Nexo experiments with liquid staking of client assets in search of DeFi yield
Crypto lender Nexo is increasing the level of client funds it allocates to liquid staking DeFi protocols as it seeks to boost returns.
Nexo started using liquid staking — which effectively leaves staked tokens free to use in other trades — about a year ago and has been steadily increasing its use since, the DeFi strategist said. Kiril Nikolov in an interview at the Avalanche Summit in Barcelona on Wednesday.
Nexo is a centralized service that allows users to lend crypto and receive a return. It generates this return in a number of ways, including lending funds to institutions, trading tokens, and staking tokens. Staking is a big part of his business and is used to generate the yield for most new coins, such as solana, luna, and avalanche.
About a year ago, Nexo began experimenting with liquid staking as a way to not only generate more yield, but also free up liquidity, especially for ether. Since then, it has expanded its range of liquid staking platforms on different blockchains and increased the amount of capital allocated to these protocols.
“It’s still a very small percentage” of Nexo’s business, Nikolov explained, although it “will increase over time and ETH 2.0 will come closer.”
What is Liquid Staking?
Liquid staking is a way to free up liquidity and generate additional return on staked assets. When you stake with a liquid staking provider, you receive a token that represents your staked assets. These tokens are essentially equivalent in value and you can use them in other DeFi protocols to generate additional yield or for purposes such as trading. But you will have to return the tokens to unlock the original staked assets.
Nikolov explains that the main problem lies with Ethereum. While Ethereum allows you to stake tokens — and some $32 billion is already staked — the network hasn’t fully transitioned to proof-of-stake (POS) validation yet, meaning opt-out is impossible. . All funds staked on Ethereum are locked until the change in point of sale – possibly later this year.
Here is an example of the dilemma. Suppose one of Nexo’s clients deposits Ether (ETH) and Nexo stakes it on Ethereum to get the staking return. If the client wishes to withdraw their funds from the platform, Nexo must return their ether. Yet, for Nexo, it is still stuck on Ethereum.
“With Ethereum, you can never exit until ETH 2.0 is ready. This is the obvious case where, if you need any type of liquidity, liquid staking is for you. said Nikolov.
With liquid staking, you can sell staked tokens on the open market at any time, rather than waiting to unlock them. Typically, this will roughly reflect the underlying value of the staked assets, since anyone can arbitrate the difference. The biggest concern for Nexo is that there is sometimes a premium for those looking to cash in immediately, which would hurt its returns.
“So it’s still a huge problem, isn’t it?” When it comes to ETH, if you are earning 5% per year, a 1% rebate is a very big concern,” he said.
A matter of risk
Nexo primarily uses Lido Finance, the largest liquid staking provider on Ethereum (and other chains), which Nikolov described as battle-tested. He added that Nexo is testing new liquid staking protocols on other chains, but starts with small sums and builds up over time as the protocol shows it is safe.
Beyond liquid staking, Nexo has put its own funds to work in DeFi protocols but has largely avoided experimenting with client funds – simply due to the levels of risk involved.
In contrast, rival crypto lender Celsius has been more aggressive in the DeFi industry and has a dedicated DeFi team. Still, it lost around $50 million when the DeFi Badger DAO protocol was mined. At the time, Celsius declined to comment on the percentage of client funds held in DeFi protocols.
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