Auto-Compounding Pendle & Ether.fi yields with Factor Strategies

8 min readMay 16, 2024

Introduction To Restaking Auto-Compounded Yields

Restaking has recently surged in popularity as stakers rush to generate additional yield by taking on incremental slashing conditions on their staked ETH.

While restaking is still a relatively new DeFi primitive, protocols such as Pendle have already started to leverage the yield-bearing nature of restaked ETH to create a market for trading yield.

While these developments offer a broader spectrum of yield generation options tailored to varying risk preferences, it also adds significant complexity to an already complex modular DeFi stack. Much of these complexities remains obscured from users’ view, as they can seamlessly access simplified dApp interfaces to tap into these diversified yield streams.

In this article we will pull back the curtains and showcase how multiple DeFi primitives are combined to realise amplified yields for Factor’s weETH Auto-Compounder strategy.

Sit back and Discover how you can leverage the restaking narrative to your advantage.

TLDR

By depositing into the Factor auto-compounding strategies, depositors get easy access to multiple yield streams from all the underlying protocols.
Additionally they can also earn Ether.fi and Eigenlayer restaking points by providing liquidity to the Factor and Penpie contracts.
While the higher yields comes with greater risks, primarily temporary ETH price fluctuations, we can expect these to resolve itself as all ETH derivatives are ultimately redeemable for underlying ETH on the Ethereum mainnet.

Yield Sources + Points Multipliers

Factor’s weETH auto-compounding yield strategy with Ether.fi conveniently stacks yield from multiple protocols and sources to generate even greater returns on ETH.

Additionally, depositors have the opportunity to rack up point multipliers, positioning themselves better to capitalise from any future points-based giveaways.

Factor

Auto-compounded Yields: The Factor yield protocol periodically harvests all accrued liquidity incentives from the underlying protocols, and reinvests the rewards into the position. Reinvestment cycles are automated, maximising yields through frequent compounding while socialising transaction costs.
Factor Protocol Emissions: Factor enables community-directed protocol emissions of up to 100,000 FCTR weekly to Factor Scale vaults. FCTR stakers can vote on the distribution of Factor emission rewards which is distributed amongst strategy depositors.
Direct Liquidity Incentives: Factor strategy depositors can also receive direct liquidity incentives via Factor Boost. Anyone can allocate any ERC20 token as additional rewards for depositors in a target strategy vaults.
Ether.fi Loyalty Points Multiplier: Factor’s eETH auto-compound strategy allows depositors to earn additional Ether.fi points.

Penpie

Amplified Pendle Voting Power: LP eETH stakers earn boosted Pendle rewards through amplified Penpie voting power. Penpie shares its yield-boosting benefits with liquidity providers on the protocol.
Penpie Protocol Emissions: Penpie allocates PNP emissions to liquidity providers on target pools on Penpie.
Penpie Bribery Market: Benefit from the Penpie Bribery Market for boosted emission influence.
Ether.fi Loyalty Points Multiplier: Penpie’s eETH pool earns 2x Ether.fi points.

Pendle

Discounted Principal Tokens: Pendle splits the principal (PT eETH) and yield-bearing portion (YT eETH)of weETH thereby enabling depositors to acquire the principal portion of weETH at a discount relative to the maturity date.
*Note that Ether.fi points accrues to Pendle YT eETH holders and is therefore indirectly accounted for as an additional discount to PT eETH (i.e. holders that do not want the uncertainty of yield and points just hold PT eETH)
Market Making Fees: PT eETH liquidity providers receive swap fees in Pendle’s weETH/PT eETH pool. The weETH/PT eETH pool enables the trading of yields with minimal impermanent loss due to PT eETH value approaching weETH value on maturity.
Pendle Protocol Emissions: Receive boosted liquidity incentives as staked PENDLE (via Penpie) is used to direct Pendle weekly emissions (weekly emission as of Oct-2022 is 667,705 with a 1.1% decrease each week until April 2026).

Ether.fi

Restaking Yields: Depositors earn additional restaking yields as underlying ETH is used to secure other applications in exchange for a fee. Ether.fi also simultaneously unlocks the liquidity of locked ETH on EigenLayer which has a 7 day withdrawal period.
Ether.fi Loyalty Points: eTH/weETH holders earn Ether.fi loyalty points which tracks their contribution to the protocol. Points enable the fair distribution of any future Ether.fi protocol rewards.
EigenLayer Restaking Points: eETH/weETH holders earn EigenLayer points in addition to Ether.fi Loyalty Points (as Ether.fi will be restaking on EigenLayer). Points enable the fair distribution of future EigenLayer protocol rewards.

Lido

Execution Layer Reward Compounding: Lido reinvests accrued Ethereum execution layer rewards (i.e. priority fees and MEV rewards) into setting up more validators, increasing yield for stETH holders.

Ethereum

Consensus Layer Rewards: By staking ETH to secure the PoS network, stakers get rewarded for the honest sequencing and validation of new blocks. These rewards take the form of attestation, block proposal, and slashing.
Execution Layer Rewards: ETH stakers may also generate additional yield through Priority Fees (tips) or MEV Rewards.

Behind The Scenes

To make the strategy accessible to the average DeFi user, various abstractions are necessary due to the multitude of protocols involved.

Currently, users must complete three separate actions before earning auto-compounded yields on Factor. As Factor’s interface continues to abstract more complexities behind the scenes, the goal is to eventually consolidate these steps into a single process:

Source weETH: Depositors need to acquire weETH on Arbitrum. The easiest way to do this is via a swap on DEXs (e.g. Camelot, Uniswap, etc.) or Aggregators (1inch, KyberSwap, etc.). Alternatively, depositors can stake ETH/stETH on Ethereum Mainnet and bridge weETH to Arbitrum.
Exchange weETH to LP eETH: Depositors can convert their yield-bearing weETH to the newly minted fixed income PT eETH via Pendle. PT eETH is then used for market making on the weETH/PT eETH pool, with users receiving LP eETH representing their share of pool liquidity and accrued fees.
Deposit LP eETH into Factor auto-compound vault: By allowing Factor to manage the LP eETH, the yield harvesting and reinvestment can be automated, resulting in higher compounded yields.

The flowchart below provides a comprehensive overview of the process and highlights the yield sources for the weETH strategy.

There are a few important things to take note of:

Ethereum (Re)Staking Yield: All the yield for restaked ETH is captured on Ethereum mainnet. This includes: Ethereum PoS rewards, Lido execution layer rewards compounding, Ether.fi additional restaking yields. These yield sources all accrue to Ether.fi’s eETH rebase token.
Arbitrum Representation: Wrapping eETH into its non-rebase weETH representation enables restaked ETH to be used in DeFi protocols, including bridging to Arbitrum One.
Protocol Gauge Rewards: Pendle, Penpie, and Factor each implement their own community-directed emissions which enable greater yields through boosted votes and various bribery markets.
Yield Tokenization: By wrapping yield-bearing tokens such as weETH, Pendle is creating a market for yield trading. This creates the opportunity to earn fixed yields with minimal market making risks.
Yield Harvesting Orchestration: Factor automates the reinvestment and compounding of yield which would otherwise require multiple manual transactions: harvest yield, swap reward tokens for pool tokens, add pool tokens to position.
Protocol Fees: Each protocol utilized is in charge of setting its own set of fees: Lido, Ether.fi, Pendle, Penpie, Factor, Uniswap, Balancer, Camelot.

By combining the various DeFi building blocks above, the Factor Ether.fi Auto-Compounder strategy is able to reliably amplify ETH restaking yields via just a single deposit on the Factor dapp.

Strategy Risk Considerations

As this restaking strategy centers around ETH as the base asset, the primary risks are associated with assets or mechanisms that are derivatives of ETH. It’s important to note that all protocols involved are permissionless, ensuring that ownership of your asset is never transferred throughout the process.

Liquid staking (i.e. stETH) depeg: Given the ubiquity of stETH, depeg risks are minimal but not impossible. However, market forces typically stabilize short-term fluctuations as stETH is redeemable 1:1 for ETH on Lido.
Restaking (i.e. eETH/weETH) depeg: In the case of eETH/weETH depegging from it’s ETH reference asset, eETH/weETH holders can redeem the underlying ETH 1:1 on the Ether.fi dapp. As long as withdrawal requests are honoured, any depegs are temporary.
Principal token depeg: PT eETH is redeemable 1:1 for the accounting asset upon maturity. As such, any price deviations will be effectively nullified upon marutity. Additionally, PT eETH holders can also decide to sell early if PT eETH ever goes above the peg.
Slashing of stake: In addition to the base slashing rules implemented by the base Ethereum PoS, restaked ETH also adopts Ether.fi slashing rules. As such, restaked ETH gains incremental slashing risks with every additional application secured.
Vesting Of Rewards: Factor Scale rewards are linearly vested as esFCTR over 90 days, and hence are not automatically compounded. While this vesting period ensures Factor ecosystem sustainability, stakers will be exposed to the FCTR price during the vesting period. The FactorDAO implements long term tokenomic incentives to ensure the growth and evolution of a resilient platform via an actively involved community.
General smart contract vulnerabilities: The above strategy makes use of multiple DeFi contracts spread across both Ethereum and Arbitrum. Every contract within this process introduces additional risks. However, all involved protocols adhere to rigorous audit and security practices.

Additional Reference

Assets Involved

ETH -> Core underlying asset
eETH -> Ether.fi natively restaked rebase token
weETH -> Non-rebase version of eETH which staking rewards accrue to. Primary token for depositing into Pendle
PT eETH -> The principal token of the Pendle eETH pool representing the principal portion of the locked weETH on Pendle
LP eETH -> LP tokens representing share of Pendle eETH liquidity pool. Used for depositing on Penpie
PENDLE -> Governance token of Pendle. Distributed as farming rewards for providing liquidity on Pendle (via Penpie).
PNP -> Governance and revenue-sharing token of Penpie. Distributed as farming rewards for staking LP eETH in Penpie
wETH -> Intermediary swap output token with deeper liquidity
esFCTR -> Factor vested emission rewards
Boost ERC20 rewards token -> Factor permissionless liquidity incentives