This article is sponsored by Origin.

Liquid staking tokens, or LSTs, have become one of the more significant developments in DeFi, attracting attention throughout the crypto space in 2023. Even after Ethereum’s Shapella upgrade, where withdrawals have been enabled for staked Ether, participation in securing the network has not shown signs of slowing down. The total amount of staked ETH has increased by 30% to $45B in 2023 across the many liquid staking protocols that are currently available.

Unfortunately, the proliferation of liquid staking protocols, combined with the increasing number of participants, has resulted in compressed yields for stakers. Returns were much higher and more volatile during the early days of ETH staking in 2021, as there were fewer LSTs and fewer stakers. Furthermore, increased competition with newer LST players, such as Frax and Stader, has essentially created a ceiling for yields. With on-chain activity remaining stagnant and more protocols entering to fight for a slice of the liquid staking pie, staking rewards for LSTs have slowly decreased to about 4% as of the time of writing.

However, in the spirit of DeFi, the rise of liquid staking platforms led to the birth of LSTFi, where the composability of various LSTs could be leveraged to create new and innovative strategies that could potentially increase returns for stakers. One of these up-and-coming products is Origin Ether, a liquid staking aggregator which currently has over $70M in TVL. Join us as we dive deeper into LSTs and what exactly makes Origin Ether so special compared to the rest.

How Do Liquid Staking Tokens Work?

Before we dive into OETH, let’s take a look at what exactly is a liquid staking token and how they work. In a nutshell, liquid staking allows users to lock their assets to secure a proof-of-stake network and earn block rewards and transaction fees for doing so. However, unlike conventional staking, where deposits are locked on a platform for a specified period of time and cannot be used for other purposes, liquid staking protocols allow users to deposit their assets and receive a liquid tokenized receipt of their staked assets. These tokenized receipts, commonly known as LSTs, can then be traded for other assets on exchanges or used on LSTFi protocols to generate extra yield.

As opposed to wrapped tokens which are often standardized across various ecosystems, depositing into different liquid staking providers will result in different LSTs, which are not fungible with one another and have their own fees, mechanisms, and staking rewards. For example, users will receive stETH from their Lido deposits, but they will receive rETH if they choose to deposit their ETH into Rocket Pool instead. 

Additionally, each protocol has its own way of redistributing staking rewards. For Lido, token balances for stETH holders are increased through a daily rebase, while rETH accrues the yield back into the underlying pool of ETH deposits, which causes the value of rETH to constantly increase. The staking reward for each provider may also vary based on the amount of ETH staked and validators owned by the protocol.

Source: Rocket Pool

Before the recent Shapella upgrade, staked assets were essentially locked, meaning that depositors could only trade their LSTs on the secondary market and were unable to redeem them for the underlying deposits. Essentially, users would have to swap between different LSTs to potentially earn higher staking returns, which would incur transaction fees and price slippage. With withdrawals enabled, users can withdraw their earlier-staked ETH into other LST protocols at any time to maximize their staking returns.

Origin Ether: Leveraging Liquid Staking Tokens and DeFi

Learning lessons from their development of the Origin Dollar, the Origin team makes its foray into the liquid staking space with Origin Ether (OETH). OETH is an Ethereum yield-aggregator that seeks to optimize returns for LSTs beyond the current staking rate through DeFi strategies across the top protocols on Ethereum.

Source: Origin Protocol

OETH is entirely backed by ETH, WETH, and LST deposits (currently supporting stETH, rETH, and frxETH). The collateral is then utilized to earn the highest yield available through ETH-staking rewards and OETH’s custom liquidity strategies across Curve, Convex, and Morpho. Currently, its OETH/ETH AMO strategy has become the primary choice for maintaining the peg between OETH and ETH, promoting better capital efficiency for its Curve pools, as well as increased yields to OETH holders. Using the AMO mechanism originally designed by Frax, the protocol can automatically deploy or remove OETH from Curve if the liquidity pool becomes imbalanced.

Instead of just earning ETH from validator rewards, OETH also accrues additional token rewards and trading fees from providing liquidity within DeFi. In a similar vein to stETH, yield is distributed to OETH holders through a daily rebase of their token balances, which eliminates additional gas costs for claiming rewards. To promote transparency, the Origin team has also put up a Proof of Yield page, which details historical OETH distributions and APY on a daily basis. The protocol currently collects a 20% performance fee on the generated yield, which is used to purchase and vote-lock CVX tokens to ensure a steady stream of future rewards.

Users can purchase OETH directly through Curve or Uniswap or mint it directly through the OETH front-end at app.oeth.com. Once the OETH tokens are received, users will begin accumulating rewards based on their OETH token balance. If, at any time, users choose to leave the ecosystem, they can immediately swap their OETH into ETH or LSTs, which would incur slippage and trading fees, or redeem their OETH for the underlying deposits, albeit with a small 0.5% exit fee. The exit fee is intended as a security feature to protect against price oracle attacks and is only charged when collateral is redeemed through the OETH front-end, but not on swaps. The collected fees are then redistributed back to the remaining OETH depositors as additional yield.

Source: Origin Ether

Just like OUSD, OETH is part of Origin’s DeFi ecosystem, which is governed by Origin’s native governance token, Origin DeFi Governance (OGV). Users who stake their OGV for vote-escrowed OGV (veOGV) become eligible to create or vote on new proposals for the protocol, as well as earn 100% of the protocol’s collected fees. Although there is no minimum veOGV amount required for participants to vote, OGV stakers will need to have a minimum of 10,000 veOGV in order to submit Snapshot governance proposals, which may include fee changes or implementing new strategies.

OETH vs stETH, rETH, and frxETH

Now that we’ve looked at what OETH is and how it fits within the liquid staking ecosystem, you may be remiss to think that it is just another LST as well. However, OETH is part of a new branch of DeFi protocols known as LSTFi – protocols that build on top of LSTs to offer new DeFi products. Below is a comparison of how OETH stacks up against other actual LSTs such as stETH, rETH, and frxETH.

Backing

While Ethereum-based LSTs are completely backed by ETH deposits, OETH is 100% collateralized by a mixture of ETH, WETH, and also LSTs. Users can deposit any of these assets for OETH through the dapp’s front-end, or they can swap their ETH for OETH on DEXs and aggregators such as Curve, Uniswap, or ParaSwap. In other words, LSTs are just a component of what makes up OETH.

Yield

Over the past 30 days, OETH has yielded approximately double of stETH’s staking returns. While rETH is generating lower returns compared to sfrxETH and stETH, all of them are averaging between 3.5% and 5.5% APY while OETH sits significantly higher at 7.7%. Most of OETH’s yield comes from the underlying LST deposits and its AMO strategy, while extra returns come from other DeFi strategies and distributing the vault’s 0.5% exit fee. 

Risks

Like most dapps, LSTs carry smart contract risks and may be susceptible to exploits. Although OETH provides diversification across various LSTs, holding OETH is slightly riskier than holding any single LST, as depositors are also exposed to risks from other DeFi protocols. OETH has been audited by OpenZeppelin, the same auditor behind Coinbase, Aave, and The Ethereum Foundation, and has received over a dozen audits of its codebase. 

Beyond the technological risks involved, there are also inherent risks with OETH’s yield-compounding strategies. While OETH is designed to be pegged to ETH, price volatility could result in impermanent loss to liquidity providers. However, since anyone can redeem OETH for its collateral, OETH trades within 0.5% of ETH nearly all the time. If the price falls below 99.5% of ETH on DEXs, arbitrageurs are able to profit from redeeming OETH, reestablishing the token’s peg to ETH. 

Should You Stake Ethereum?

While users may feel slightly overwhelmed by all the hype about liquid staking and doing their part to secure the network, there are still lots to consider before you decide to take the plunge. If you’re a long-term hodler just looking to earn some passive rewards, staking Ethereum could be the perfect choice to make use of your ETH while you camp out and wait for Ethereum’s next run.

On the other hand, if you’re comfortable taking a little bit more risk to maximize your LST returns, interacting with the new wave of LSTFi projects such as OETH could be right up your alley. If you’re interested to find out more, check out Origin Ether’s website or head over to their front-end to mint some OETH for yourself!