ETH Staking Yields Rise Above 10% APR

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Genesis suspends withdrawals as the fallout from the collapse of FTX continues. Elsewhere, Ronaldo announces his first NFT collection with Binance as the FIFA World Cup 2022 kicks off in less than a week.

Today, we examine the rise of ETH staking yields and our Research team highlights Morpho Finance, an up-and-coming lending/borrowing optimizer.

This is the Delphi Daily. Let’s dive in.

🚨 In Case You Missed It

• Crypto broker Genesis suspends withdrawals and new loans in its lending business as withdrawal requests exceed current liquidity.
• Sony files a patent that suggests the company is exploring NFTs as a way to track in-game assets.
• Cristiano Ronaldo launches an NFT collection as part of an exclusive, multi-year partnership with Binance.
• Binance’s NFT marketplace will now include OpenSea NFTs in addition to NFTs currently listed on the marketplace.
• The Federal Reserve of New York launches a 12-week pilot to test a central bank digital currency.

📊 ETH Staking Yields Rise Above 10% APR

• Staking APR on stETH has reached an all-time high of 10.7% since the Merge. Since stETH is a rebasing token, holders can expect a higher increase in the number of stETH tokens held.
• Lido attributes this increase to higher-than-expected execution layer rewards. Recently, the liquid staking protocol also had to increase rebasing oracle limits from 10% to 17.5% to let the increased rewards flow to stETH token holders.
• As a result of the increased rewards, the yield earned by recursive borrowing strategies such as icETH has also reached an all-time high of 25.5% since the Merge.
• Interest Compounding ETH (icETH) is an investment strategy by Index Coop that offers amplified exposure to ETH staking yield in the form of an ERC-20 token. Currently, icETH has a total value locked of $12M.
• The strategy collateralizes stETH tokens on Aave to borrow WETH that is used to purchase additional stETH tokens. While the target leverage ratio is 3.1x, the current leverage ratio stands at 2.7x.
• Apart from smart contract risk, investors in icETH need to consider the liquidation risk from borrowing ETH from Aave and interest rate risk from the spread between borrowing cost and staking return.

⚡ Morpho Finance: A Pareto-Efficient Lending Optimizer

• Before the peer-to-pool (P2Pool) money market model became the norm in DeFi, peer-to-peer (P2P) lending was the default design for lending and borrowing.
• Gradually, money markets began to shift to the peer-to-pool model, where lenders deposit their liquidity in a common pool and borrowers are able to obtain a loan from that liquidity pool made up of individual depositors.
• The P2Pool model provides more flexibility and ready liquidity. Lenders can withdraw their deposits anytime as long as there is sufficient capital in the pool, and borrowers can repay their loans anytime.
• P2Pool lending pools are not designed to be fully utilized, implying an inability to maximize capital efficiency. Interest rate algorithms set optimal utilization rates well below 100% so there is enough liquidity to allow lenders who want to exit to do so.
• Consequently, interest income earned by utilized funds is shared across the entire pool. This results in a spread between borrowing and lending rates.
• Morpho is an up-and-coming lending/borrowing optimizer that combines P2P lending with the benefits of the P2Pool model to create a more efficient market for users. The main advantages are higher yields for lenders and lower rates for borrowers.

• Morpho is built on top of existing lending protocols like Aave and Compound. It enables zero-spread loans by automatically matching lenders to borrowers wherever possible.
• Morpho also preserves the same liquidity and liquidation guarantees as the underlying lending market. Debt and lending positions move automatically between the underlying P2Pool markets and a P2P credit line as counterparties are found or lost.
• Instead of just P2Pool matching, as with Aave and Compound, Morpho uses a hybrid model. It combines P2P matching with the underlying P2Pool market as a fallback.
• Right now, the two fallback markets Morpho leans on are Aave and Compound, paving the way for “Morpho-Aave” and “Morpho-Compound.”
• To illustrate this, imagine a borrower taking a loan from Morpho-Compound. Morpho’s matching engine automatically tries to find a counterparty to match the user’s loan.
• If a supplier deposits the token a borrower desires into Morpho-Compound, Morpho uses the stacked ibToken of the supplier to pull liquidity out of the pool and directly transfer it to the borrower.
• Morpho-Compound’s lender and borrower are now matched on a peer-to-peer basis. The result is a 100% utilization rate, creating an efficient interest rate for both parties.
• If the supplier would like to withdraw their funds, and the borrower has not repaid yet, Morpho uses Compound’s liquidity pool to provide the supplier with liquidity. It subsequently reconnects the borrower directly to Compound’s liquidity pool.
• If a match is not found, Morpho uses the borrower’s collateral to take a loan from the underlying liquidity pool. The APY the borrower pays is the same APY as the underlying market — in this case, Compound.
• For more on Morpho Finance, Delphi members can read our Delphi Pro report here.

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