Lido Finance: Exploring wstETH’s use cases across the Arbitrum ecosystem
Lido Finance is one of the most well-known projects in the crypto ecosystem and become an inspiration for most of the projects around the space. With their innovative solution of liquid staking, Lido provides a more secure Ethereum network while creating a flexible investment opportunity for the users.
Lido Finance has been covered frequently, so no further general overview is required. Thus, our aim in this article is to cover the wstETH use cases across the Arbitrum ecosystem. However, to fully understand wstETH, its use cases, and its features, one must know:
1- Liquid Staking
2- Lido Finance
3- stETH
4- wstETH
5- Comparison of stETH and wstETH
Thus, we’ll first provide a brief introduction to the concept of liquid staking and the Lido Protocol, then, we’ll analyze stETH, after that we will be focusing on wstETH, covering all details that are required to fully comprehend wstETH while analyzing its use cases in the Arbitrum ecosystem.
What is Liquid Staking?
Liquid staking is a solution that is required after Ethereum’s transition to proof of stake. Thus, the Ethereum network needs validators who stake their ETH on Beacon Chain to secure the blockchain. However, due to the limitations that will be analyzed later, it is very hard for regular users to be a validator.
From the name of the concept, it can be understood that liquid staking aims to make the staking activity liquid.
How are they going to do that? The answer is Lido Finance. By tokenizing your staked token, Lido Finance can make your staking activity liquid.
Let’s cover Lido Finance in a different chapter so that you can understand both the concept of liquid staking and Lido Finance better.
What is Lido Finance?
In December 2020, Lido was launched a few weeks after the Ethereum 2.0 Beacon Chain went live. Lido aims to make staking on Ethereum easier by addressing some of the challenges of the staking process, and by making it accessible for the average ETH holder.
These challenges can be analyzed as:
- Users have to lock their ETH for a period of time and staked ETH will be illiquid and non-transferable.
- Users can only stake multiples of 32 ETH, which makes participation difficult for those who own less than that amount.
Lido solves these issues by allowing users to stake any amount of ETH and giving them a tokenized version of their staked assets at a 1:1 ratio in the form of stETH (staked ETH).
This solution makes staked ETH liquid and tradable with stETH tokens. Staking with Lido allows users to participate in on-chain lending and earn additional yield within the different DeFi applications and it can be stored, transferred, spent, or traded like a regular token while still earning rewards from their staked ETH on the Lido Protocol.
Explained: stETH
As stated before, stETH is the tokenized version of staked ETH to make your staking process liquid.
When you stake your ETH with Lido, you receive stETH tokens in return, which represent your initial deposit and staking rewards combined. These tokens are created when you deposit your ETH and are destroyed when you redeem them. The amount of stETH tokens you have is the same as the amount of ETH you staked with Lido, and their balance is updated daily based on the total stake.
The balance of stETH tokens is increased every day with the current annual percentage rate (APR), which is called a “rebase”. You can use stETH tokens like regular ETH, allowing you to earn staking rewards while also benefiting from yields in DeFi products.
With Lido’s stETH tokens, you can earn rewards every day that you hold them in your wallet. They are fully liquid, so they can be used with various DeFi protocols like lending protocols, DEXes, liquidity pools, aggregators, and optimizers.
For example, by pooling stETH and ETH together in a liquidity pool, users can indirectly unstake their ETH and receive their initial deposit back through pool swaps. This is useful when users want to unstake without waiting for transactions to be enabled. Liquidity pools are crucial in maintaining stETH as the liquid equivalent of ETH.
Lending protocols can use stETH as collateral for borrowing assets while still earning rewards through staking. This creates opportunities for advanced rewards farming strategies. Moreover, aggregators can also use stETH in their rewards farming strategies, which can maximize rewards for users.
Explained: wstETH
Lido’s wstETH is stETH wrapped into a DeFi-compatible token, designed for use in protocols that don’t support rebasable tokens. It symbolizes the account’s proportion of the stETH total supply.
Lido’s stETH token is subject to daily changes in the balance due to earned staking rewards, which is known as a rebasable token. However, some DeFi protocols require a constant balance mechanism for tokens such as Uniswap,1inch, and SushiSwap, so Lido created wrapped stETH (wstETH) which uses an underlying share system to reflect your earned staking rewards and keeps your balance of stETH fixed.
For example, if you wrap 100 stETH to 99.87 wstETH, you can continue to earn rewards on your wstETH and when you unwrap your wstETH, you will receive 101 stETH.
This allows for easier integration of stETH into DeFi protocols and promotes its use as a fundamental element in a variety of unique Ethereum protocols.
Moreover, another point that needs to be highlighted is that Lido will only support wstETH for their initial deployment on L2 protocols for various reasons such as simpler bridge contracts and ease of integration with both bridges and the DeFi space in general.
Comparison of stETH and wstETH
As stated, Lido offers two versions of stTokens: stETH and wstETH. Both tokens are ERC-20 tokens that represent the rewards earned through staking on Ethereum 2.0.
stETH and wstETH differ in how they reflect staking rewards.
As stated, stETH’s balance is adjusted through a mechanism called rebasing. Rebase occurs periodically, which increases the stETH balance proportionally to the staking rewards earned. This means that the amount of stETH in a user’s wallet increases over time, reflecting the rewards earned through staking.
In contrast, wstETH’s balance remains constant, but its value increases in terms of stETH over time. This means that the amount of wstETH in a user’s wallet stays the same, but its value in stETH increases as the staking rewards are earned. wstETH can be redeemed for stETH, which reflects the user’s total staking rewards.
Both stETH and wstETH can be converted back and forth using a trustless wrapper. This feature makes stETH and wstETH highly interoperable, and both tokens effectively share liquidity. This allows users to easily convert their tokens based on their needs and preferences.
Use cases of wstETH in Arbitrum Ecosystem
As can be seen, there are several reasons for wstETH to be used by the platforms launched in L2 protocols. One example of this is the Arbitrum ecosystem which is one of the most hyped and promising L2 protocols that is home to many platforms that uses wstETH.
Across the Arbitrum ecosystem, there are several DeFi applications that wstETH is used. We will analyze them in four categories namely AMMs/DEXs, options, lending/CDP, and aggregators.
a) AMMs/DEXs
Trader Joe, Balancer, Curve, Kyber Network, and Camelot have already integrated wstETH in their platform while Mycelium is preparing to complete the integration. I will analyze some of them to show how you can use wstETH on these platforms.
Trader Joe
Trader Joe is an Avalanche native DEX that recently launched on Arbitrum. With their new incentive program called Arbitrum Adventure, they aim to lead the DEX ecosystem on Arbitrum. Their tailored solution called ‘’Liquidity Book’’ is key to achieving this aim.
Users can swap wstETH with different pairs such as ETH, USDC, and WETH on Trader Joe while can become an LP on the wstETH / ETH pool.
Balancer
Balancer is a decentralized protocol that allows for DeFi liquidity infrastructure. It offers various features that reduce gas costs, increases capital efficiency, and facilitate custom Automated Market Makers (AMMs).
For Lido users, it’s possible to use Balancer on Arbitrum to easily swap between wstETH and other cryptocurrencies like WETH, USDC, and LDO. Additionally, users can earn fees by becoming LP in several pools, including wstETH-WETH, wstETH-USDC, and wstETH-LDO.
By adding liquidity to certain pairs in Balancer Pools, users can earn swap fees. There are two types of wstETH-related pools available: Weighted and Composable Stable. Weighted pools are used for assets that don’t have any price correlation, such as wstETH/USDC and wstETH/LDO. Composable Stable pools, on the other hand, are used for correlated assets or pegged tokens like wstETH/WETH.
Curve
Curve Finance is an exchange liquidity pool designed for extremely efficient trading and low-risk, supplemental fee income for liquidity providers
Lido users can use Curve on Arbitrum to quickly swap wstETH and ETH. On top of that, you can make money by depositing your assets and getting trading fees and more rewards, like the wstETH/ETH pool.
b) Options
There are several options protocols developed on Arbitrum. Two of the most important of them are Premia and Dopex. While Premia has integrated with wstETH, Dopex’s integration will soon be completed.
Premia
Premia is a decentralized marketplace that allows you to trade options contracts based on a pool-to-peer architecture. On Arbitrum, users can trade wstETH call and put options on Premia with any asset.
There are two types of pools for wstETH/DAI: a Call pool and a Put pool. If you want to take a long position in wstETH, you can buy Call options, and vice versa.
c) Lending/CDP
As far as I can see, at this point, no lending protocol allows you to lend/borrow wstETH. However, Radiant is preparing to integrate wstETH. I suppose AAVE would also integrate it soon.
d) Aggregators
As of my knowledge, there is only Beefy Finance as an aggregator on Arbitrum that integrates wstETH right now, however, I suppose YFI would integrate wstETH soon.
Beefy Finance
Beefy Finance is a decentralized, multi-chain yield optimizer platform that allows its users to earn compound interest on their crypto holdings. Currently, on Arbitrum, there are four main pools including two of them with Lido boost.
Users can use these vaults to increase their revenue via wstETH which is a great chance that needs to be used.
Potential use cases of wstETH on Arbitrum
I believe that wstETH can be used in every area that stETH is used. Thus, there is no limitation to potential use cases. There are five main areas in which I think wstETH has potential.
- Lending/Borrowing
- Leveraged Staking
- Aggregators
- Derivatives
- CDP
Specifically, I believe that we immediately need to have an opportunity on Arbitrum to lend/borrow wstETH, This is very important as I think that it will increase the liquidity in the general ecosystem while creating new opportunities for users. AAVE and Radiant can lead Arbitrum in this area.
Moreover, leveraged staking is a great investment tool that can provide sustainable high returns for investors. When there is enough wstETH liquidity in Arbitrum, leveraged staking tools can be developed so that users can benefit from high returns from their wstETH.
I don’t think that there are enough aggregators on Arbitrum that integrate wstETH. Aggregators can use stETH to increase the rewards for their users in their existing rewards farming strategies. These strategies can combine various protocols and initiatives to generate high rewards, such as liquidity mining incentives, rewards from lending protocols, rewards from native protocol staking, and more. This flexibility allows for the highest possible rewards to be earned for users.
Derivates are one of the most hyped and used platforms in the ecosystem. Considering the demand for ETH, I am sure that wstETH on Arbitrum can really make a huge boost to the Arbitrum ecosystem. As Arbitrum is one of the centers of DeFi innovation in the ecosystem, I believe we’ll see a wstETH derivative in the near future.
Lastly, I think that we need a CDP, a protocol that mints its own stablecoin using collateralized lending. wstETH can be used as collateral to issue its own stablecoin on the Arbitrum ecosystem which can improve liquidity.
Conclusion
In general, it can be analyzed that wstETH is a great tool to expand the utilities of stETH into the DeFi ecosystem, especially on L2s. There are several use cases for wstETH on the Arbitrum ecosystem ranging from DEXs to options. However, there is still more integration to be done. The future of wstETH on L2 protocols is bright and we are lucky to witness this process.
Bibliography
https://blog.lido.fi/steth-the-mechanics-of-steth/
https://blog.lido.fi/steth-defi-usecases/
https://blog.lido.fi/concerning-steth-liquidity/
https://blog.lido.fi/the-road-to-trustless-ethereum-staking/
https://lido.fi/lido-ecosystem
https://help.lido.fi/en/collections/3641672-lido-on-layer-2-l2#overview
https://docs.lido.fi/guides/steth-integration-guide/
