Introduction to LSD
Who here likes LSD? No, not that kind… I’m talking about Crypto LSD, called Liquid Staking Derivatives. Liquid Staking Derivatives is an advanced strategy that crypto users utilize to be able to generate compounding interest rates. Now, that all sounds really complex and fancy, but I promise you, it’s really not. It’s incredibly simple.
So, let’s break down Liquid Staking Derivatives
What Is LSD
In short, the Ethereum Blockchain is powered by a network of Validators. These validators are powered the Ethereum Token itself. To power a validator, Users must deposit their own ETH, with the promise of earning interest on that deposit.
The user is the individual who provides the staking token (ETH) as a deposit.
In this case, users are supplying the Ethereum Token, which powers the Ethereum Blockchain, into a Liquid Staking Smart Contract.
Liquid Staking Smart Contract
In a manual situation, this step would be missing, and users would deposit their Ethereum straight into the Validators. This is where LSD begins to play. The Liquid Staking Smart Contract acts like a bank. When a user deposits their Staking Token into the smart contract, it will deposit these tokens into the Validator and record a receipt of this transaction. All the interest generated by the Validators will be returned to the Smart Contract, not to the user directly. This mediary action allows the LSD Smart Contract to create and return Derivative Tokens to the user who supplied the Staking Tokens.
When the user supplies a Staking Token to the LSD Smart contract, they will receive an identical (1:1) amount of Derivative Tokens in return. In this case, the Derivative Tokens are Staked Ethereum (stETH). Staked Ethereum has a recognized identical (1:1) value to the original Ethereum it represents. This is because in order to recover the original Ethereum, Users must return the Staked Ethereum back to the Liquid Staking Smart Contract.
To participate in Ethereum Staking, Users are required to deposit their Ethereum into a Validator. These Validators promise to return interest to the User. The LSD Smart Contract acts as the depositor into the validator.
Generating Interest with Staked Ethereum
Because users receive stETH from the LSD Smart Contracts, many DeFi lending platforms have begun to recognize stETH as having the same value as ETH. This provides an opportunity for stETH users to deposit their tokens as collateral, earning an additional interest rate provided by the lending platform.
That’s not all! Having collateral grants users with the ability to borrow additional ETH against their stETH deposits. You may start to see where this is going. Users can now deposit these borrowed ETH tokens into an LSD Smart Contract, which will grant more stETH tokens, take these stETH tokens back to the lending platform, deposit them as collateral, and borrow even more ETH against them. This process can be repeated near infinitely to be able to keep stacking additional interest reward rates. This is known as yield farming.
Automating this process with CIAN
Trying to execute LSD manually requires users to undergo an absurd amount of steps and button clicks, which can slow down the process and provide an increasing room for error with each cycle. To make LSD Yield Farming easy for the user, CIAN is providing its own proprietary automation tools to the public FOR FREE. That’s right, CIAN does not charge any fees for using their automation tools!
CIAN uses a strategy that takes advantage of AAVE v2 lending markets and flashloans. Within AAVE, users are allowed to deposit their tokens as collateral to earn interest. In turn, they may borrow other users tokens, being required to pay interest on this loan. Flashloans are an interesting tool that allows users to take out a loan without any collateral as long as the loan is paid back within one block, which is too short of a time for a person to manually execute.
CIANs automation tools are able to execute the following steps within one single block:
Stake Original ETH into LSD Smart Contract in exchange for stETH Derivative Token
Flashloan a pre determined amount of ETH based on the User's desired leverage.
Stake Flashloaned ETH into LSD Smart Contract in exchange for additional stETH
Deposit stETH from steps 1 and 3 into AAVE v2 Lending Market
Borrow ETH using deposited stETH as collateral
Use Borrowed ETH to repay flashloan from step 2.
During this process, users are able to add layers of interest to their original ETH from steps 1, 3, and 4, at whatever leverage they choose.
Mitigating Risk with CIAN
LSD is not a risk free strategy, especially when using leverage. Because AAVE interest rates are determined by the tokens utilization rate within the platform, the interest that is required to pay a loan, or borrowing action, may exceed the interest generated from supplying collateral and staking. If this were to occur, CIAN provides notification tools to alert users with insight as to when they may need to close their position. CIAN is also able to automate the action of Flash Repaying in the event stETH were to depeg. This prevents users from being liquidated as their loans rely on stETH and ETH remaining 1:1 in value.
-LSD is a crypto strategy that lets users generate layers of interest on their ETH.
-LSD Smart Contracts provide users with the ability to receive stETH, which is 1:1 to ETH in Value
-CIAN Provides Automation tools that allow users to take advantage of LSD opportunities that can't be executed manually.
Learn more about CIAN: https://cian.app/
Join the CIAN Community: https://discord.gg/cian