Earn ETH Yield with Marinade Staking SOL Yield on mSOL
Learn about the mSOL-ETH vault, a Mixed Strategy that earns dual yield from mSOL staking and ETH APY from trading fees.
Note: This article is not financial advice. Kamino Finance does not endorse any tokens or platforms mentioned in this article.
Overview
- Can add to positions and maintain exposure to two Layer 1 tokens
- Earns yield from staking SOL with Marinade Finance (mSOL)
- Increased risk from pairing two volatile derivative tokens
This Mixed Strategy vault pairs two volatile tokens representing different Layer 1 blockchains, Solana and Ethereum. The vault has exposure to mSOL staking rewards, which accrue from liquid staking Marinade SOL, and it provides extreme exposure to the crypto market as users swap mSOL and ETH on Solana.
Why mSOL - ETH?
ETH is not a Solana-native asset and exists on the blockchain as a wrapped asset. There’s no form of ETH staking available on Solana, so users who want to hold and stake ETH but also transact on a home network with affordable fees can instead remain on Solana and earn ETH interest rates from providing liquidity.
The other option is to participate in ETH lending, but like mSOL lending, users are less apt to borrow an asset that can appreciate in value. So ETH yield on Solana can be very low. If a user can lend ETH or provide liquidity for ETH APY, the latter usually attracts greater counterparty interest.
If users are bullish on both SOL and ETH, then they can make Solana their home chain and provide mSOL - ETH liquidity instead of switching chains to pay higher fees to stake Ethereum assets. Marinade SOL earns yield from staking, and mSOL crypto market value is dependent on SOL price as well as fees accrued from mSOL staking.
What is mSOL and What is Marinade Staking?
Marinade Finance provides liquid staking tokens in the form of mSOL. When users stake their SOL to earn staking rewards from validators, they lose the opportunity to use their SOL elsewhere in DeFi. Instead, Marinade Solana tokens accrue staking yield, reflect SOL price, and can be used in DeFi across Solana.
Marinade staking helps delegate SOL to a wider number of validators on Solana, which helps decentralize the network through liquid staking. To incentivize mSOL Marinade sometimes offers MNDE rewards to liquidity providers on a DEX, which can boost overall yields.
What is ETH ?
ETH, or Ether, is the Ethereum network’s native token. It is used to pay for transactions on Ethereum, and it is one of the first tokens to take a prominent place in DeFi, as DeFi was essentially born on Ethereum. ETH yield farming was one of the first iterations of the DeFi primitive, and the token is one of the primary integrations in OG DeFi e.g., AAVE ETH.
Before Ethereum transitioned into Proof-of-Stake (PoS), it was originally a Proof-of-Work network that required users to bid for transaction space from miners. As the Ethereum merge to PoS was in limbo, Lido staked ETH became increasingly popular, and Lido ETH, or Lido stETH, an mSOL predecessor in liquid staking, became a DeFi standard.
Although DeFi is growing on Solana, liquid-staked ETH has not caught on cross-chain. This means that users on other chains seeking ETH yield must participate in ETH yield farming through other means, and providing liquidity with wrapped ETH can produce ETH APY.
When to mSOL - ETH?
The pairing of two volatile assets provides two options for a market maker: either provide liquidity for short-term yield on high volume and low volatility or stick around for the long haul earning fees while waiting for both assets to appreciate in value. If both projects succeed, then liquidity providers can optimize their gains from price action by accumulating mSOL - ETH yield.
What are mSOL - ETH Risks?
If both mSOL and ETH rise in value at the same time, users gain from this appreciation. Conversely, this vault can experience extreme impermanent loss if one of the assets increases or decreases in value opposite to the other asset, and the loss can be realized if the position is rebalanced.
It’s possible that yield from providing Marinade SOL and finding a workaround for ETH staking can be less than realized losses if both assets depreciate in value or experience so much divergence that rebalancing highly affects the position. Additionally, mSOL crypto market value can de-peg from SOL, exacerbating divergence.
In the past, Lido ETH has diverged from vanilla ETH staking due to extreme leverage. On Solana, the biggest risk is that the custodian that issues wrapped ETH on the network can no longer meet their obligations to swap wrapped ETH for ETH on Ethereum. This recently happened when FTX declared bankruptcy and could no longer redeem soETH.
Conclusion on mSOL - ETH
Users can hold two assets from major blockchains while earning yield from mSOL staking and fees from providing liquidity. Plus, users can help participate in securing the Solana network by participating in DeFi with mSOL staking derivative tokens instead of pairing ETH with vanilla SOL.
A short-term view of high volume on SOL and ETH or a long-term positive outlook on both of these tokens can make the mSOL - ETH vault a possible way to earn ETH interest rates while transacting on Solana. However, there are significant risks if the prices of the two tokens diverge or mSOL de-pegs from SOL or wrapped ETH goes unbacked.
