In today's DeFi landscape, DAOs and others managing onchain treasuries are constantly seeking ways to achieve risk-managed yield. Aera, a treasury management protocol, addresses this need by offering a fully automated, non-custodial treasury solution designed to optimize passive yield, automate operations, grow liquidity, and more.

Continuing our series on specific asset-allocation strategies enabled via Aera vaults, today we explore levered ETH staking. By using a combination of flash loans and borrowing via a top lending protocol (e.g., Compound, Aave, etc.), we can significantly boost the potential staking rewards earned from the assets in your Aera vault.

How Aera Works

Before we jump into the strategy, a quick refresher on Aera.

Aera offers customizable, non-custodial vaults to DAOs and other onchain treasuries that want to put their idle treasury assets to work.

Any community, team, or other entity with an onchain treasury can deposit that treasury’s assets into a vault, a self-custody smart contract that enables DAOs and treasury managers to always retain control of their funds (visit Aera’s docs for more).

1. DAOs or treasury managers set comprehensive goals aligned with their overall strategy and specify their Aera vault policy, including whitelisting specific assets and protocols with which the vault contract can interact. Aera vaults currently support two types of tokens: ERC20s and ERC4626s (i.e., yield-bearing assets).

2. A third-party Guardian recommends allocations and strategies across approved assets to optimize the use of treasury funds based on real-time market conditions and preset objectives.

3. The vault autonomously executes the most effective asset-allocation and rebalancing recommendations.

4. Aera vaults use price oracles to monitor a treasury’s assets; if certain pre-defined thresholds are met, the vault contract can automatically trigger the exit or deleveraging of a position.

In Aera’s current V2 iteration, Gauntlet is the sole Guardian, which leverages offchain intelligence and its comprehensive experience as an industry-leading risk manager to develop vault recommendations. In future versions, a network of Guardians will compete to provide recommendations that optimize treasury management strategies.

Aera vaults currently support various DeFi strategies, including dynamic liquidity provisioning on DEXs (see our previous post on protocol-owned liquidity and liquidity mining), volatility targeting, low-liquidity asset diversification, yield farming, lending, and — the topic of today’s post — levered ETH staking.

Levered Staking with Aera

Aera’s levered ETH staking strategy aims to optimize a vault’s potential yield using a risk-first approach by using a top lending protocol (e.g., Compound, Aave, etc.) to generate staking rewards through leverage.

The strategy: Use a flash loan to provide leverage and increase the amount of staked ETH from which an Aera vault can earn rewards. Our target is 5x leverage, our reasoning for which we’ll get into later.

Let’s use a basic example in which we have 1 wETH (wrapped ETH) to demonstrate how the strategy works.

With our 1 wETH, we could stake it via Lido and receive 1 wETH worth of Lido’s liquid staking token, stETH, which accrues ETH staking rewards that carry an APY of around 3.15%, as of this writing.

But we can do better with leverage. Here’s how Aera’s levered staking strategy would play out:

1. Flash loan: We’ll start with the same 1 wETH, but we’ll add to it by borrowing 5 wETH with an uncollateralized flash loan via a top lending protocol (e.g., Compound, Aave, etc.). We now have 6 wETH.

2. Acquire wstETH: On the same lending protocol, we swap our 6 wETH for the equivalent value in wstETH, the wrapped version of Lido’s liquid staking token, which accrues the same staking rewards as the unwrapped version we’d receive if we staked directly via Lido’s platform.

3. Borrow against our wstETH: We now collateralize the 6 wETH worth of wstETH, and use it to borrow 5 wETH on the lending protocol.

4. Repay flash loan: We use the borrowed 5 wETH to repay the flash loan. (Flash loans require the entire operation to be atomic — i.e., all transactions need to occur within the same block, or they’ll all fail.)

The result is we have 6 wETH worth of wstETH, supplied as collateral on the lending protocol, and a 5 wETH debt. Our net position value remains 1 wETH.

Why would we do this? Because now we are earning 3.15% on 6 wETH, instead of on 1 wETH, meaning that we are now effectively earning 6 * 3.15%  = 18.9% on our original 1 wETH.

However, we need to factor in the borrowing costs. At the moment, borrow rates for wETH on Aave, for example, are currently 2.57%. So, if we’re borrowing 5 wETH, we’re effectively paying 5 * 2.57% for our 1 wETH position, or ~12.85%. The net of these two positions, though, is still positive and we’re now earning 18.9 - 12.85 = 6.05% on our 1 wETH.

This strategy allows you to leverage your staking rewards, achieving higher returns on your initial investment while managing the associated costs. Vault owners are provided a dashboard where they can review all current and historical daily APYs.

What risks are associated with this strategy?

Like any strategy in DeFi, there are risks associated with Aera’s levered staking strategy.

Besides the typical smart contract risk and possibility of ETH itself losing value, the main risk is if wstETH’s value falls in price relative to wETH.

Today, wstETH’s price generally appreciates regularly due to the underlying design of stETH, with rebasing events only moderately lowering the price. However, stETH has deviated from par in the past, most recently in the summer of 2022 when token holders faced uncertainty in their ability to swap their stETH for ETH (a risk that’s been mitigated in Lido V2 as withdrawals now happen via a smart contract).

That said, there is no guarantee the price of wstETH won’t drastically deviate from that of ETH at some point in the future for other reasons. Gauntlet, Aera’s first Guardian, invests a significant amount of time understanding the exact mechanics of this possibility and simulating possible scenarios that inform the parameter recommendations they make towards lending protocols (this discussion in Aave’s governance forum provides an example).

Gauntlet currently targets 5x leverage based on an assumed loan-to-value ratio of 0.8 — though, maximum LTV is governed by the specific lending protocol’s pool settings — leaving room for a 13% deviation from par while still giving us a roughly 2x increase in staking rewards (at current rates). They recognize a 13% buffer offers the opportunity to take more risk, but they believe there are diminishing returns given the increase in staking rewards to be had.

Get started with Aera

If you want to learn more about Aera vaults and available treasury management strategies, please reach out on social media or explore our website.

Aera Team