Auto-Compounding Pendle & Kelp yields with Factor Strategies

8 min readMay 20, 2024

Introduction To Restaking Auto-Compounded Yields

Restaking has recently seen an explosion of interest 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 means more options for yield generation based on differentiated risk profiles, it also adds significant complexity to what is already a very complex modular DeFi stack. Much of these complexities are hidden behind the scenes as users can easily interact with simplified dApp interfaces to gain exposure to such yield streams.

This article peels back the curtains and showcases how multiple DeFi primitives are combined to realize amplified yield for the Factor’s rsETH Auto-Compounder strategy.

Sit back and Discover how you can take advantage of the restaking narrative.

TLDR

By depositing into the Factor auto-compound vaults, users get easy access to multiple yield streams from all the underlying protocols.
Depositors also earn additional Kelp Miles and restaking points by providing liquidity to the Factor and Penpie contracts.
While the improved yields comes with greater risks, this is mostly limited to temporary ETH price depegs which should correct itself as all the ETH derivatives are ultimately redeemable for the underlying ETH on Ethereum mainnet.

Yield Sources + Points Multipliers

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

Additionally, depositors can also rack up point multipliers to supercharge their points accumulation therefore positioning themselves better to benefit from any future points-based giveaways.

Factor

Auto-compounded Yields: The Factor yield strategy periodically harvests all accrued liquidity incentives from the underlying protocols and reinvests the rewards into the position.
Reinvestment cycles are automated enabling amplified yields through more frequent compounding while socializing transaction costs.
Factor Protocol Emissions: Factor enables community-directed protocol emissions of up to 100,000 FCTR weekly to Factor Scale strategies. FCTR stakers can vote on the distribution of Factor emission rewards which is distributed amongst strategy depositors.
Direct Liquidity Incentives: Factor strategy depositors may also receive direct liquidity incentives via Factor Boost. Anyone can allocate any ERC20 token as additional rewards for depositors in a target strategies.
Kelp Miles Multiplier: Factor’s rsETH auto-compound strategy earns 2x Kelp Miles.

Penpie

Amplified Pendle Voting Power: Stake LP rsETH to earn boosted Pendle rewards via 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.
Kelp Miles Multiplier: Penpie’s rsETH pool earns 2.5x Kelp Miles.

Pendle

Discounted Principal Tokens: Pendle splits the principal (PT rsETH) and yield-bearing portion (YT rsETH) of rsETH thereby enabling depositors to acquire the principal portion of rsETH at a discount relative to the maturity date.
*Note that Kelp Miles accrues to Pendle YT rsETH holders and is therefore indirectly accounted for as an additional discount to PT rsETH (i.e. holders that do not want the uncertainty of yield and points just hold PT rsETH)
Market Making Fees: Receive swap fees on LP rsETH as PT rsETH is added as liquidity the Pendle rsETH/PT rsETH pool. The rsETH/PT rsETH pool enables the trading of yields with minimal impermanent loss due to PT rsETH value approaching rsETH 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).

Kelp

Restaking Yields: Earn additional restaking yields as underlying ETH is used to secure other applications in exchange for a fee. Kelp also simultaneously unlocks the liquidity of locked ETH on EigenLayer which has a 7 day withdrawal period.
Reward Market: Non-ETH rewards are availed to different yield strategies generating additional yield for rsETH holders.
Kelp Miles: rsETH holders earn Kelp Miles which tracks their contribution to the protocol. Miles enable the fair distribution of any future Kelp protocol rewards.
EigenLayer Restaking Points: rsETH holders will earn EigenLayer points in addition to Kelp Miles, as Kelp will be restaking on EigenLayer. Points enable the fair distribution of any future EigenLayer protocol rewards.

Lido

Execution Layer Reward Compounding: Lido reinvests any accrued Ethereum execution layer rewards (i.e. priority fees and MEV rewards) into setting up more validators. This enables more yield to accrue to 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

Given the number of protocols utilized in the strategy, various abstractions are required to facilitate the accessibility of such strategies for the average DeFi user.

Currently, users are still required to perform 3 separate actions before they can start earning auto-compounded yields on Factor. As the Factor interface continues to abstract more of these complexities behind the scenes, it is envisioned that all the following will eventually be packaged into a single step:

Source rsETH: Depositors must first obtain rsETH 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 stETH (or other liquid staked ETH tokens) on Ethereum Mainnet and bridge rsETH to Arbitrum via Stargate.
Exchange rsETH to LP rsETH: Depositors can convert their yield-bearing rsETH to the newly minted fixed income PT rsETH via Pendle. The PT rsETH is then used to market make on the rsETH/PT rsETH pool with the user receiving LP rsETH representing their share of the pool liquidity and accrued fees.
Deposit LP rsETH into Factor auto-compounder strategy: By allowing Factor to manage the LP rsETH, the yield harvesting and reinvestment can be automated thereby resulting in higher compounded yields.

The flowchart below provides a comprehensive overview of the process as well as showcases the yield sources for the rsETH 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, Kelp additional restaking yields. These yield sources all accrue to Kelp’s rsETH token.
Arbitrum Representation: rsETH is bridged to Arbitrum One via Stargate which supports native asset bridging.
Protocol Gauge Rewards: Pendle, Penpie, and Factor all 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 rsETH, 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, Kelp, Stargate, Pendle, Penpie, Factor, Uniswap, Balancer, Camelot.

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

Strategy Risk Considerations

Given that this restaking strategy revolves around ETH as the base asset, the majority of the risks are focused on assets or mechanisms which are derivatives of ETH. Note that all the protocols involved are permissionless hence 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. Nonetheless, market forces will likely balance out any short term swings as stETH is redeemable 1:1 for ETH on Lido.
Restaking (i.e. rsETH) depeg: In the case of rsETH depegging from it’s ETH reference asset, rsETH holders can redeem the underlying ETH 1:1 on the Kelp dapp. As long as withdrawal requests are honoured, any depegs are temporary.
Principal token depeg: PT rsETH is redeemable 1:1 for the accounting asset upon maturity. As such, any price deviations will be effectively nullified upon marutity. Note that PT rsETH holders can also decide to sell early if PT rsETH 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 Kelp approved services 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 hence are not automatically compounded. While this vesting period ensures Factor ecosystem sustainability, you will be exposed to the FCTR price during the vesting period. The FactorDAO has been implementing 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 protocols involved haverigorous audit and security practices in place.

Additional Reference

Assets Involved

ETH -> Core underlying asset
rsETH -> Kelp’s liquid restaked token which staking rewards accrue to. Primary token for depositing into Pendle.
PT rsETH -> The principal token of the Pendle rsETH pool representing the principal portion of the locked rsETH on Pendle
LP rsETH -> LP tokens representing share of Pendle rsETH 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 rsETH in Penpie
wETH -> Intermediary swap output token with deeper liquidity
esFCTR -> Factor vested emission rewards
Boost ERC20 rewards token -> Factor permissionless liquidity incentives