ILMs 101: Automated growth strategies to magnify your rewards
Table of Contents
· Summary/TL;DR
· Introduction
· Staked ETH
· Introducing ILMs
· How do ILMs work?
· Why are ILMs beneficial?
· How to get started?
· FAQs?
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Summary/TL;DR:
- This post explores the power and innovation of Integrated Liquidity Markets (ILMs), which are automated growth strategies that leverage a user’s collateral to execute specific predetermined strategies i.e. looping.
- The inaugural ILM, a 3x leveraged wstETH/ETH looping strategy, illustrates how users can magnify staking rewards through automated lending and borrowing in just a couple of clicks. Through smart contract execution and efficient capital deployment, ILMs aim to enhance the borrowing experience while minimizing the costs and time associated with position management.
Introduction
In the world, and in DeFi, no two people are the same. From risk-averse savers to adventurous investors, each person’s situation is unique with individualized goals and preferences.
Whether seeking high-yield opportunities, passive income streams, or innovative ways to participate in the digital economy, each DeFi user brings a unique perspective and set of motivations to the table.
For many, their approach to DeFi hinges on time horizon and risk. Identifying personal preferences across these factors help users identify their own persona among the kaleidoscope of profiles that exist.
Due to its long term time horizon and growth potential, Staking has been an emerging focus area that has frequently surfaced across the Seamless community. Within staking, staked ETH in particular presents unique opportunities to passively generate staking rewards while remaining correlated with the underlying ETH.
Staked ETH
Staked ETH is not necessarily a new concept. In exchange for verifying transactions through a process called “proof-of-stake” (PoS), validators (or stakers) are rewarded for their work with transaction fees and newly minted ETH.
Recent projects have removed historical barriers to participate, making the act of staking ETH more accessible for the masses. For example, Lido Finance, a crypto project with the largest TVL on Ethereum Mainnet, lets users supply ETH (regardless of amount and knowledge of operating a node) to earn staking fee rewards.
Users of Lido can easily stake their ETH and in return receive a staked ETH (stETH) ERC-20 token in return. This stETH is correlated to the underlying ETH that is now staked, however the stETH also grows in value. It grows in value through the staking fees it accumulates as a result of supporting operations of the Ethereum network.
There are several staked ETH offerings, including Lido’s stETH, Coinbase’s cbETH, Rocketpool’s rETH, and more. As a basic example, if ETH was priced at $2,700 a staked ETH token would be priced at a slightly higher value due to the staking rewards inherent with these tokens.
Many users who stake ETH fundamentally believe in its asset appreciation over time. Users who stake benefit from the following:
A) They do not lose out on ETH price movements and potential future price appreciation
B) They earn additional staking rewards by supporting the Ethereum network
Here’s where ILMs come in. If you feel that staking ETH is a strategy consistent with your own risk appetite and belief in the DeFi space, ILMs allow you to magnify your staked position to earn additional staking rewards all while remaining LONG ETH.
Introducing ILMs
ILMs are the easiest and fastest way to loop and magnify your staked ETH positions to earn additional staking rewards. Built by contributors from Seamless Protocol, the largest native Lending & Borrowing platform on Base, ILMs offer a capital efficient solution to help users automate their growth strategies.
The inaugural ILM strategy is a 3x leveraged wstETH/ETH looping strategy. In this strategy, users deposit wstETH and ETH is borrowed to magnify their position. By holding more wstETH, users earn additional staking rewards. To get started with this strategy, click here.
ILMs as a broad term refer to any smart contract managed strategy. Because this is an umbrella term, ILMs enumerations are endless and many more automated growth strategies can be created. While this first strategy is a wstETH/ETH looping strategy, expect many more variations of ILMs moving forward as they become more composable and robust.
At their core, ILMs are integrated smart contract strategies that utilize Seamless’s capital pools with better rates to maximize rewards.
Let’s break this down:
Smart contract strategies: ILM strategies are written in code and executed by smart contracts. This means that a predetermined ILM borrowing strategy is able to execute automatically, without any manual intervention. A key differentiator for ILMs is that they are composable with endless possibilities for new automated growth strategies to be spun up quickly.
Seamless’s capital pools: Since Seamless is one of the largest lending and borrowing protocols on Base, significant liquidity has been supplied to the protocol. This ample liquidity offers competitive advantages in terms of speed, availability, rates, and user experience. With ILMs, user’s assets are put to work immediately, with a high degree of speed and efficiency.
Better rates: Users can achieve higher leverage and better rates with the same capital on ILMs than other platforms. Having direct access to liquidity in-house means no hidden or added middleman fees from other UI layers.
Maximize rewards: With no hidden fees and optimal borrowing rates, ILMs offer material differences when it comes to rewards. Compared to other platforms, Seamless’ transparent and low fee structure greatly impacts a users’ P/L, not to mention auto compounding of gains back into the strategy through automated rebalancing.
How do ILMs work?
When you deposit assets into an ILM, all actions involved with the ILM automated growth strategy are securely embedded within smart contract code, ensuring trustless and tamper-proof execution. Since the assets have a predetermined use and purpose, users benefit from more capital efficiency, more automation, and less collateral needed.
Let’s walk through a few steps to illustrate how the 3x leveraged wstETH/ETH looping strategy works:
- A user deposits wstETH into the ILM and receives an LP Token signifying their position in the strategy.
- ETH is borrowed in accordance with the strategy which will eventually be used to magnify a users wstETH position. This ETH is borrowed from the supply side of the Seamless Protocol lending & borrowing markets.
- This borrowed ETH is swapped on a DEX for additional wstETH — achieving a 3x leveraged ratio.
- As wstETH generates staking fee rewards, the price of wstETH will grow relative to the price of ETH. As wstETH grows it will naturally fall outside of the targeted 3x leveraged ratio — when this happens, additional ETH will be borrowed and swapped for wstETH automatically. This process of continuously monitoring the leveraged ratio of debt to equity is called rebalancing and is fundamental to ILMs.
wstETH is correlated with ETH, in other words, as ETH trades up and down, so does wstETH. Because of this, price movements on the underlying ETH does not affect the 3x leveraged ratio. Instead, the staking fee rewards baked into the price of wstETH will eventually trigger an auto rebalancing event to borrow additional ETH. All of this is done automatically within the ILM itself meaning the user does not need to do the looping/swapping themselves.
Central to this strategy is the Looping Strategy, a foundational component of the ILM framework, which recursively leverages deposited assets as collateral to amplify exposure to the underlying asset.
Aptly named “looping,” this ILM strategy entails a series of steps wherein user collateral is pooled and deposited into a lending pool, debt assets are borrowed against the collateral, exchanged for the collateral asset on an external decentralized exchange (DEX), and subsequently supplied back to the lending pool. By continuously rebalancing to maintain a desired collateral ratio, the Looping Strategy optimizes capital efficiency while facilitating seamless asset management.
Here’s a quick example with numbers:
Let’s assume wstETH is priced at $3,500 and ETH is priced at $3,000
- User adds 2 wstETH to ILM (Equity) ~$7,000 USD. The user receives an LP Token to signify their position in the ILM
- ILM Borrows 4.67 ETH (Debt) ~14,000 USD to achieve a targeted 3x leverage ratio (Debt+Equity/Equity)
- This Borrowed ETH is swapped into wstETH on a DEX incurring DEX Fees
- As wstETH earns staking fee rewards, the user’s wstETH grows relative to ETH, requiring periodic rebalancing to take out more ETH to stay in 3x ratio
With this ILM strategy, you can see that a user ultimately achieves magnified staking fee rewards.
Why are ILMs beneficial?
If you are Long ETH and/or currently stake ETH, this wstETH/ETH Looping Strategy ILM might be exactly what you are looking for. Other comparable offerings that offer Looping LSTs via borrowing logic are limited by the fact that there is no auto compounding of gains, additional fees impacting your P/L, and require users to actively manage these positions due to liquidation risk and price movements.
ILMs take a different approach
⭐️ With ILMs there is auto-compounding of gains.
⭐️ With ILMs there are no hidden fees.
⭐️ With ILMs there is no need for active management of your position.
All of these unique innovations combine to ultimately deliver a product that has material impact on your P/L and performance. ILMs have been carefully crafted through conversations with users about problems and limitations they face with other looping strategies.
ILMs are a novel approach to enhancing capital efficiency by minimizing the costs associated with position management.
*To learn more about competitive advantages and key differentiators of ILMs, continue reading ILMs 102: Key Differentiators and a leap forward for Base DeFi, the next post in the Introducing ILM Blog Series
How to get started?
ILMs are a central part of Seamless Protocol — bringing automated growth strategies to borrowers looking to magnify their positions.
To get started with ILMs, users can head to app.seamlessprotocol.com. On the Dashboard, users will see available strategies to choose from. By clicking into the details of each ILM, users can learn more about the automated growth strategy and expected performance.
FAQs?
Who are ILMs built for?
If you are someone who is long ETH and/or is a believer in Ethereum’s potential to revolutionize the way individuals interact with the blockchain, ILMs are for you.
If you are someone who stakes ETH via Lido Finance, Rocketpool or other staking providers, ILMs are for you.
If you are looking for an easy and fast way to magnify your own ETH staking rewards that does not require consistent active position management, ILMs are for you.
How are ILMs different from the competition?
There are other looping strategies that exist, however ILMs are different on a few key facets.
- ILMs do not have any hidden fees inherent to the strategy. Other products take fees which have a material impact on a user’s P/L which takes months to recoup.
- ILMs auto compound gains from staking fees and automatically rebalance to take on additional debt to maintain a 3x leverage ratio. Other products require manual intervention to capitalize on these opportunities
Is lower-collateral borrowing secure?
With other DeFi lending and borrowing, there is no specific purpose tied to the borrow i.e. a user can take those funds and choose what to do with them on or off platform. Because of this, overcollateralization is necessary to ensure there is sufficient funds to pay back the lender.
With ILMs, there IS a specific purpose tied to the borrow and the funds are managed by a smart contract without leaving the protocol. This means that the user can’t run off with these funds thereby offering a more capital efficient solution with less idled capital locked up as collateral.
What is the inaugural ILM strategy?
The inaugural ILM strategy is a 3x leveraged wstETH/ETH looping strategy. In this strategy, users deposit wstETH and ETH is borrowed to magnify their position.
Have ILMs been audited?
Yes, ILM smart contracts have been audited via formal verification from Certora, a leading blockchain auditing firm who has audited DeFi giants such as Maker, Lido and Balancer.
Seamless Protocol is the first decentralized, native lending and borrowing protocol on Base. Seamless lays the foundation for Modern DeFi, focusing on lower-collateral borrowing and a better user experience to inspire the masses.
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