Optimize Yield with Lido stSOL and USDH Stablecoin Liquidity
Earn stSOL staking yield while borrowing USDH and providing liquidity? Yes, that's possible with Kamino and Lido Finance.
Note: This article is not financial advice. Kamino Finance does not endorse any tokens or platforms mentioned in this article.
Overview
- Earn fees from stSOL-USDH trading on Orca
- Can borrow USDH with stSOL to provide liquidity
- Possible to 3x rewards from multiple protocols
This Mixed Strategy vault pairs a Solana-native stablecoin, USDH, and a volatile Solana liquid staking derivative (LSD) token, stSOL. The USDH stablecoin is crypto-backed and pegged to USD, and the Lido liquid staking token stSOL is backed and pegged to SOL, deposited with Lido Finance for staking.
Why stSOL - USDH?
USDH is the most widely paired Solana-native stablecoin on Solana decentralized exchanges (DEXs). The stSOL-USDH route on Orca’s Whirlpool is often highly favored by DEX aggregators due to the capital efficiency of concentrated liquidity from users who acquire USDH to repay their USDH borrow on Hubble Protocol.
In addition, the stSOL-USDH pair earns a fee rate of 0.3% for trades on Orca and, at the time of writing, also earns LDO rewards on both Orca and Kamino. These dual rewards are auto-compounded into stSOL-USDH liquidity positions by Kamino at a rate of every ten minutes.
Moreover, since a USDH borrow can be executed against stSOL collateral, it’s possible to hold stSOL, mint USDH, and provide liquidity for the stSOL-USDH vault with borrowed USDH. This strategy can earn yield from trading fees and Lido staking plus LDO rewards for borrowing against stSOL on Hubble Protocol.
What is USDH?
The USDH stablecoin is minted by users who borrow against their assets through Hubble Protocol. As a collateralized debt position (CDP) stablecoin, a USDH borrow is initiated by users who first deposit tokens and then mint stablecoins through the USDH Hubble smart contract at a value below the maximum loan-to-value (LTV) for each asset.
Users can mint USDH against a basket of crypto assets including SOL, ETH, kTokens, stSTOL, and other LSD tokens. As a crypto-backed CDP stablecoin, USDH is built on a decentralized stablecoin model that has proven to be one of the most sustainable methods for minting dollar-pegged assets.
USDH Address: USDH1SM1ojwWUga67PGrgFWUHibbjqMvuMaDkRJTgkX
What is stSOL?
Lido’s stSOL is a liquid staking derivative (LSD) token. Users participate in stSOL staking by depositing SOL with Lido, and Lido staking contracts then distribute SOL to an increasing number of Solana validators to secure the Proof-of-Stake (PoS) network and earn yield from staking rewards.
Lido Finance has become the leading provider of liquid staking tokens in DeFi. Lido staked assets include Lido ETH (stETH) and Lido SOL (stSOL), each of which earns yield from staking while providing a token that can be used, for example, to participate in stSOL lending or providing liquidity.
stSOL Address: 6CAdvg19AS7wy1RjyDeL5Ja62SN1wJizDyoB95yBxQvB
When to stSOL - USDH?
This Mixed Strategy pair is best for periods of high trading volume and low volatility. Providing liquidity with the USDH stablecoin paired with a volatile asset like stSOL crypto increases the fee tier for market making with USDH, but it also increases the risk of impermanent loss during volatility.
This vault is a poor choice for market making during periods when SOL is expected to rise or fall in price in the near future. Earning yield from short-term volume bursts of high volume during crab markets is usually the most optimal strategy for volatile assets paired with stablecoins.
What are stSOL - USDH Risks?
As mentioned earlier, pairing stablecoins with volatile assets like stSOL increases the risk of divergence loss. This loss is less severe than if pairing two volatile tokens, for example, Lido ETH with stSOL, when these tokens diverge in price, but the position can still incur a loss when stSOL drops in value.
In addition, if SOL goes into price discovery mode and begins to rise, Lido staked SOL comes along for the ride, which means this vault will experience some impermanent loss if SOL increases in price. When this vault falls out of range, and a rebalance is triggered, impermanent loss can be realized during the rebalance.
Conclusions on stSOL - USDH
Lido DeFi has been one of the strongest actors on Ethereum, with Lido stETH, and Solana, with stSOL staking. Lido staked assets are widely held on Solana and can be traded for USDH to repay loans on Hubble Protocol, one of Solana’s most seasoned projects, which could mean this pair remains active for a long while.
The risks of impermanent loss with this pair can be outweighed by the rewards earned from a 0.3% fee tier, and multiple Lido Finance LDO rewards programs across three protocols (including an stSOL lending strategy for USDH on Hubble). However, these rewards are not guaranteed, and there is always the possibility that divergence can lead to losses when mistiming Mixed Strategy pairs.
