In the world of decentralized finance (DeFi), observing the strategies of large holders—often called "whales"—can provide valuable insights. One popular approach involves using DAI to achieve a high annual percentage yield (APY) of up to 8%, effectively "eating multiple fish with one catch" by maximizing returns from multiple steps. Here’s how it works and how you can evaluate it for your portfolio.
Understanding the Multi-Step Yield Strategy
This strategy combines several DeFi protocols to amplify returns on Ethereum-based assets. It involves staking, borrowing, and depositing in a sequence designed to generate additional yield without immediately selling your holdings.
Step 1: Staking ETH on Lido
Begin by staking your ETH on Lido, a liquid staking solution. This process converts your ETH into stETH (staked ETH), which accrues staking rewards. The current approximate yield for this step is around 4% APY. This maintains your exposure to ETH’s potential appreciation while earning rewards.
Step 2: Wrapping stETH into wstETH
Next, wrap your stETH into wstETH (wrapped stETH) using Lido’s wrapping tool. This wrapped version is more compatible with various DeFi protocols, allowing you to use it as collateral in lending platforms without losing staking benefits.
Step 3: Using wstETH as Collateral on MakerDAO
Deposit your wstETH into MakerDAO’s Spark Protocol. This allows you to borrow DAI against your wrapped stETH. The borrowing process involves:
- Assessing the collateral value of your wstETH.
- Determining the borrowable amount (e.g., up to ~68% of the collateral value).
- Noting the borrowing cost, which is approximately 3.19% APY.
Step 4: Depositing DAI into the DSR
Finally, take the borrowed DAI and deposit it into MakerDAO’s DSR (Dai Savings Rate) module. This currently offers an APY of about 8%. By doing this, you earn savings interest on the borrowed DAI.
Calculating the Net Yield
To understand the overall benefit, consider the following calculations:
- ETH staking yield: ~4% (from Lido).
- Borrowing cost for DAI: -3.19% (paid to MakerDAO).
- DSR earnings on DAI: +8% (earned from savings).
The net yield on the borrowed portion is approximately 4.81%. However, since you’re only borrowing against a portion of your collateral (e.g., 68.4%), the effective additional yield on your total capital is around 3.29%. This is a gain on top of your base ETH staking rewards.
Key Considerations and Risks
While this strategy can enhance returns, it’s not without risks. Here are important factors to keep in mind:
- Liquidation risk: If the value of your collateral (wstETH) drops significantly, you could face liquidation. Always maintain a safe collateral ratio far from the liquidation threshold.
- Gas fees and costs: Each transaction (staking, wrapping, borrowing, depositing) incurs network fees. These can eat into profits, especially for smaller amounts.
- Smart contract risk: All DeFi protocols involve some level of smart contract risk. Use audited and well-known platforms.
- Yield variability: APYs for staking, borrowing, and savings can change based on market conditions. Monitor rates regularly.
This approach is generally more suitable for larger portfolios due to the complexity and fixed costs involved. For smaller amounts, the net gains might not justify the effort and risks.
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Frequently Asked Questions
What is the main benefit of this strategy?
It allows you to earn additional yield on your Ethereum holdings without selling them. You benefit from staking rewards and savings interest simultaneously.
Is this strategy safe for beginners?
It involves multiple steps and risks, including liquidation and smart contract vulnerabilities. It’s better suited for experienced users with a solid understanding of DeFi.
How often do the APY rates change?
Rates for staking, borrowing, and savings can fluctuate based on supply, demand, and protocol governance. Check current rates before executing.
Can I use other assets besides ETH?
The strategy specifically relies on ETH/stETH due to its integration with Lido and MakerDAO. Other assets might have different processes and yields.
What happens if ETH price drops sharply?
A significant price drop could trigger liquidation of your collateral. Always use a conservative borrowing ratio to buffer against market volatility.
Are there alternatives to this approach?
Yes, other yield farming and lending strategies exist. Compare APYs, risks, and compatibility with your assets before deciding.