Ethereum (ETH) Staking: How to Maximize Your Yields

Ethereum ETH staking yields

Staking is often praised as one of the best ways to earn passive income in crypto. It has recently become even more attractive to Ethereum users, as it successfully implemented proof-of-stake as its consensus mechanism, enabling anyone to stake their tokens and earn rewards.

While the annual percentage yield (APY) for staked ETH currently fluctuates at around 4-5%, some estimates suggest it could reach 7-14% in the near future. However, there are strategies aimed at helping users increase their ETH staking rewards two-fold and even more.

Let’s take a deeper look at how staking works on the Ethereum blockchain and how to maximize your rewards.

How Does ETH Staking Work?

The Ethereum blockchain uses proof-of-stake as its consensus mechanism. Proof-of-stake relies on validators that each have some amount of ETH locked to validate blocks and secure the network. In return, validators receive staking rewards in the form of more ETH.

Users of the network can stake ETH via a centralized exchange (CEX), a staking pool, and by running a validator node. Staking via a CEX is considered the riskiest option as it means users are at the mercy of a centralized authority (not your keys, not your coins).

Running one’s own validator node is the purest staking method, but also the most difficult. It requires extensive technical knowledge, 32 ETH to lock up, and a piece of hardware connected to the internet 24/7.

Finally, staking via a staking pool is the most user-friendly staking option for everyday users. It involves multiple people combining their tokens on platforms like Lido and granting the staking pool operator a validator status. In turn, the validator, using the staked ETH in the pool, earns rewards by validating blocks and later distributes them among the poolers.

The staking reward rates depend on the staking method. Those who run their own validators get the most rewards. Stakers who stake through a CEX or a staking pool earn fewer rewards due to the validator fees they are required to pay.

However, there are ways to boost staking yields even without running a validator node and get even more than validators themselves.

Leverage Liquid Staking

Anything with the word “leverage” in it may sound scary – and understandably so. But leverage liquid staking provides viable ways of increasing exposure to staking rewards with minimum risk.

There are a couple of ways investors can stake with leverage, and both of them involve Lido’s ERC-20-compatible liquid token stETH. 

The first way is to deposit ETH into Lido in exchange for stETH tokens on a 1:1 basis; borrow ETH against them on Aave; and then stake the borrowed ETH.

The other way is to wrap stETH into wstETH; use it as collateral on Maker to mint DAI; then swap DAI for ETH (or any other token); and stake again.

Both of these strategies allow investors to increase their staking rewards two, five, or even ten times. However, if the borrowing interest climbs over the staking reward rates, stETH depegs from ETH, or the underlying Aave position gets undercollateralized, investors face liquidation risk.

For those that are looking for more user-friendly options, there are tokenized versions of leverage liquid staking.

1. icETH

Index Coop’s Interest Compounding ETH Index (icETH) token product offers a simple solution to leverage staking – and it does it for you. Built on Set and Aave, it offers automatic rebalancing, multiple safety mechanisms, and up to two and a half times amplified staking returns, or around 9-11% APY.

All the same risks of undercollateralization, stETH-ETH depegging, and interest rate increase still exist. However, if investors know their risk appetite and can manage the position accordingly, icETH offers an elegant way of leverage staking.

All investors need to do to get leveraged exposure to ETH staking rewards through icETH is purchase icETH tokens. icETH is also available on zkSync’s layer 2 network, which means investors can trade icETH with virtually zero gas fees (though icETH has a 0.75% streaming fee).

2. DeFi Saver

DeFi Saver is one of the more interesting DeFi products out there. Instead of issuing new tokens, the protocol offers “recipes,” various investment strategies involving interactions between multiple DeFi apps and utilizing flash loans and token swaps.

Investors can choose to use either use ready-made recipes, create their own and execute them with a click of a button, or try it first in a simulation mode. For example, here’s what a leverage ETH staking recipe looks like:

1. Take out a flash loan of 4 WETH from Balancer;

2. Wrap 2 ETH to WETH;

3. Swap 6 ETH for at least 5.97 stETH;

4. Deposit all stETH to Aave;

5. Borrow 4 WETH from Aave;

6. Pay back the 4 WETH flash loan to Balancer.

Such a recipe yields 11.17% APY. It also incurs a 0.1% service fee.

DeFi Saver also offers automatic position protection and is integrated with Optimism and Arbitrum, which significantly reduces gas costs.

All of the same risks also apply here as well. The more layers added, the bigger the risk of getting liquidated.

Liquidity Providing

Another way of making the most of staked ETH is to provide liquidity. Liquidity providing involves depositing assets into a liquidity pool to earn trading fees and other rewards.

How do staking and liquidity providing work together? It’s simple: Investors acquire stETH and deposit it into a Curve stETH-ETH liquidity pool. Since the pool is 50% ETH and 50% stETH, the staking rewards earned on stETH will be reduced by 50%, but that’s just one side of the story.

The other side is that 50% of deposited ETH earns additional rewards in the form of CRV, Curve’s native token, and Lido’s LDO. In total, users get stETH staking rewards (2-2.5%), CRV (0-1%), and LDO (2-3%).

But there’s more. Users can then take the CurveLP-stETH-ETH tokens that they received for depositing to Curve and use them as collateral to borrow DAI on Maker.

One caveat with providing liquidity with Curve is that the CRV and LDO rewards aren’t compounded. Investors need to claim the rewards before reinvesting them, which costs gas fees.

However, investors can use Yearn for a simpler approach to liquidity providing. The yield aggregator packages this staking strategy into a simple liquid token and auto compounds all the extra rewards back into the base layer.

Parting Thoughts

There’s no denying: Ethereum has become an attractive asset to hold and stake. Institutions, major brands, and network users will – and already are – looking for where to put their ETH to work.

While some are satisfied with basic staking rewards, others look for more exposure. For them, leverage staking and liquidity providing strategies offer a myriad of ways to maximize their staking yields.

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed to be financial legal or tax advice. Trading Forex, cryptocurrencies, and CFDs poses a considerable risk of loss

Author

Rue Abernai is a blockchain content writer focused on Web 3.0 domains, DeFi, and Ethereum Layer-2s. Rue believes blockchain technology has the potential to transform how we see and interact with society, economy, and culture. Rue spends his spare time hiking, playing with his dog, and reading. He has been active in blockchain and cryptocurrencies since 2020.