*stETH-ETH as an example
Every stETH is strictly backed by one ETH on the Beacon chain, which eliminates the possibility of stETH’s crash. However, since users can’t directly unstake their ETH until the Merge is mature, the exchange ratio between stETH and ETH demonstrates large, but temporary fluctuations, especially under recent market conditions.
Fig. 2 Source: https://www.livecoinwatch.com/price/LidoStakedEther-_STETH
The temporary stETH price deviations not only bring adversely impact to stETH holders, but also provide great arbitraging opportunities that could be capitalized by ambitious long term stETH/ETH holders, provided that there are good onchain positions and risk management tooling. As an example: If you buy stETH at 0.95 ETH and sell it at 0.98 ETH, you pocket 0.03 ETH as profit in this iteration of arbitrage. The risk of stETH arbitraging is largely limited by the strict 1:1 ETH backing, which in turn limits the scale and duration of stETH price deviation from ETH. The attractive RR ratio of this active strategy provides strong argument for smart ETH/stETH holders to add leverage to this strategy for amplified return, if the traders have good tools to set and adjust proper arbitraging prices. To stETH ecosystem, the scaled adoption of this strategy could potentially result in improved stETH’s price stability, which would be beneficial to all stETH holders.
To that end, CIAN launches decentralized onchain automation tools for “Leveraged stETH-ETH Arbitrage” strategy, which iteratively automates user’s stETH purchasing and selling in Curve protocol at prices preset by the user with desired leverage ratio (max 2.5 x). All the parameters including purchasing & selling price limits, leverage ratios etc. can be adjusted at any time. Meanwhile, since the staking rewards of stETH（current APR on Lido:3.9%） is usually higher than the borrowing interest of ETH (APR:1.84%) on AAVE V2, users can passively earn extra yields while waiting for the system to profit from an arbitrage opportunity.
Let’s refer to Figure 3 for the product details.
- 1.Deposit Amount: Principle used for this strategy (stETH or ETH)
- 2.Leverage (up to 2.5X)
- 3.Lower Price (onchain slippage not included): When the market price reaches this target, CIAN will automatically swap ETH for stETH using the preset leverage ratio.
- 4.Upper Price (onchain slippage not included): When the market price reaches this target, CIAN will automatically swap all stETH for ETH, waiting for the next arbitrage opportunity.
- 5.Stop-Loss Price (onchain slippage not included): When the market price reaches this target, CIAN will automatically unwind the leverage, repay the debts and swap all stETH for ETH. Once executed, the strategy will automatically end, sending back all funds to users’ smart wallet.
- 6.Deposit Gas Fees (min. 0.5 ETH): gas fees used to cover all the automated transactions.
- 7.Gas Fees Limit (Optional): You can set a limit per transaction to avoid paying excessive gas fees in case of network congestion.
Fig. 3 Source:dapp.cian.app
Let’s walk through a simple example.
- 1.Market Price(stETH/ETH): 0.95
- 2.Deposit Amount: 10 ETH
- 3.Leverage: 2.5 X
- 4.Lower Price: 0.95
- 5.Upper Price: 0.96
- 6.Stop-loss Price: 0.9
- 1.The strategy is activated when the market price matches the lower price limit of 0.95, after which CIAN’s tool will swap 25ETH for 26.31stETH (2X leveraged).
- 2.After the market price goes above the upper price of 0.96, CIAN will swap 26.31 stETH for 25.26 ETH and repay the 15 borrowed ETH (borrowing interest not included).
- 3.Now 10.26 ETH are kept in the strategy waiting for the next arbitraging opportunity. Users could adjust the parameters setting any time they want.
Based on similar parameters as set above, we ran a backtest tracking the data of the past 3 months（slippages and swap fees are not included）.
Note: These results should not be considered as standard since the APY generated by the “Leveraged Arbitrage” strategy is higly dependant on users’ preset parameters, which should be set/modified according to the market conditions.
We will answer this question using the example above:
- 1.Borrow ETH (10 ) through flashloan from Balancer.
- 2.Swap all the ETH (10+10) for stETH (21.05).
- 3.Deposit stETH (21.05) in AAVE and borrow ETH (10) to repay the flashloan.
All steps are executed within one transaction.
- 1.Borrow ETH (10) to repay the debt on AAVE through flashloan from Balancer.
- 2.Withdraw stETH (21.05) from AAVE and swap for ETH (20.21).
- 3.Repay the flashloaned ETH(10) from Balancer.
All steps are finished within one transaction.
- 1.Arbitrage profits
- 2.stETH staking rewards (APR:3.9%) x leverage ratio
- 1.CIAN will charge no fee during the promotional period (3 months).
- 2.Borrowing interest rate — when purchasing stETH with leverage, CIAN will need to borrow ETH from AAVE.
- 3.Swap fees and slippage. When trading stETH-ETH pair through Curve, users will be charged by curve for swap fees and possibly also incurs price slippage.
- 4.Gas fees. Gas fees consumed by every transaction will be deducted from the gas balance in the users’ gas contract.
Note: All related fees except gas fees are also getting leveraged.
- 1.Trading loss. The “Leveraged Arbitrage” strategy is neutral. Users will generate profits or losses according to their preset parameters, which should be set/modified according to current market conditions.
- 2.Liquidation. In theory, users’ positions might get liquidated under extreme market conditions. To alliviate this risk, users will be able to set a stop-loss, automatically unwind their leverage and close the position. But in practice, liquidation is almost impossible to happen since we limit user’s leverage ratio in this strategy to 2.5 x, which requires an extra 14.3% drop in stETH-ETH relative prices from the “lower price”.
- 3.Execution costs. If a user’s position is too small, the high gas fees on Ethereum may out-weight the gains, resulting in an overall loss.