Liquid Staking Tokens in Automated Market Makers

Krzysztof Gogol (), Robin Fritsch, Malte Schlosser, Johnnatan Messias, Benjamin Kraner and Claudio Tessone
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Krzysztof Gogol: University of Zurich
Robin Fritsch: ETH Zurich
Malte Schlosser: University of Zurich
Johnnatan Messias: Matter Labs
Benjamin Kraner: University of Zurich
Claudio Tessone: University of Zurich

Chapter Chapter 2 in Mathematical Research for Blockchain Economy, 2024, pp 27-54 from Springer

Abstract: Abstract This paper studies liquid staking tokens (LSTs) on automated market makers (AMMs), both theoretically and empirically. LSTs are tokenized representations of staked assets on proof-of-stake blockchains. First, we model LST-liquidity on AMMs theoretically, categorizing suitable AMM types for LST liquidity and deriving formulas for the necessary returns from trading fees to adequately compensate liquidity providers under the particular price trajectories of LSTs. For the latter, two relevant metrics are considered: (1) losses compared to holding the liquidity outside the AMM (loss-versus-holding, or “impermanent loss”), and (2) the relative profitability compared to fully staking the capital (loss-versus-staking) which is specifically tailored to the case of LST-liquidity. Next, we empirically measure these metrics for Ethereum LSTs across the most relevant AMM pools. We find that, while trading fees often compensate for impermanent loss, fully staking is more profitable for many pools, raising questions about the sustainability of the current LST liquidity allocation to AMMs.

Date: 2024
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DOI: 10.1007/978-3-031-68974-1_2

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