/curvelp-steth-eth-collateral-onboarding-risk-evaluation/11224
Notional Finance: https://notional.finance/portfolio
Lido on Element Finance: https://help.lido.fi/en/articles/5407347-a-guide-to-element-finance
Element on Curve: https://medium.com/element-finance/how-to-get-crvsteth-36ae70536228
