Neutral Strategies in Restaking: Unlocking Yield with Stable Collaterals

Neutral strategies in DeFi involve leveraging stablecoins as collateral to borrow assets like native ETH or wstETH. These borrowed assets can then be restaked to generate rewards while minimizing exposure to market volatility.

This article explains how these strategies work in practice, the tools offered by InceptionLRT, and the considerations liquidity providers (LPs) should take into account.

Understanding Neutral Strategies

A neutral strategy leverages the predictable value of stablecoins to generate rewards in DeFi. By doing this, you’re not betting on price movements. Instead, you’re making the spread between borrowing costs and restaking rewards work in your favor. The process typically involves the following steps:

1. Stablecoins, such as USDC or DAI, are deposited as collateral into a money market like Morpho.

2. Based on the collateral provided, assets such as ETH or wstETH can be borrowed, which in the current market conditions, have lower borrowing APY's than the stablecoins supply.

3. Borrowed assets are then restaked using LRT protocols like InceptionLRT to mint inwstETHs.

4. The profitability of the strategy depends on the difference between the borrowing costs and the inwstETHs restaking yield. As long as the borrow APR remains equal to or lower than the inwstETHs APR, the strategy stays neutral or generates rewards.

For instance, if the borrowing APR of a given asset is 3% annually and the restaking yield from inwstETHs is 6% APY, the net yield is 3%. Apart from this, InceptionLRT and LRT protocols also provide additional incentives, such as rewards or rewards, which can further enhance the overall yield. On top of this, the liquidity provider retains an LRT, which creates further opportunities for rewards through integrations with other protocols, making this a versatile strategy for managing capital efficiently.

Facilitating Neutral Strategies with InceptionLRT

InceptionLRT provides a streamlined framework for implementing neutral strategies. Here’s a closer look at what our protocol offers:

- ERC4626 Vaults: Our multi-curated vault on Symbiotic, for example, is designed specifically for wstETH restaking, making it easy to deposit and start accruing rewards.

- Asset Conversion via Enso: For users who hold other assets, our integration with Enso automates the conversion of assets like ETH or stablecoins into wstETH before depositing them into our Symbiotic vault.

InceptionLRTs wstETH Symbiotic Vault (Source)

This structured approach ensures that the technical barriers for implementing such strategies are significantly reduced.

Implementing a Neutral Strategy: A Practical Example

Consider the case of a liquidity provider with $10,000 in DAI. The following workflow illustrates how this capital can be put to use:

1. Collateralization: The liquidity provider deposits $10,000 of DAI as collateral on a lending market (such as Morpho), receiving a borrowing limit of up to 75%. To maintain a safety margin, $5,000 worth of ETH is borrowed instead of the full limit.

2. Conversion and Restaking: The borrowed ETH is converted to wstETH using InceptionLRT’s integration with Enso. The resulting wstETH is deposited into an ERC4626 vault, minting inwstETHs, which will start generating rewards immediately.

3. Reward Assessment: As long as the borrowing costs are equal to or lower than the inwstETH APR (which includes the base APR and any additional protocol incentives), the liquidity provider remains in a neutral or positive borrowing position. For example, if the borrowing APR is 3% and the inwstETH APR is 6%, the liquidity provider achieves a net yield of 3% on the borrowed amount. This balance ensures that the strategy remains sustainable while leveraging stable collateral to unlock staking rewards.

This process allows stablecoins to serve as a base to unlock restaking rewards, while the risk of price fluctuation is effectively managed.

Maximizing Returns Through Looping

Looping is an advanced technique that compounds rewards by leveraging collateralized assets. Here is how it can be applied:

1. After restaking the borrowed amount of ETH into the vault, the inwstETHs minted can be used as collateral on platforms like Morpho.

2. Additional ETH or wstETH is borrowed against the inwstETHs.

3. The borrowed assets are restaked, repeating the process until the incremental cost of borrowing exceeds the rewards generated.

For example, a liquidity provider could deposit $5,000 in wstETH as collateral in return for inwstETHs, borrow an additional $3,000 in ETH, and restake it. Each iteration amplifies the reward potential but requires careful management to avoid over-leveraging.

For the full scope of looping in DeFi, check out this article: Navigating DeFi Loops: Wy Isolated LRTs are Superior for Optimal Yield

Key Considerations for Neutral Strategies

When implementing a neutral strategy, careful attention should be paid to the following factors:

- Net Yield Calculation: The profitability of the strategy depends on the difference between borrowing rates and restaking yields. Regular monitoring ensures that the strategy remains viable.

- Collateral Management: Maintaining a safe collateral-to-debt ratio is essential to avoid liquidation during market volatility.

- Transaction Costs: Gas fees associated with borrowing, converting, and staking can impact returns, especially in complex strategies like looping.

- Platform Reliability: Using trusted platforms such as InceptionLRT, Morpho, and Enso minimizes risks associated with smart contract vulnerabilities. Each of these considerations plays a critical role in ensuring the strategy’s long-term sustainability and success.

The Role of InceptionLRT in Neutral Strategies

InceptionLRT simplifies the implementation of neutral strategies by providing the necessary infrastructure to stake borrowed assets efficiently. The integration with Enso for seamless asset conversion, along with robust vaults and yield tracking tools, The integration with Enso for seamless asset conversion, along with robust vaults and yield tracking tools, allows depositors to choose the most appealing assets based on borrowing APRs, optimizing their strategies without direct exposure to asset price volatility.

With the flexibility to accommodate stable collateral and offer advanced strategies like looping, InceptionLRT empowers LPs to make the most of their capital in the DeFi space.