Discover the advantages of hedging a Liquid Staking Token. New Asset available on MetalSwap’s dApp on Linea Chain
Originally written on MetalSwap’s Official Blog: Use Case — Hedging Liquid Staking Token
MetalSwap has recently released its hedging contracts on the Linea blockchain, introducing wstETH as the first asset for hedging operations. WstETH is the wrapped version of the liquid staking token of ETH from Lido, a leading dApp in this sector. In today’s article, we explore the advantages of integrating this asset within MetalSwap dApp.
Different liquid staking token?
The liquid staking sector has seen significant growth since Ethereum transitioned to the Proof of Stake block validation algorithm. In essence, dApps like Lido enable users to engage in ETH staking, actually providing returns of around 3–4%, without locking up their funds. Users staking through liquid staking dApps receive a receipt, in the form of another token, representing the locked staking position. StETH is undoubtedly the most well-known and capitalized liquid staking token, while wstETH is a “wrapped” version of it, again issued by Lido. Unlike regular stETH, wstETH is not a rebase token, meaning its supply does not increase constantly day by day, but it uses a different mechanism for the revenue share of the staking rewards.
How wstETH actually works?
As mentioned earlier, unlike stETH, wstETH is not a rebase token. Instead of increasing the token supply based on staking rewards, wstETH, being a wrapped version, increases in value compared to the underlying asset it mirrors, namely ETH and stETH. This approach simplifies integration with dApps like MetalSwap, as the constant supply increase of rebase tokens poses integration challenges. Currently, wstETH trades at a higher price than ETH, around $2575 compared to ETH’s approximately $2250. This price difference is due to the accumulated rewards over time, and it is expected to widen as time progresses.
Liquid staking token on MetalSwap
There are numerous advantages to having a liquid staking token within the hedging dApp. Firstly, in the short term, this token exhibits a price action comparable to ETH, allowing for all the various use cases that the team had discovered in the past months.
Secondly, for long-term positions, wstETH is likely to outperform the underlying asset, offering better returns over time. As mentioned earlier, there is already a price difference between the two assets, and it is expected to increase due to the underlying rewards mechanism.
Thirdly, for those engaging in liquidity providing operations, offering a token like wstETH within the dApp and earning dual rewards from ETH staking and MetalSwap dApp liquidity reward becomes more enticing than depositing ETH alone.
Risks
While there are clear advantages to exposure to an asset that will likely outperform its underlying, it’s essential to be aware of potential risks. The first is placing trust in an intermediary that locks ETH and issues the receipt token. In this case, Lido is the leading and most capitalized dApp in this sector, but it adds an extra layer of risk compared to holding “free” ETH.
Another risk is the possibility of the staking revenue share mechanism encountering issues and becoming unavailable for an indefinite period. As mentioned earlier, this solution involves reliance on an intermediary.
The final risk is the depegging of the two assets, where wstETH, for any reason, loses its reference to the underlying asset stETH.
A new era for MetalSwap
MetalSwap’s debut on the Linea blockchain marks the beginning of a new era for this protocol, utilizing its smart contracts on zero knowledge technology for the first time. The initial days of this venture have been explosive, with MetalSwap participating in the DeFi Linea Voyage, gathering over 3500 hedging positions within the first days of this campaign and reaching the 17th position in the gas guzzlers rank on the Linea Mainnet. This outstanding record demonstrates that MetalSwap’s DAO has chosen the right path.
-The DeFi Foundation
✎ What is MetalSwap?
MetalSwap is a decentralized platform that allows Hedging Contract on financial markets with the aim of providing coverage to those who work with Digital Asset and an investment opportunity for those who contribute to increase the shared liquidity of the project. Allowing the protection for an increasing number of operators.
With Hedging Contract we enable hedge swap transactions through the use of Smart Contracts, AMM style.
It’s great to Hedge the Risk of Price volatility with MetalSwap dApp !
