Understanding Your icETH Yield
Holders of icETH have asked a number of questions about the product recently. We’d like to take this opportunity to answer all your questions about icETH.
November 22, 2022
Our Interest Compounding ETH Index (icETH) token is one of our most popular products, recently boasting APYs in the 8.4% to 26.9% range. In this bear market, there has been increased interest in icETH because it is a simple way to access sustainable yield. However, under the hood, it’s a fairly complex product. Holders of icETH have asked a number of questions about the product recently. We’d like to take this opportunity to answer all your questions about icETH and provide a helpful calculator to estimate your icETH yield.
Where does icETH’s staking yield come from?
Ethereum’s switch to proof-of-stake created a sustainable form of yield for those validating the network’s transactions.
Ethereum node operators can pledge their ether, also known as staking, to the network to be selected as a block validator. As a reward for correctly adding valid blocks to the blockchain, node operators receive newly minted tokens as rewards, known as staking rewards.
The rates of these rewards are not a static APY and will fluctuate with the activity on the Ethereum networks and revenues accrued by Lido’s stETH token.
icETH enhances these rewards via an automated leveraged liquid staking strategy. The composability of Lido’s stETH token and Aave, the lending/borrowing protocol, make it possible for icETH to construct this sophisticated yield strategy in a simple ERC-20 token. Lido’s stETH token represents 1:1 ETH staked on the Beacon Chain. It’s the most popular liquid staking derivative in the market. stETH helps users stake their ETH while leaving the hard parts of purchasing/operating a node and retaining liquidity to Lido.
stETH is a tradable token that can be utilized within DeFi to do much more with a user’s stake. AAVE, one of the prime lending protocols, integrated stETH as collateral. By combining these two DeFi building blogs, icETH tokenizes an automated strategy to multiply the stETH yield.
icETH deposits stETH into the Aave V2 Protocol. Then ETH is borrowed on Aave until it reaches the desired multiple level. Next, the loaned ETH, as well as the user’s initial deposit, is exchanged for stETH. The total stETH, minus the fee, is deposited back into the Aave V2 Protocol until the target leverage ratio is reached.
If the index needs to deleverage, it will execute the same process in reverse: exchange stETH for ETH, reduce debt position in Aave and repeat until reaching the target leverage ratio.
How does yield accrue to icETH?
Unlike Lido’s stETH, icETH is not a rebasing token. So icETH holders won’t see yield accrue as an increasing number of icETH tokens.
The yield denominated in stETH auto-compounds and accrues to the position in Aave, and this gain in yield is reflected in the price of the icETH token. Over time, the value of icETH should be greater than both stETH and ETH.
Why is the price of icETH sometimes less than ETH?
On occasion, holders might observe the price of icETH lower than ETH. The market volatility in 2022 has created a short-term price differential between stETH and ETH, where stETH is worth less than ETH. Since icETH’s underlying holding is stETH, the price of icETH is also impacted.
It’s important to know that price differential can also be magnified by the icETH’s leverage ratio. For example, the difference between the price of stETH & ETH times the leverage ratio; ex. 1 ETH ($1203) - 1 stETH ($1188) * 2.66 = $39.90 or a price for icETH of $1163
Once the Shanghai update is complete, and withdrawals are enabled for the Beacon Chain, experts expect the price spread between stETH and ETH to tighten.
The APY on icETH is high, so why is my balance falling?
The annual percentage yield (APY) represents the real rate of return earned on icETH, taking into account the effect of compounding interest.
In the long term, a high APY will bolster the icETH price, but as mentioned in the previous section, market volatility can obfuscate those gains.
Deviation from the net asset value (NAV), differences between the prices of stETH and ETH, and the leverage ratio all play a role in pushing the current price of icETH lower.
icETH is consistently generating yield in the form of stETH, and we’ve built a calculator to make the returns more visible to holders.
Calculate My Yield
Input your wallet address, and we’ll calculate your personalized icETH yield: https://dune.com/index_coop/iceth-wallet-performance
Is there anything else that could negatively impact the yield?
In times of high market volatility, icETH’s smart contracts can trigger some automated deleveraging to protect against catastrophic loss of funds.
In practice, this means that some of icETH’s underlying holdings would be traded for wrapped ETH. The market volatility around the Luna collapse resulted in an automated deleveraging of icETH that created *~.5% in NAV (Net Asset Value) decay. If you’d like to learn more, read our full blog post about those events.
The lead-up to the Merge also resulted in a short period of negative APYs. Borrowing costs on Aave spiked as opportunistic traders positioned themselves for the possibility of an ETHPoW airdrop. The borrowing rate dropped back to normal pre-Merge levels, and two months of double-digit APYs have helped recover from the event.
Is icETH secure?
Each icETH component (Set, Aave, Lido) has undergone smart contract audits to ensure safety and security.
Audits for:
icETH is built on the same battle-tested leverage token infrastructure as the FLI tokens, which abstracts collateralized debt management, automates rebalancing, and minimizes liquidation risk.
You can learn more about the risks associated with icETH in our blog.
And the risk profile of Aave and stETH; https://docs.aave.com/risk/v/aave-v2/asset-risk/introduction
https://blog.lido.fi/category/steth/
https://blog.lido.fi/lido-stassets-collateral-risk-monitoring/
How to Buy icETH
For trade sizes less than 10 ETH:
1. You can save on gas costs by buying on L2 zkSync. This can be accomplished with either the Argent wallet or directly via the ZigZag exchange
2. If you’d rather stay on Ethereum mainnet, buy on DEX or DEX aggregator like CowSwap, which provides MEV protection.
For trade sizes above 10 ETH:
3. Flash Mint icETH via the Index Coop app.
More questions? Reach out!
If you have additional questions about how icETH enhances ETH staking rewards, visit us in Discord, and we’ll be happy to help you learn more.
Disclaimer: This content is for informational purposes only and is not legal, tax, investment, financial, or other advice. You should not take, or refrain from taking, any action based on any information contained herein, or any other information that we make available at any time, including blog posts, data, articles, links to third-party content, discord content, news feeds, tutorials, tweets, and videos. Before you make any financial, legal, technical, or other decisions, you should seek independent professional advice from a licensed and qualified individual in the area for which such advice would be appropriate. This information is not intended to be comprehensive or address all aspects of Index or its products. There is additional documentation on Index’s website about the functioning of Index Coop, and its ecosystem and community.
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