Aave is a decentralised, non-custodial lending platform where depositors can supply their assets to earn rewards while borrowers are able to borrow other assets in a collateralised way.
Aave has integrated Lido’s stETH and wstETH (i.e. the wrapped version of stETH). Lido users can now borrow assets against their stETH or wstETH while still earning their ETH staking rewards.
Aave now is running 2 versions (i.e. V2 and V3) on multi chains. stETH holders can supply it on Aave V2 (Ethereum) but borrowing stETH is not supported. Aave v3 supports wstETH lending and borrowing on Ethereum, Optimism, Arbitrum and Polygon.
Borrowing against stETH or wstETH
Head over to Aave.
Decide the asset to supply (i.e. stETH or wstETH). As stated above, V2 for stETH and V3 for wstETH. You can select Aave market around the top left side.
Select the amount to supply and confirm the transaction.
Select the asset to borrow.
Enter an amount to borrow. Make sure to keep the position’s health factor higher enough. The higher it is, the safer your position is against a liquidation scenario. When the factor value is below 1, your position gets liquidated. To learn more about it, please visit docs.aave.com/faq/borrowing#what-is-the-health-factor
Decide the borrowing rate mode (i.e. Variable or Stable). Variable rate can go up or down depending on the amount of liquidity in the reserve. Stable rate will keep the same during the loan period.
Confirm the transaction. You will see the borrowed asset in your wallet after the transaction completion.
Volia! You have successfully borrowed an asset using your stETH/wstETH as collateral.
Advanced strategy: Leveraged Ethereum Staking
Aave’s integration of Lido’ stETH and wstETH introduces an advanced strategy by effectively leveraging the users’ liquid staking position to maximise their returns. The way it works is:
Supply stETH or wstETH as collateral
Borrow ETH against it
Re-stake the borrowed ETH and get stETH or wstETH in return
Repeat the process in a number of times.
By doing it, the users earn all the staking rewards of the supplied position after deducting the borrowing interest.
The recursive actions lead to a number of transactions with higher gas cost. Fortunately, the platforms, such as DefiSaver, provide a one-click and gas-saving solution to streamline the strategy execution.
Again, be wary of the health factor of your position.
Would I earn the staking rewards when supplying stETH or wstETH on Aave?
Yes. When you supply stETH on Aave V2, you can see the stETH balance in the Supply page rebase/increase after the Lido daily rebasing event around 12:30 UTC. Therefore, you get more stETH after withdrawing your position. As for wstETH lenders, your wstETH position still accrues values as usual.
Why stETH or wstETH supply APY on Aave is lower than Lido’s staking APR?
stETH or wstETH supply APY shown on Aave doesn’t include Lido’s staking APR while it is the APY that Aave market is supposed to pay you rather than Lido but you still earn the staking rewards from Lido.