LSTs and leveraged staking strategies

There are huge demand for LSTs and leverage staking in Defi. LSTs and leveraged staking strategies are now available in Starlay Finance! Check out this article and find out the best way to utilize this feature!

Popularity of LSTs

In the Ethereum ecosystem, Liquid Staking Tokens (LSTs) are rapidly gaining popularity, signaling a shift in DeFi practices and capital efficiency. The LST market has seen substantial growth, particularly post-merge, with its value reportedly in the billions. These tokens provide Ethereum stakes with liquidity options that were previously unavailable, allowing them to engage in additional DeFi activities while earning staking rewards. This has been a game-changer, particularly for liquidity providers (LPs) who can now utilize their staked assets more flexibly across DeFi protocols.

Starlay Finance aims to capture this surging demand within the Polkadot ecosystem by integrating LSTs and leveraged staking strategies similar to those found in the Ethereum space. By providing users with the opportunity to stake assets and maintain liquidity, Starlay is revolutionizing the interaction between Polkadot users and DeFi platforms.

Popular LSTs in the Polkadot ecosystem

In the Polkadot ecosystem, the emergence and popularity of Liquid Staking Tokens (LSTs) associated with DOT are pivotal. DOT, as the native token of Polkadot, has inspired the creation of several LSTs, underscoring the ecosystem’s commitment to innovative staking solutions.

Notable among these are Acala’s LDOT and Bifrost Finance’s vDOT. LDOT by Acala allows users to stake their DOT and receive a liquid token in return, maintaining their liquidity while earning staking rewards. This innovative approach has been well-received in the Polkadot community. Similarly, vDOT from Bifrost Finance offers a standardized, interest-bearing liquid staking token, enhancing the flexibility and utility of DOT across multiple chains. These tokens have been instrumental in driving a range of DeFi activities, from collateralization to yield farming, meeting the growing demand for efficient and flexible staking solutions.

Following these, Astar Network’s contributions to nASTR and vASTR further enrich the Polkadot ecosystem’s LST offerings. These tokens, tailored to Astar’s specific requirements, are designed to provide similar benefits — liquidity and staking rewards — within Astar’s DeFi environment.

LDOT Structure

Since our launch on the Acala Network, we have been utilizing LDOT for leverage staking. Let’s delve into the structure of LDOT.

Understanding the full potential of LDOT requires a comprehension of its core principle — staking DOT, the native cryptocurrency of Polkadot. Staking DOT means locking your tokens to support network security and, in return, earning rewards. This concept has consistently been popular in Proof-of-Stake networks. With the growing popularity of staking, centralized exchanges began offering staking services, addressing the limitations of staking directly on the relay chain. They introduced “one-click staking” to provide a more convenient and flexible way for users to contribute to network security, while also reducing the 28-day unstaking period.

LDOT to DOT Ratio

When LDOT was initially launched, the exchange rate between DOT and LDOT was set at 1:10. This meant that for every 1 DOT staked, users would receive 10 LDOT. As of now, the exchange rate has evolved to 7.4, implying that the initial 10 LDOT are now equivalent to 1.35 DOT, and this value is expected to keep increasing. This exchange rate is determined internally by the protocol based on the staking rewards accumulated and is independent of market conditions, such as the listing prices of LDOT.

For more information, you can visit: https://medium.com/acalanetwork/the-rising-appeal-of-ldot-acalas-liquid-staking-token-2791d0c4283f

Leveraged DOT staking on Starlay

How the Yield is created and the formula for leveraged APY

The potential of this strategy lies in the difference between the staking yield that LST offers and the DOT borrowing rates on various lending protocols. The formula for calculating the staking reward is as follows:

Leveraged Staking Yield =
Leverage × (LST APY — Borrow interest rate of underlying token on Starlay)

In the case of LDOT,
Leverage × (LDOT APY — DOT Borrow Interest Rate on Starlay)

※ Leverage can be calculated as 1/(1-LTV).

How Leverage Staking Function Works

The purpose of leverage is to increase LDOT exposure by borrowing DOT, but this requires repeatedly converting borrowed DOT into LDOT and increasing LDOT deposits. The appeal of leverage staking is that it eliminates the need for repeated transactions and can be completed with one click. To understand this, I have prepared a simple simulation.

Let’s assume:

• 10 LDOT = 1 DOT
• User holding = 10 DOT
• LTV = 30% (Maximum leverage is 1/(1-LTV), which is 1.42x).

In the case of manually applying maximum leverage to enjoy LDOT’s APY:

• Convert 10 DOT to 100 LDOT
• Deposit 100 LDOT
• Borrow 3 DOT (equivalent to 30 LDOT)
• Convert 3 DOT to 30 LDOT
• Deposit 30 LDOT
• Borrow 0.9 DOT (9 LDOT)
• Convert 0.9 DOT to 9 LDOT
• Deposit 9 LDOT
• Borrow 0.27 DOT (2.7 LDOT)
• Repeat this process

Through this process, the Deposited LDOT = 139 LDOT and the initial holding is 100 LDOT, so the leverage is 1.39x (you can repeat it more and get close to 1.42x).

Alternatively, with our leveraged staking (flashloan), you can apply Max leverage in one click, saving both time and gas fees.

• Borrow 14.2 DOT
• Convert 14.2 DOT to 142 DOT
• Deposit 142 LDOT
• Borrow 4.2 DOT (42.6 LDOT)
• Repay 14.2 DOT
• Deposited LDOT = 142 LDOT and the initial holding is 100 LDOT, so the leverage is 1.42x

Here’s an example of executing a single transaction to establish a 1.9x leveraged LDOT position on Starlay calculated with actual figures. Suppose a user has 100 DOT, with LDOT’s LTV at 50%, and 1 LDOT equivalent to 0.14044 DOT. The outcome would be a position where 1068 LDOT is used as collateral and 90 DOT is borrowed, even though the user initially has only 100 DOT, which is equivalent to 562 LDOT, consequently, the user can deposit 1068 LDOT.

This process requires using LDOT as collateral to borrow DOT, and then minting the borrowed DOT into LDOT. This cycle needs to be repeated. However, today, we are excited to introduce our new dedicated dashboard for 1-click leveraged LDOT staking! The new leveraged DOT staking dashboard will be available here: https://acala.starlay.finance/app/evm/makai. You can now complete the process shown in the above image with just one click.

Start Leverager

Currently, you can perform leverage staking of LDOT using either DOT or DOT(position). DOT transactions are initiated from your wallet, while DOT(position) transactions are made using the DOT you have deposited. After choosing between DOT or DOT(position), you select the amount you wish to supply. Then, considering that the current LTV for LDOT is 50% and there are costs associated with minting and flash loans, the leverage can be set up to 1.9x.

After making all selections, the post-leverage staking state is displayed, showing Collateral, Debt, Health Factor, and Net APY. Below is a clarification of these terms:

• Collateral: The amount of LDOT deposited
• Debt: The amount of DOT borrowed
• Health Factor: Triggers liquidation. If it falls below 1, the position becomes subject to liquidation. Learn from here
• The Net APY: The sum of the yield from leveraged staking
• YoY Return: The expected yearly return of this position based on the current conditions of DOT borrow rate and staking rewards from LDOT

Once all parameters are set, you have the ability to review the liquidation price, current price, and the percentage off-peg to liquidation. Below is a clarification of these terms:

• Liquidation Price: This is the ratio of LDOT to DOT at which your position would descend below the liquidation threshold.
• Current Price: This refers to the ongoing ratio between LDOT and DOT.
• Off-peg % to Liquidation: This indicates the percentage by which the LDOT to DOT price ratio would need to decline for your position to be liquidated.

We’ve developed a graph to check your position to avoid liquidation. You can now access historical data for the aforementioned information. If the exchange rate falls below the liquidation price, there’s a potential for liquidation. The off-peg % to liquidation shows how much the price of LDOT needs to decrease in comparison to DOT for liquidation to occur.

When the ‘Start Leverager’ is pressed, a transaction is executed and a position is created. This can be verified from the dashboard. If you check the flow on the bottom left, you’ll notice that 134.27 LDOT are wrapped, and as shown in the image below, 134.27 LDOT are deposited. With this, the leverage staking process is complete.

Check your position

Once you establish your LDOT position through leveraged staking, you can monitor it in the “My stats” section. Here, you can view your Total Staked LDOT and the APY of your position. Additionally, you can assess the conditions under which your position would be liquidated using our graph. To illustrate with the image below, as long as the price of LDOT does not decrease by more than 14.13% relative to DOT, liquidation will not occur. As the graph demonstrates, given the nature of LDOT, there is no need to worry about liquidation.

Close Leverager

Next, ‘Close Leverager.’ This function allows you to repay the borrowed DOT amount and withdraw LDOT. Simply click on CLOSE LEVERAGER. This action will use the DOT in your wallet to repay the loan, and LDOT will be transferred to your wallet. It’s important to note that you need to have at least the amount of DOT in your wallet that you borrowed for leverage staking. In this case, since you are leveraged staking 10 DOT at 1.9x, you need to have at least 9 DOT in your wallet.

When you press ‘Close Leverager,’ a transaction is initiated, and once the transaction is completed, LDOT will be in your wallet. Currently, closing the leverager is only possible using DOT from within your wallet, but we are in the process of developing a feature that will soon allow closing the leverager with DOT (from position) as well.

LDOT Staking reward APY and DOT borrow rate

Leverage staking is significant because it follows the formula: Leverage Staking Yield = Leverage × (LST APY — Borrow Interest Rate of Underlying Token on Starlay). This makes the Leverage, LST’s APY, and the borrow interest on Starlay critical components. Currently on Starlay, the LTV for LDOT is set at a fixed 50%. If we assume LDOT’s APY to be 15.87%, then the borrow rate and maximum APY become variable. The APY ranges from 13.05% to 30.04% with a DOT borrow rate varying from 0.06% to 9%.

LDOT Staking reward APY and DOT borrow rate

Also soon we’re planning to increase the LTV for LDOT. Once we adjust the LTV to higher percentages for LDOT, you could see APYs ranging from 30.54% to an impressive 305.4% at LTVs between 50% and 95%.

Further development

Setting the LTV for LDOT between 90%-95% entails high risk, so at Starlay, during Q1, we are considering implementing an efficiency mode similar to Aave’s High-Efficiency Mode (E-mode): This efficiency mode enhances capital efficiency for assets with correlated prices, such as LDOT pegged to DOT. When users supply LDOT in efficiency mode, they gain increased collateral power for borrowing assets like DOT. In E-mode, only assets from the same category (e.g., LST and its underlying token) can be borrowed, enabling LTVs up to 90–95%.

Risk

Leveraged staking comes with increased risks, including market volatility and potential liquidation. Users must assess their risk tolerance and the stability of the underlying assets when considering leveraged strategies. Follow the discussions and insights on this topic on platforms like Twitter for real-time updates and community feedback.

Conclusion

Engaging in leveraged staking on Starlay Finance offers potential benefits but comes with its own set of risks. It’s essential to make informed decisions based on thorough research and personal judgment. As always, your comments and feedback are invaluable to us, and we are here to support you in navigating this exciting yet complex world of DeFi.

Please feel free to join us in our discord where we’d love to hear all your comments, feedback, and suggestions, and you’ll always find us available for any questions or assistance needed.