# Liquid Staking Enabling Yield Stacking

### Background on Staking and Market Opportunity:
https://docs.google.com/presentation/d/1s1XBwPBovt-pNVibz__TU7H1_M__WIGyKxkWwO0V_5k/edit?usp=sharing

One of the top 5 staking protocols, Ethereum 2.0 currently has $35.5 billion locked in validators with a staking rate of 8.69% ([source](https://www.stakingrewards.com/earn/ethereum-2-0/)), which entails huge potential for market growth with strong investor interests. However, looking ahead, the competing yield opportunity cost problem existing in the more composable permissionless Defi ecosystem could very well present in the institutional/permissioned space. Here is a break down of the problem:

* Staking on Ethereum 2.0 requires token lock-up hence single token utility with low capital efficiency -- inability to earn additional yield
* Defi yields are attractive and competing against L1 staking yield
* The opportunity cost problem: investors would have to choose between these investment options as the token can only be used once

To solve this, yearn could offer an Institutional Liquid Staking as a solution. Liquid staking is based on minting an interest-bearing Ethereum 2.0 liquid staking derivative that represents staked Ethereum 2.0 position (principle + reward) and can be used to participate DeFi, avoiding token lock-up and generating extra yield. In other words, in addition to getting liquidity for locked ETH, investors no longer have to choose between cross layer investment options and be able to earn Defi yields on top of ETH2 staking yield with the powerful tool of Eth2 liquid staking derivative.

### **ETH2 Liquid Staking Derivative As an Asset Class
**

From an asset class perspective, the ETH2 liquid staking derivative is analogous to Tokenized Internet Bonds, which represent “the digital work agreements between the lenders of capital and resources (validator & staker) and the protocol(s) operating on the base layer of the new internet economy (issuer)” ([source](https://thedefiant.io/internet-bonds-bridging-the-gap-between-proof-of-stake-and-traditional-finance/)). Besides relatively stable interest revenue for staked capital (in forms of network inflation), it also has “debt and equity-like characteristics” ([source](https://thedefiant.io/internet-bonds-bridging-the-gap-between-proof-of-stake-and-traditional-finance/))[](https://www.stakingrewards.com/earn/ethereum-2-0/).

In comparing to government bonds, ETH2 liquid staking derivatives has the advantage below:
- It has a more competitive yield of 4.48% from staking reward (source) at the time of writing. (see graph below for government bond performance)
- It has higher base value compared to government bonds in the long run as fiat money supply has continuously increase in the past decade


# Derivative Defi Utility Ecosystem
#

To enable potential future clients to stack Defi yield on top of ETH2 staking yields, yearn could build a comprehensive derivative utility ecosystem in permissioned Defi, catering specifically to institutional clients' security, compliance, insurance and capital efficiency requirements.

Mirroring the permissionless Defi ecosystem, the permissioned derivative ecosystem shall be fully composable for the ease of liquidity flow and a diverse set of use cases for various yield generating options with different risk profiles.

Below is an illustration of a flexible yield staking process at high level.

### Permissionless Derivative Case Study (work in progress)

Liquid Staking Marketshare
(Deposits in ETH)

Concretely using Lido (stETH) liquid staking as an example, capital efficiency is achieved through farming yield on DeFi platforms, such as:

- *Yearn: Maximizing yield through automated lending and trading strategies*
- Anchor: Earn staked ETH rewards on Terra through staked bETH
- Curve: Exchange liquidity pool on Ethereum for additional stETH rewards
- MakerDAO / Oasis.app: Deposit wrapped stETH in a vault as collateral for instant DeFi loans
- AAVE: Deposit stETH in a vault as collateral with self repaying loans
- Harvest Finance: DeFi platform that allows additional yield farming for crv:stETH pairs
- Babylon Finance: A community driven asset management / investment strategy platform


Four major protocol holders currently account for 91.5% (minus Curve LP)

Holders
(w/o curve LP)
Lido
- wstETH [31.6%]
- Balance: 576,302
Anchor
- bETH [25.4%]
- Balance: 462,384

AAVE_V2
- [26.7%]
- Balance: 485,644

Gnosis Safe
-[7.8%]
-Balance: 142,636

### Closing Remark:
###
As shown above, there is a huge potential on the permissionless liquid staking front and I believe there is an untapped/huge market for the institutional side as there is more capital with much more security measures to ensure safety of funds etc while giving opportunity for additional yield.

## Open Questions:

- how does that look like in the long run ? Potentionally a fully composable ecosystem that mimic the one in the retail/degen ecosystem

- How is that even possible? Add in empirical evidence on lido market cap, use case & volume

## Resources:
-https://messari.io/article/the-de-coupling-thesis?utm_source=newsletter_middle&utm_medium=organic_email&utm_campaign=the_decoupling_thesis