We’re proud to launch our liquid staking pool on Stakewise v3, enabling individuals to stake any amount of ETH and benefit from Chorus One’s enterprise-grade staking infrastructure and industry-leading MEV yields! Additionally, staking on Chorus One’s pool enables users to un-stake at any time, or utilize their staked ETH capital throughout DeFi. You can start staking with on Chorus One’s pool here .
We're also introducing exclusive Private Vaults tailored for our institutional clients and investors who desire a dedicated liquid staking solution. These personalized Vaults come with individual agreements, ensuring user assets remain distinct and aren't mixed with other Vaults.
Additionally, in the upcoming months, we plan to deepen our collaboration by seamlessly integrating our public Vault into our Staking Dashboard. This integration will make it incredibly easy for OPUS customers to access liquid staking and mint osETH, enabling them to participate in the DeFi space effortlessly. Stay tuned for more updates!
Below, we dive into some of the key details about Stakewise and how you can start staking ETH on Chorus One’s Vaults.
Stakewise v3 represents the latest version of the Stakewise protocol, announced by the Stakewise DAO in 2022.
V3 was conceived to tackle the issue of stake centralization, a significant challenge impacting the security and well-being of Ethereum. Setting up Ethereum validators has traditionally been complex for node operators, with factors like the 32ETH minimum requirement, technical and hardware demands, and the risk of financial penalties for validator mistakes. Consequently, there has been a decline in solo stakers engaging in individual ETH staking. Many have opted to outsource validator operations to commercial node operators, who possess the expertise, hardware, and security measures required to establish validator nodes for individuals and organizations with 32 ETH.
Stakewise v3 tackles this challenge by elevating its existing liquid staking solution, introducing mini staking pools referred to as "Vaults." These Vaults empower individuals, node operators, or organizations to effortlessly launch their own nodes, mint staked ETH (osETH) tokens against those nodes, accept delegations, or delegate any amount of ETH across multiple nodes to mitigate network concentration.
Importantly, each Vault or mini Pool is entirely agnostic to the configurations set up by its operator. This means that the operator can fully customize its vault according to its own design, allowing users to select a vault based on features that best suit the depositor. Whatever client solutions, KYC features, MEV relays the entity wishes to run are under their control, resulting in a diverse marketplace of staking solutions for users to explore and choose from.
Moreover, users can establish private pools, allowing deposits only from addresses whitelisted by the Vault Operator. This ring-fences the Vault, ensuring that staked assets are not co-mingled with funds from other Vaults.
We've covered everything you need to know about how Stakewise v3 works and its use cases for solo stakers, institutions, DeFi users, and commercial node operators in this guide. Check it out!
For investors
Previously, staking ETH was restricted to investors and institutions with a minimum of 32 ETH. They could delegate validator maintenance responsibilities to an experienced node operator like Chorus One, known for its enterprise-grade staking infrastructure.
By staking on Chorus One’s Pool on Stakewise v3, anyone with any amount of ETH can now access the same infrastructure and benefits as our institutional customers. This opens doors for a significantly larger number of individuals to safely and seamlessly stake and unstake their ETH without any minimum requirements.
Chorus One has garnered widespread recognition for our dedication to research and the implementation of strategies aimed at enhancing our MEV performance. We consistently optimize our infrastructure to maximize MEV rewards.
The following graph illustrates our performance over a 60-day period. Over this time period, Chorus One nodes have captured close to 14% more MEV rewards per validator (ETH) when compared to the weighted industry average, observed on Lido.
*Please note that this is a snapshot, and that MEV rewards fluctuate as a function of variance and market conditions. Please visit Rated Network to view the latest figures.
To learn more about the work we’ve done in in spearheading MEV research in the industry, please visit our dedicated MEV page.
We are one of the very few node operators to hold the ISO 27001:2022 certification, representing the industry standard for implementing top-tier security practices. Safeguarding customer assets and data is our utmost priority, ensuring users that their funds are in experienced hands.
Our in-house team of researchers and experts consistently scrutinizes the crypto ecosystem and the Ethereum network with a keen eye. We regularly publish reports and analyses addressing current industry issues, providing fresh insights based on our expertise. We are dedicated to ongoing improvement, constantly exploring opportunities to enhance our performance and deepen our understanding of the network in ambition to improve the overall experience and rewards for our customers.
For institutions
Our institutional clients have the option to establish their own secure vault, operated exclusively by Chorus One. This choice allows them to implement additional measures to safeguard their funds, ensuring that staked assets remain isolated from other vaults. Opting for Chorus One as the operator of their private vaults provides institutions with the assurance that their assets are in capable hands, coupled with the added benefits of our infrastructure, including the highest MEV yields, enhanced security, and streamlined operational processes.
In the upcoming months, OPUS customers can seamlessly stake on our liquid staking pool and earn staked ETH (osETH) directly from our Staking Dashboard. This empowers users to effortlessly access the liquid staking ecosystem with just a few clicks on our platform, allowing you to conveniently track your rewards in one place! Stay tuned for more details – coming soon! 😉
To stake ETH on Chorus One’s Vault, visit here.
If you're interested in launching a private Vault operated by Chorus One, please reach out to us at staking@chorus.one.
To delve deeper into Stakewise v3, check out our explainer guide here. For a step-by-step guide on how you can start staking on Chorus One’s Vault MEV-Max, please refer to this article.
About Chorus One
Chorus One is one of the biggest institutional staking providers globally operating infrastructure for 45+ Proof-of-Stake networks including Ethereum, Cosmos, Solana, Avalanche, and Near amongst others. Since 2018, we have been at the forefront of the PoS industry and now offer easy enterprise-grade staking solutions, industry-leading research, and also invest in some of the most cutting-edge protocols through Chorus Ventures.
Stake centralisation has been the talk of Ethereum’s town in 2023. Recognizing its detrimental effect and the risk it poses for Ethereum’s security and vitality, the Stakewise DAO announced its V3 in September 2022 - a permissionless and decentralized liquid staking protocol with a novel design and a liquid staked ETH token called osETH. The primary goals of v3 were stated to reduce the degree of stake centralization on Ethereum by i) making solo staking more appealing, ii) putting the choice of node operator(s) into the user’s hands, and iii) offering a new, less risky staked ETH token standard as an alternative to prevailing models.
Chorus One is proud to partner with Stakewise to support these goals by launching our liquid staking pool on Stakewise v3, enabling individuals to stake any amount of ETH and benefit from Chorus One’s enterprise-grade staking infrastructure and highest MEV yields. Additionally, staking on Chorus One’s pool enables users to un-stake at any time, or utilize their staked ETH capital throughout DeFi.
As 2023 approaches its final weeks, over a year since Stakewise announced their V3, we take a closer look at the protocol's current state - diving into its architecture, distinctions from existing liquid staking protocols, and its potential to broaden the landscape for ETH staking amongst solo stakers and institutions.
Jordan Sutcliffe, Head of Business Development at Stakewise, aptly coined Stakewise V3 as the ‘Swiss army knife’ for ETH staking, sparking a flurry of interest from ETH enthusiasts. During the unveiling, the team revealed that the new version opens the doors for anyone capable of running Ethereum validators to engage in liquid staking and receive delegations in a permissionless manner - an approach that aims to welcome a broader range of participants, fostering control and driving decentralization within the ETH staking ecosystem.
StakeWise V3 achieves this by introducing the concept of layered staking, allowing users i) to delegate ETH to a vault of the node operator(s) of their liking (1st layer), and ii) giving them the option to mint osETH to represent their stake (2nd layer). This design enables anyone to join as a solo staker who can mint osETH tokens against their node, or delegate ETH across multiple nodes to counteract network concentration. Notably, V3 introduces a slashing-resistant staked ETH token, osETH, ensuring scalability without introducing systemic risk to the broader ecosystem.
Ethereum was conceived with the mission of building a permissionless, censorship-resistant and financially robust network for value exchange.
The transition to Proof of Stake (PoS) through the Merge aimed to democratize participation, shedding the hardware and compute costs of Proof of Work (PoW). A year on from the Merge, however, centralization remains one of Ethereum’s biggest challenges - ironically, drifting towards the paradox of its own mission statement.
Currently, staking on Ethereum mandates validators to lock up 32 ETH with the network. While this investment yields interest, any misstep or dishonest conduct by a validator can lead to the revocation of funds. Setting up a validator node to stake on the network can also be a complicated task, meaning financial penalties can result if things are set up improperly.
To address this, liquid staking protocols emerged as intermediaries, enabling solo stakers and institutions to pool their ETH, collectively forming the 32 ETH required for a node. This innovation democratized ETH staking, allowing nearly anyone to participate. Intermediaries assumed the operational responsibilities, handling the pooling, staking, and technical requirements, while taking a share of the rewards for their efforts.
So, why Stakewise V3?
The drawback of the pre-existing version of Stakewise and its counterparts is simple but crucial. The absence of technical or capital requirements, the ability to temporarily exit from staking, and the increased efficiency of staked capital presented by liquid staking protocols resonate with depositors to an extent that it leads to a decrease in solo stakers (for example, individuals setting up ETH validators at home). Over time, this decline can significantly impact Ethereum’s security and decentralization.
To address this, the Stakewise DAO introduced Stakewise V3, its latest version that allows anyone—from solo stakers to established node operators to financial institutions—to participate. As a solo staker, one can seamlessly launch their own nodes, mint staked ETH (osETH) tokens against their nodes, or delegate any amount of ETH across multiple nodes to counteract network concentration.
Layer 1: Vaults
At the heart of Stakewise V3 are ‘Vaults’ - a network of permissionless, non-custodial staking mini pools that anyone can launch on the Stakewise platform and receive ETH delegations on their nodes. It offers users the freedom to stake with whichever vault they want, choosing between vaults run by solo stakers, node operator companies, and groups of solo/commercial operators.
For every 32 ETH of deposits accumulated in a Vault, the Vault operator(s) registers an Ethereum validator in the Beacon Chain and starts staking. The staking rewards belong to the depositors, net of the staking fee charged by the Vault.
Importantly, each of these Vaults is completely unique to the configurations set up by its operator, meaning that the operator can fully customize its vault as per its own design, allowing users to pick a vault based on the features that best suit the depositor. Essentially, Vaults are completely agnostic to the staking solutions that an operator wants to run - whatever client solutions, KYC features, MEV relays or DVT middleware that the entity wants to run are under their control. This leads to a very diverse marketplace of staking solutions that users can shop around and choose from.
Moreover, Vault Operators can set their Vault to a private setting, allowing deposits only from addresses whitelisted by the Vault Operator. This enables use cases like solo stakers depositing ETH into their own Vault and not accepting deposits from others. For instance, compliance-sensitive organizations can create a Vault to enable staking for only a limited number of KYC'd participants.
Layer 2: The osETH Token
The osETH Token is a new type of overcollateralised ETH token introduced by V3, which is a liquid ERC-20 representation of staked assets that uses Vault Token(s) as collateral. It can be minted by anyone who has staked ETH into a Vault(s), or can be bought/sold on decentralized exchanges.
Importantly, osETH represents a new type of liquid-staked ETH token that has its value pegged to staked ETH 1:1, but that does not directly pass on the slashing losses to holders, ensuring that all the staking rewards and penalties remain isolated to the individual Vault. To ensure this, V3 requires >1 ETH for every osETH that stakers in Vault want to mint. In the scenario where slashing does occur, there is always a reserve of ETH that absorbs the slashing losses before osETH holders are affected. This protects osETH holders from losing their principal, making osETH a safer option for staking.
Note that the stakers who mint osETH are still exposed to the slashing risk of the Vaults in which they staked ETH, and excess collateralization makes sure that the other osETH holders are not affected.
For solo stakers -
StakeWise V3 empowers solo stakers by allowing them to mint osETH tokens against their nodes, providing access to DeFi opportunities while maintaining a non-custodial setup. Solo stakers can set up private vaults, mint osETH, and even earn additional revenue by hosting validators for other stakers. Alternatively, public vaults enable solo stakers to accept delegations, maximize their score, and mint osETH based on received vault tokens.
For DeFi users -
StakeWise V3 caters to users seeking yields by providing osETH tokens, tradable in decentralized exchanges or minted within vaults. osETH integrates slashing protection, and ensures that staked capital are not co-mingled across funds, thereby offering a less-risky, diverse marketplace for users to mint osETH and use it in DeFi.
For institutions and exchanges -
Financial institutions typically prefer direct engagement with trusted staking service providers to ensure due diligence and favorable terms. StakeWise V3 caters to this preference by enabling institutions and exchanges to create private vaults, allowing exclusive collaboration with chosen operators and staking clients. Vault tokens from staking represent staked ETH, offering institutions the flexibility to enable liquidity and utility within their ecosystem. Additionally, for broader access to DeFi markets, institutions can mint or permit customers to mint osETH tokens.
For commercial node operators -
In StakeWise V3, operators, whether independent or collaborating with other entities, can establish vaults to accept delegations, allowing depositors to tokenize their staked ETH into osETH. Operators can choose to keep vaults private or public, showcase strong performance, and enhance their vault Score by taking risk-reducing measures.
As experienced node operators, we have established both our public pool (Chorus One - MEV Max) in StakeWise V3, providing individuals access to liquid staking while benefiting from our network expertise and proven MEV strategies. Our institutional clients also have the option of launching private, ring-fenced pools operated by Chorus One. For more details, refer to the final section of this article.
Chorus One is expanding the possibilities of V3’s Vaults by extending our MEV optimization strategies beyond a select group of customers to encompass ALL ETH stakers. We hold decentralization as a core value, and through our partnership with Stakewise, take immense pride in making our enterprise staking infrastructure to everyone - all without any minimum requirements to stake ETH.
Below, we provide a brief breakdown of the various methods available for staking ETH and minting osETH with Chorus One. For a comprehensive understanding of the benefits associated with staking your ETH on Chorus One's liquid staking pools, we've covered all the details here. Check it out!
Chorus One's public vault invites users to stake any amount of ETH and mint osETH, enjoying the benefits of our enterprise-grade staking infrastructure, proven MEV strategies, world-class security measures, and network expertise. Access Chorus One’s Public Vault here.
We will also have private, tailor-made vaults for clients seeking individual, personalized agreements for their staked capital. With these private pools, user assets stay separate and are not commingled with other Vaults, thus offering the perks of liquid staking with enhanced security and all the other benefits Chorus One has to offer—higher MEV yields, top-notch security, network expertise, and more. To launch Private Vault with Chorus One, please reach out to us at staking@chorus.one.
In addition, we're making liquid staking more accessible to both our existing and new OPUS customers.
Soon, our public pool will be seamlessly integrated into our Staking Dashboard, allowing OPUS users to dive into liquid staking, mint osETH, and leverage it in DeFi or hold it—all with just a few clicks! Stay tuned for more updates coming your way soon!
You can also get a glimpse of how it will work, and more insights into Stakewise v3 from Jordan Sutcliffe’s speech at the staking summit, here.
About Chorus One
Chorus One is one of the biggest institutional staking providers globally operating infrastructure for 45+ Proof-of-Stake networks including Ethereum, Cosmos, Solana, Avalanche, and Near amongst others. Since 2018, we have been at the forefront of the PoS industry and now offer easy enterprise-grade staking solutions, industry-leading research, and also invest in some of the most cutting-edge protocols through Chorus Ventures.
In March 2020, Vitalik Buterin expressed frustration over the lack of a trustless solution for swapping between BTC and ETH. Fast forward to November 2023, and Chainflip has finally arrived, transforming swaps with a straightforward and seamless process for exchanging digital assets. Chorus One is proud to support the network as one of the genesis validators!
Chainflip is a cross-chain decentralized exchange based on a proof-of-stake validator network that offers users the simplest way to swap assets across different chains. Fully permissionless, it simplifies trading for users who can select the coins they want to trade and submit the transaction. No wrapped tokens, synthetic assets, KYC, P2P counterparties, or any other time-consuming complexities are requisite. Chainflip is designed to minimize slippage and offer great pricing for high-liquidity trading pairs.
Contrary to traditional AMMs like Uniswap, where liquidity is maintained through smart contract-stored pools, Chainflip operates with up to 150 validators constructing multisig 'vaults' on all supported blockchains simultaneously, collateralised by Chainflip's token, FLIP. The assets used for trading are held in these Vaults on chains such as Ethereum, Bitcoin, and so on, creating a decentralized ‘settlement layer’. This is paired with the ‘accounting layer’, the Chainflip State Chain, which is a substrate-based application specific Blockchain. Instead of traditional on-chain pools, Chainflip virtually trades assets on the ‘State Chain’, balancing accounts and settling with the real assets stored securely in Vaults. The State Chain oversees all activities in the Chainflip protocol, including but not limited to recording, executing, or triggering protocol events. Think of it like a unified wallet system in centralized exchanges, simplifying the tracking of user balances.
Trading and tracking assets virtually on the State Chain simplifies the work needed to support individual chains, as rather than needing to write swapping logic in a range of smart contract and scripting languages on external blockchains, it is entirely contained within the Chainflip State Chain environment.
Validators achieve consensus on every transaction within the Chainflip State Chain. FLIP is automatically purchased and burned with each swap, funding emissions for validators and offering liquidity incentives.
Additionally, all of the swapping and trading logic happens on the State Chain, meaning it’s fast, cheap, and dedicated for this purpose. The user experience is incredibly simple, requiring only a destination address for a swap, without any setup: The user selects the coins they want to buy/sell and submit the transaction. No wrapped tokens, synthetic assets, KYC, P2P counterparties, or anything else complex and time consuming is needed.
The above animation by Chainflip demonstrates the path of a typical swap, where a hypothetical user swaps USDC (ERC20) for BTC (native), and Market Makers A & B compete to win the liquidity fee from the trade. Source: https://docs.chainflip.io
For a more detailed explanation of each step, visit https://docs.chainflip.io/concepts/swaps-amm/just-in-time-amm-protocol
Chainflip, a Proof of Stake network without support for native delegation, allows up to 150 validators in the protocol's authority set. Validators secure the network using collateralized FLIP as part of the active set. All Validators with sufficient $FLIP to outbid others in Auctions become part of the active set and similar to Ethereum, each authority member earns equal rewards per epoch. A fixed reward (much less than the Authority Set reward) is split between Backup Validators each Epoch. To be a Backup Validator, Validators must be Qualified and have one of the top 50 bids of non-Authorities.
We've collaborated closely with Chainflip since its inception, actively participating in the testnet.
While users can't delegate FLIP to public nodes, our institutional customers can get involved through Chorus One's whitelabel solution for Chainflip. We set up and maintain validator nodes on your behalf, allowing you to brand the node while we handle all the technicalities. To learn more about our whitelabel solution for FLIP, please reach out to us at staking@chorus.one.
Conversation with Simon Harman, founder of Chainflip on Epicenter Podcast -
Chorus One is one of the biggest institutional staking providers globally operating infrastructure for 45+ Proof-of-Stake networks including Ethereum, Cosmos, Solana, Avalanche, and Near amongst others. Since 2018, we have been at the forefront of the PoS industry and now offer easy enterprise-grade staking solutions, industry-leading research, and also invest in some of the most cutting-edge protocols through Chorus Ventures.
Decentralized Finance (DeFi) is a profound paradigm shift, redefining how the world engages with financial services. At its center, open liquidity provisioning allows for seamless decentralized trading,lending, and more complex financial strategies. In contrast to traditional finance, centralized intermediaries are not required as liquidity providers, instead, users are empowered to bootstrap liquidity.
Automated Market Makers (AMMs) - see e.g. Uniswap - allow anyone to contribute assets to pools and thus facilitate trading. Users are compensated with a share of trading fees, and potentially,idiosyncratic incentives added by parties benefiting from liquidity (e.g. a project issuing a token). AMMs are simple - users may provide liquidity over the entire price range, or for a specific pricing interval.
DeFi composability and the absence of asset custody by intermediaries push market participants to opt for AMMs over centralized exchanges (CEXs). AMMs have the potential to outperform centralized exchanges in terms of liquidity provision (G. Liao and D. Robinson).
Conversely, Decentralized Exchanges (DEXs) driven by a Central Limit Order Book (CLOB) - see e.g. dYdX v4 - demand a substantial pool of assets and ample order book depth for smooth operation. A CLOB is adept at consolidating liquidity around the market price and has the flexibility to adjust quotes as needed.
However, the process of actively matching buy and sell orders to connect traders is complex and rewards sophistication. Market makers in CLOB-based DEXs must consistently update their positions to prevent their orders from becoming stagnant. This dynamic nature of CLOBs, while offering powerful tools for price discovery, also renders liquidity provision a more intricate endeavor. This complexity is particularly pronounced for those traders who may not have access to real-time market data, as remaining profitable in such an environment requires a deep understanding of market dynamics and order flow.
AMMs and decentralized CLOBs are the dynamic engines driving the DeFi ecosystem. For Liquidity Providers (LPs) navigating the DeFi landscape, a central challenge looms – adverse selection, as extensively explored in J. Milionis et al for AMMs and U. Natale et al for CLOBs. This article delves deep into these mechanisms, highlighting challenges and opportunities facing LPs. We’ll zoom in on Uniswap v3, the most widely used AMM, to explore the complexities and potential solutions in this dynamic landscape. In the final section, we argue that staking, specifically with a validator optimizing for MEV, is a way of recouping potential losses.
Uniswap is the leading DEX by volume with $1.5 trillion in lifetime volume since its 2018 debut (cfr. DefiLlama), and over $1 trillion alone processed by Uniswap v3 (H. Adams et al). Central to its operation is the concept of concentrated liquidity (CL), empowering LPs to offer assets within specific price ranges. LPs facilitate the smooth flow of assets and liquidity, making the success of these AMMs critically dependent on LPs participation, who provide liquidity in exchange for trading fees.
For LPs participating in AMMs, the primary challenge is adverse selection, cfr. J. Milionis et al. This issue arises because parties with access to real-time market prices can exploit price discrepancies between AMMs and other platforms. These transactions often involve arbitrage between CEXs and DEXs. To succeed in capitalizing on price disparities, individuals need not only priority access to the first few on-chain transactions in a block (T. Gupta et al) but also the ability to execute high-quality trades on CEX. This transaction flow between different venues forms the backbone of efficient AMM trading, however, it can have adverse effects on LPs via adverse selection.
In U. Natale et al, we evaluate how pricing on dYdX v4 could be impacted by the presence of another CLOB with higher liquidity, for a given asset - e.g. on a CEX. However, it's important to note that this platform is not live at the moment. This means that making an exact comparison of the profitability of professional Market Makers in a decentralized order book like dYdX v4 is currently unfeasible. Consequently, for the remainder of our analysis, our primary focus will be on Uniswap v3, where Concentrated Liquidity presents opportunities and challenges worth exploring.
Estimating the effective profit & loss (PNL) for a LP has been a subject of extensive study in literature. One widely debated estimator, frequently discussed in the context of the profitability of ETH/USDC LPs on Uniswap v3, revolves around markouts, as outlined in a series of medium articles by Ambient finance, formerly known as CrocSwap. However, it's crucial to highlight that markouts, as an estimator, may not present a holistic view of LP profitability on Uniswap v3.
This is because markouts typically overlook the genuine liquidity and the precise price range within the pool. Consequently, they may overlook changes in the value of the numéraire within the pool, focusing solely on the risky asset's fluctuations. The omission of these critical factors can significantly impact the accuracy of LP profitability assessments.
In order to avoid possible biases in the analysis, we decided to use an estimator that is dependent on the actual variation in pool value, see here for the description of the mathematical framework.
To estimate the PNL, we built a Dune Analytics dashboard, where we consider the USDC/ETH pool with 0.05% fees.
The picture above shows the final Pool’s PNL since the beginning of the year, which corresponds to a general gain of around $35M. Let’s observe that, to achieve this figure, we need to consider the total TVL as capital deployed for the strategy. At current TVL of $206.59M, this corresponds to a 16.9% gain, instead, by considering the maximum historical TVL (~$320M) the total gain since the beginning of the year is around 10% of the capital deployed.
If we focus on the PNL from pool value variation, i.e. no fees, we can see how the overall gain is primarily driven by accrued fees. Indeed, the adversarial selection produced - at time of writing - a loss of $400k, with a maximum loss of ~$1M in May.
If we compare with the ETH price movement during the same time period, we can see that this effect is primarily driven by the movement in ETH price.
More precisely, this is an effect related to price volatility, as shown in Milionis et al. Indeed, when price volatility sharply increases, the price discrepancy between Uniswap v3 and other venues also increases, amplifying the MEV size. The two plots below show the pool value variation due to Toxic Flow and the correlation between pool value from toxic flow and spikes in volatility (24h Moving Average). Here by Toxic Flow we indicate all the transactions coming from informed traders that generate a negative PNL for the LPs. Given the nature of DEXs, informed traders aim to include their transactions in the top part of the block (we used the first 10 txs in the block) to avoid price movements due to market activity.
Before concluding this section, it's worth mentioning that, despite the PNL of $35M due to the accrued fees, being competitive and effectively implementing a strategy that generates a positive PNL is a complex undertaking. This is because there are sophisticated LPs, and the accrued fees need to be divided among all participants. Barriers to entry include access to highly performant price feeds and pricing models, as well as optimized execution. Furthermore, the previous estimator considers the PNL from the pool value, inherently assuming that the entity deploying the strategy has infinite capital that can be allocated each time the price moves. If we utilize the estimator defined in Eq. (8) of this document, we can illustrate how an LP with a fixed initial amount deployed in the liquidity provision strategy experiences a PNL of -30% (without accounting for the fees), as demonstrated below.
Additionally, by updating the positions every minute, the LP accumulates a total gas cost of $2M since the beginning of the year. It's important to note that this cost can be hedged with solutions like Alkymia, in which Chorus One has invested.
We have seen how LPs, who diligently provide liquidity, may face losses as arbitrageurs exploit price differences between centralized and decentralized platforms. Staking represents a strategic approach for LPs to recapture a portion of the extracted MEV. This is particularly advantageous when LPs choose validators that are actively working to optimize MEV yields, like Chorus One (see previous chapter). By aligning their staked assets with validators who specialize in maximizing MEV yields, LPs can amplify their returns while bolstering their resilience against the challenges of adverse selection.
This endeavor is not about exploiting MEV at the expense of the ecosystem but rather about recapturing it for the benefit of those who contribute to the DeFi landscape. Maximizing MEV yields is a way to ensure that the value generated from the MEV ultimately flows back to the stakers, aligning incentives and fostering a fairer and more rewarding DeFi ecosystem. Moreover, the staked amount can be thoughtfully hedged against price fluctuations using external sources, creating a comprehensive strategy to safeguard LPs' investments and enhance their gains.
In summary, LPs, who play a pivotal role in DeFi liquidity provision, can employ a multifaceted strategy combining liquidity provision, staking, and hedging to mitigate the impacts of adverse selection and recapture a portion of the extracted MEV. By making strategic choices in validator selection and actively managing their positions, LPs can navigate the complexities of the DeFi landscape and emerge as resilient and profitable participants.
About Chorus One
Chorus One is one of the biggest institutional staking providers globally operating infrastructure for 45+ Proof-of-Stake networks including Ethereum, Cosmos, Solana, Avalanche, and Near amongst others. Since 2018, we have been at the forefront of the PoS industry and now offer easy enterprise-grade staking solutions, industry-leading research, and also invest in some of the most cutting-edge protocols through Chorus Ventures.
