Balancer Leads the Yield Bearing Token Revolution
Learn how users can earn further yields on staked ETH, benefiting both projects and the Protocol.
The Ethereum Upgrade or "Merge" is on the horizon, eliminating the need for energy-intensive mining and instead will secure the network using staked ETH. There's a surplus of coverage surrounding one of the most significant upgrades in the history of Ethereum. So a quick refresh is sufficient.
- The Ethereum network will go from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism
- The current Ethereum Mainnet will merge with the Beacon Chain proof-of-stake system.
- The Merge will reduce Ethereum's energy consumption by ~99.95%
- The upgrade sets the stage for future scaling upgrades, including sharding
Staking Post Merge
While lower costs to secure the network and lower energy consumptions are benefits of the awaited Merge, staking is one of the most anticipated features of the upgraded Ethereum network.
Current requirements to stake are pretty steep at 32 ETH. However, there are several projects, such as Rocket Pool and Lido Finance, that are creating solutions for users with fewer ETH to be able to participate.
The ETH 2.0 upgrade was targeted to occur in June with community projections of 12% to 15% APYs for staking post Merge. The date has since changed, with metrics pointing to slightly lower staking yields once the Merge takes place.
11.5 million ETH, or 9.5% of Ether's circulating supply, is currently locked within the staking contract. While the growth of the amount of ETH staked makes the network more secure, it also means that the rewards received for protecting the network decrease proportionally.
Factors affecting staking APYs post Merge
- Amount of ETH staked
- Ethereum fees
- Percentage of fees burnt
Current projections for ETH staking APR are likely to be within 9–12%. While percentages are lower, they reflect the maturation of Ethereum, which has over $35 billion staked. This also provides greater security and longevity to the blockchain.
Breaking Down WETH, stETH, wstETH
Ethereum's native token isn't ERC-20 compliant, so it needs to be made compatible. The process by which ETH is converted to an ERC-20 is called "wrapping." Note: WETH is tradable for ETH on a 1:1 basis at all times.
32 ETH is required to stake Ether. To mitigate such costs, staking pools like Lido Finance let users combine their ETH and stake it with a validator. When you stake ETH with Lido, you receive tokens representing your staked ETH position.
These tokens are redeemable for ETH on a 1:1 basis after the Merge.
Note: These tokens aren't necessarily tradable for ETH on a 1:1 basis before the Merge as their value is subject to natural market conditions. stETH isn't pegged to ETH, and the token is backed by time-locked ETH. Reasons stETH could trade under ETH's current market price include:
- Systemic risks (smart contract or validator)
- The Merge execution risk
Wrapping stETH creates a DeFi-compatible version of the stETH token, which allows for easier integrations with DeFi protocols, including Balancer. Through Balancer, users can provide wstETH as liquidity to the respective Pool to earn trading fees and additional incentives.
For context, Lido is the largest liquid staking protocol. By allowing traders and LPs to tap into Lido's $6.32 Billion TVL, Balancer is a top destination for liquid staked ETH liquidity, facilitating between Ether and Staked Ether to offer liquidity for stakers securing the Ethereum Network.
Recently, Lido joined the L2 '22 Summer by launching stETH on Layer 2 networks Optimism and Arbitrum. Users can stake ETH with lower fees and use stETH assets across DeFi.
Balancer's technology is deployed across L2s, including Arbitrum and Optimism, further strengthening its offerings for liquid staked ETH liquidity and is equipped to support Lido's launch of wstETH on Layer 2's.
How exactly can Balancer users earn further yields on staked ETH?
Through MetaStable Pools.
MetaStable Pools are great for tokens with highly correlated, but not hard-pegged, prices. Because of this, MetaStable Pools are especially well suited to handle pegged tokens that gradually accumulate fees.
Wrapping rebasing tokens, such as stETH, makes them compatible with Balancer, but knowing the exchange rate between the underlying rebasing token and the wrapped token is necessary to facilitate Stableswap trades. Rate Providers are contracts that provide an exchange rate between two assets. These exchange rates can come from any on-chain source. For a Direct Balance Query like stETH, the wstETH rateProvider has a getRate() function that calls wstETH’s own stEthPerToken() function.
What differentiates Balancer from other DEXs are rate providers, which update the price of wstETH as it earns staking yield. By using rate providers, through MetaStable Pools, both Lido and RocketPool LPs can collect that yield instead of arbitragers.
Liquid Staked Eth Use Cases
Balancer wstETH/ WETH Pool
The wstETH/WETH Pool, with Lido Finance, allows users to stake their ETH — without locking assets or maintaining their own infrastructure. The wstETH/WETH Pool solves problems associated with initial ETH 2.0 staking: illiquidity, immovability, and accessibility. By making staked ETH liquid, users can stake ETH with any amount.
The wstETH/wETH Stable Pool TVL remained the largest at the end of the quarter, with over $200 Million in TVL.
Q2 trading in the wstETH/WETH Pool was dominated by large users. Almost all of the volume was attributable to wallets that executed more than $1 million in volume in the quarter.
Balancer's rETH/WETH Stable Pool
ETH staking protocol, RocketPool lowers both the capital and hardware requirements for staking on ETH 2.0. Balancer's rETH/WETH Stable Pool TVL has grown considerably in the past few months. Mere speculation, this growth could be attributed to the pending September Merge date to PoS.
Currently, Balancer holds the most rETH/WETH liquidity over other major DEXs.
Balancer applies the Protocol fee, which currently sits around 50%, to the staking yield making Balancer the optimal destination for liquid staked ETH. A large part of Balancer's revenue is directly tied to the fees earned on ETH staking yields.
Let's get into some numbers.
At the time of writing, Balancer collected $120k in protocol fees from the wstETH Pool. For context, each round is two weeks. The total revenue collected that round was $489k. wstETH is currently the highest fee-earning Pool by revenue.
As Ethereum switches from PoW to PoS, the amount of staked ETH will increase with a bullish consensus on ETH staking yields post Merge. The wstETH/wETH and rETH/WEST Pools already position Balancer as a top destination for liquid staked eth liquidity. Balancer plans to expand usage of wstETH beyond Pools, benefiting both projects and the Protocol. The future of liquidity providing is incorporating yield bearing tokens, and Balancer views staked ETH as the most natural first step in this evolution.