Post Celsius, I swore off yield. I had learned the lesson that risking a multi-bagger asset for single-digit returns was dumb.
Now that some time has passed and the sting has softened, I decided to analyze what happened and re-examine my approach to yield generation.
PART 1 - Experience in the last cycle
What made me look for yield in the first place?
Greed — Self-explanatory
Boredom — Once I had deployed my capital, I found myself twiddling my thumbs. Looking for yield was a reflex action to avoid feeling unproductive. My brain was telling me — “Surely you can do more.”
What I did
I looked up the biggest platforms offering yield, Celsius, Nexo, Amber, BlockFi, etc, and compared percentage returns. Celsius looked attractive.
I went against the crypto philosophy of trustlessness. I trusted experts, and I trusted them blindly. All these platforms were black boxes. I had no visibility on how yield was being generated.
I rationalized. I told myself that these were math czars exploiting fool-proof arbitrage strategies. They weren’t sharing those strategies with the world because that would crowd the trades they had put on.
An annoying voice in my head told me that this was unsustainable, but I convinced myself that I could get out before any signs of trouble.
What Celsius did
Celsius was making very real returns in the beginning. However, the easy yields of the earlier years disappeared as markets matured, more players entered, and more capital chased the same opportunities.
Celsius was now competing with BlockFi, Nexo, WhaleFin, Gemini, Coinbase, and many others to attract deposits. They succumbed to the pressure and offered the same yields of earlier years by getting into riskier trades. When some of their trades lost money, they panicked and hid them, hoping profits from future trades would cover these losses.
Final outcome
One shouldn’t have entered those risky trades in the best of markets. Celsius entered into these trades right when crypto winter was looming.
The damage was excessive, and Celsius dropped any pretense of ever being able to recoup losses.
On emerging from bankruptcy, it was announced that customers received 79% of their deposits back. In reality, they received 25–30%. Customer claims were determined based on the dollar value of deposits on the day bankruptcy was declared when crypto prices were at their cycle lows.
PART 2 - Approach in this cycle
Below, I lay out how I’ve been thinking about yield after my experience with Celsius
FIRST — Understand how returns are generated
I ask myself if I understand how yield is being generated. No more trusting the experts blindly. If I don’t understand how yield is being generated, I stay away, however mouth-watering the promised returns might be. Ideally, I should be able to observe the yield generation in real time.
SECOND — Inflation-adjusted returns
The simplest and most legitimate way to earn yield is through staking. But ETH staking earns only a 2–3%. Is that worth risking my tokens? The first instinct is to say no. But the question is more nuanced.
When dealing with fiat, you have to account for inflation. A 2–3% return is lower than inflation and means that you’re actually losing money in real terms. With crypto, things are different. If your view is that BTC will be worth $1,000,000 in the next 7–10 years, 2% returns in BTC terms means 20% returns in USD terms and even higher in terms of most other fiat currencies.
Coins like bitcoin and ether are rare. Most of today’s cryptocurrencies will converge on a value of zero and high percentage return on zero is still zero. If risking BTC or ETH is earning you returns in a shitcoin then the risk is not worth it. You want to earn returns in BTC and ETH.
THIRD — Level of risk
Even if 2% crypto returns are valuable in fiat terms, do I want to risk 100% of my capital that could otherwise grow at a 25% compounded rate of interest?
Here, I remind myself that all risk is not equal. Risk is a spectrum. Depositing cash in a tier-1 bank for a 2% return is considered virtually risk-free. But lending money at 20% to my addict cousin with a history of unemployment is plain irresponsible.
Conclusion — You must identify how big the actual risk is.
TAKING STOCK — This is where I now stood
While BTC is clearly the gold standard in crypto, staking BTC with Babylon doesn't earn returns in BTC. It earns returns in tokens of the proof-of-stake platform that you’re securing. I wasn’t going to risk my BTC for a shitcoin.
ETH is a worthy runner-up to BTC. Staking is a legitimate way to earn yield in ETH. The code of the large staking operators is well-audited, making staking risk fairly manageable.
FOURTH — Exploring staking options
The easiest way to stake is to stake with the exchange you buy tokens on. Coinbase, Gemini, Binance, etc, offer staking through an incredibly simple user interface. 2 issues with them, though:
Their commission is 25%.
After Celsius, I learned the virtues of self-custody. Leaving balances in centralized platforms is convenient but less secure. If anything happens to the platform, you’ll lose your money. This has happened to customers of FTX, Celsius, Mount Gox, and many others.
I, however, don’t have the technical know-how to run my own staking node. I need to find someone to handle the tech for me. My choices were to stake with a staking pool or employ a firm offering Staking-as-a-Service.
FIFTH — Staking with Lido
My research indicates that Lido is the most credible staking pool.
Lido charges only 10% commissions and is non-custodial. Users maintain control of their private keys.
Additionally, when I stake with Lido, it gives me a liquid token (stETH) that I can deploy in Defi. While I have no plans to deploy on DEXes or DeFi Money Markets, I do plan to explore restaking with Eigen, where I’ll need stETH.
SIXTH — Decentralised Validator Technology (DVT)
When I went to stake on Lido, I noticed another option- Staking with a Decentralised Validator Vault (DVV).
I researched this and realized that DVT is the future of ETH staking. DVT distributes a single validator’s duties to multiple nodes, removing the single point of failure and improving network uptime. It’ll increase decentralization and, hence, improve resilience and security.
I reason that Lido is a credible protocol, and since they’re running the DVV, the DVV must be credible, too.
Also, there’s a monetary advantage to staking with DVV. SSV and Obol are partners in this project. By staking with the DVV, in addition to ETH rewards, I’d also receive rewards in SSV and Obol tokens. Remember I said that there’s no point earning rewards in shitcoins, but my research indicates that SSV and Obol are both core to the Ethereum validator infrastructure. This might be worth it.
But I decide against it for 2 reasons:
When I do plain vanilla staking with Lido, I receive stETH. when I unstake, I get my ETH back. With DVV, I receive wstETH [wrapped staked ETH) back. I suspect that the market for wstETH is thin, and selling it will lead to slippage.
The proposal discussion on the Lido Research portal indicated that the simple DVT module would likely be superseded by more sophisticated DVT modules in the future, with better scalability and permissionlessness. I’d want to avoid having to switch from Simple DVT to a scalable version in the future.
SEVENTH — Running a Validator Node
So now I was back to simple staking. BUT, I had another unconnected thought.
Stakers earn (1) transaction fees, (2) ETH subsidies, and (3) MEV. All 3 are legitimate sources of yield. But Lido doesn’t seem to be sharing any MEV with me. Seems unfair. Lido will be earning MEV using my capital and will not give me my share. How can I get access to MEV?
MEV is non-transparent. Ethereum has no visibility into how much money validators make using various MEV strategies. There’s no way for me to track the actual MEV generated. P2P.org claims MEV adds up to roughly 30% of rewards. I can’t know what percentage of generated MEV they’re sharing, but what they are sharing increases my yield by a third.
2 issues with P2P.org:
You need a minimum of 32 ETH
It doesn’t give a liquid token like stETH that I can deploy in DeFi.
Remember that depositing funds takes a day, and your validator becoming active takes another day. Post this, execution rewards and consensus rewards will be sent to 2 separate wallets.
EIGHTH — Staking and Restaking through the same platform
P2P.org has an option where not only does it create a validator node and do the staking for you, but it also restakes the same with Eigen. (I mentioned before that I want to explore restaking with Eigen.) I don’t need stETH anymore to restake with Eigen. P2P.org does it for me.
Further, instead of simple staking, p2p.org can stake using DVV described above. This means that when Lido upgrades from Simple DVT to Scalable DVT, P2P.org engineers will handle the migration for me.
NINTH— Restaking
I think I skipped a step and didn't explain my journey with restaking well.
Eigen Layer provides a much-needed service for new protocols that require consensus. Instead of having to build their own consensus mechanism, they can borrow security from Ethereum’s consensus. Those staking ETH can restake their staked ETH to additional projects.
This is a win-win. The new projects get readymade security. ETH stakeholders get additional income. This is especially valuable now that ETH staking returns have fallen with transactions moving to L2s.
The restaking ecosystem, however, is currently less mature than staking.
Staking has established operators. The best restaking operators are not obvious. The skills required of a restaking operator are different and, in some ways, more complex compared to the skills required of a staking operator.
In addition to running nodes, restaking operators must select the right projects, also called AVSs (Actively Validated Services). This requires them to consider the below questions:
Does the AVS provide a valuable enough service that its token will be valuable in the future? AVSs will compensate for the economic security provided by staked ETH with their native tokens. Projects like EigenDA are a no-brainer, but the value of other AVSes is not clear.
Is the AVS smart contract safe? Once slashing goes live, smart contract risk will be a bigger problem.
Are AVSs being secured only with restaked ETH or also some Alt Coins? How are restaking rewards shared between ETH and Alt Coin restakers.
What is the tokenomics of the AVS native token?
Eigen Layer website lists restaking operators.
I ordered operators based on ETH value restaked. I reasoned that those that have attracted higher ETH are likely more trustworthy.
It didn’t show what kind of returns these operators have historically provided. I understand that if returns are in AVS tokens, their value as of today doesn’t mean much, but some clarity on earnings would have helped.
Eigen’s website did show how many AVSs the operator restaked for. There are a total of 25 AVS projects that operators can restake. I did not investigate them all.
An operator abstracts away the job of running restaking nodes, researching which AVSs are worth restaking for, and setting up the additional infrastructure needed to connect to those AVSs.
The more AVSs you secure, the higher the returns and the higher the risk. As of now, Eigen has not activated slashing, but when it does, the quality of AVSs secured will matter.
TENTH- Restaking directly with Eigen
If you don’t have an interest in SSV and Obol rewards or MEV, and choose simple staking instead of DVV within Lido, you will receive stETH back. You can then restake the stETH by depositing it in an Eigen Layer smart contract yourself.
This process is a lot cleaner, and you have higher visibility into how the returns are being generated. Also, there’s no minimum requirement of 32ETH.
You have a wider choice of restaking operators. Here, I’ve chosen Eigen Yields. The process is straightforward.
Conclusion
In what I’ve described above, I am trusting the P2P.org platform so as to get access to SSV and Obol tokens, and MEV. Am I repeating the same mistake as with Celsius? Am I risking my gold for returns in iron scraps? P2P.org may be trustworthy, but crypto says that one must not “have to” trust.
Eigen Layer also comes across as well-intentioned and backed by good technology. But I’m risking ETH for tokens of opportunistic AVS projects that might not be around next year.
I’ll spend the next few weeks scouring the discussion forums to learn more about these portals. There’s a chance that once I’ve learned all there is to learn, I’ll unstake from P2P.org and do simple staking with Lido instead.
Simple staking is a mature space. I’d suggest it even to newbies. It's a good first step to experience self-custody. DVT and Restaking both need to go through some iterations before they justify the risk and are user-friendly enough.
Remember that there are professional yield farmers who stake early to earn airdrops in high-profile tokens. Be ready to see your token value drop dramatically when they abandon projects immediately after receiving their airdrops. Unless you’re confident in your skill of exiting at the right time, don’t chase airdrops.
Comentários