If you’re here because of the title, you probably know that Lido Finance is the largest ETH staking platform.
You also know that Lido is the issuer of stETH — a liquid staking token. You probably also know that that token “multiplies” each day as Lido counts the staking rewards it acquired.
However, you might not know how this process occurs and how to predict the rate of stETH’s multiplication.
This rate is what I will focus on in this short piece.
🔸 stETH Rebasing
When ETH holders delegate their ETH to Lido, Lido spins validators that compete for rewards. Once a day, Lido accounts for all the rewards and all the slashings, calculates the fees, and how much to compensate validators.
After the network of validators agrees on the computation results and how much is left to divide among the stakers — Lido distributes the freshly minted ETH by “multiplying” the supply of stETH. Everybody that is holding stETH at the time of this event (AKA rebalancing) can observe their balance grow. In other words, stETH is a rebase token.
One interesting detail is that, regardless of whether you have acquired your stETH one second or 23 hours before the rebalancing, you’re exposed to the entire 24 hours’ worth of rewards before rebalancing.
Can the number of new rewards, or the rate at which they will grow between rebase occurrences, be predicted?
🔸 Why is the Real-time Rate Essential?
Lido rebalances every 24 hours. Only then is the APR for the past 24 hours revealed.
This type of rate update is easily accessible to everyone for free. Unfortunately, it means that every time we look at that reported rate, we look into the past.
Sophisticated users can attempt to predict the rate with the available information. That makes for an unfair market.
If we were to trade the Lido staking rate (what IPOR platform will soon offer) and rely on the rate published by Lido, the pool would be exposed to additional risk. Some users could front-run the trades if they knew the real-time rate, making AMM disadvantaged.
A solution to this problem is to move to trading the real-time Lido rate from the get-go. But how can the IPOR Protocol access such a rate? By building it.
🔸 Going From Daily Rebalancing to Real-time Rate
Because Lido operates on the chain, we can investigate how much each Lido-run validator gets in rewards.
1️⃣ The hurdle here is the number of validators — hundreds of thousands — each holding 32ETH.
2️⃣ Another issue is the slashings and penalties. If acting out of line, each validator can be penalized by losing their stake.
3️⃣ On top of that, Lido can impose internal penalties.
Thankfully, Lido’s smart contract provides valuable functions that we can use to iterate over the validators to simulate Lido’s state for each given block. Iterating over thousands of addresses is a laborious process, and when Lido does it, the validators also need to agree on the final rewards. This is one of the reasons why Lido only does this once daily. Another is the frequency and cost of rebalancing stETH and wstETH tokens.
The above chart shows the real-time “24-hour rolling window” staking rate, taking the rate guessing out of the picture. As we trace this real-time chart closer to publication, predicting how much the stETH token will “multiply” becomes easier.
After the launch of the IPOR stETH market, traders will be able to:
- Preview real-time Lido staking rate (at various resolutions),
- Trade that rate with 1,2,3 month swaps with very narrow spreads,
- Be sure that their swaps track the Lido rate within single basis points at all times, even between times when Lido publishes their rate.
IPOR's stETH Stake Rate Swap market is launching this month.
Learn about IPOR swap’s advantages over other instruments enabling fixed rates in DeFi in Darren Camas’ recently published piece:
You can also learn how to trade the Lido staking rate in IPOR Labs’ Business Development Head Konstantinos Tsoulos's piece:
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