Learn · DeFi composition
Leveraged yield: assets, debt and downside
Borrowing can buy more assets that earn staking rewards. It also creates a debt that keeps growing when those assets lose value.
Fictional educational model. No live rates, wallet or real transactions. Start with lending and liquidation if collateral and health factor are new to you.
One staking return, more exposure
A liquid staking token (LST) represents a claim associated with staked assets and their rewards or penalties. Here, a fictional LST starts at its backing value. Its backing changes with staking; its dollar price also changes with the underlying asset and any market discount.
Supply LST as collateral, borrow a dollar token, buy more LST and supply it again. At 2× leverage, $1,000 of your equity supports $2,000 of LST and $1,000 of debt. The dollar token stays at $1 in this example. Borrowing the underlying asset instead would create different price exposure.
The staking return is counted once. Supplying this LST as collateral adds no separate supply interest here. Under flat prices, a 5% staking return on $2,000 earns $100; 3% interest on $1,000 debt costs $30. That leaves $70 before transaction costs, compared with $50 from holding $1,000 unlevered. A higher borrowing rate or a price fall can reverse that difference.
Background: Lido’s token integration guide explains staking-token rewards, penalties and accounting. This lab uses fictional tokens and parameters.
Fictional · computed in your browser
Change one assumption, then follow the result
One year, simple interest, $1,000 starting equity. The staking return is net of staking-provider fees; negative values represent penalties. No separate lending supply yield or token incentives. Costs include an assumed combined transaction/slippage budget, paid at exit. The same cost percentage applies to the unlevered comparison.
01 · Build the balance sheet
Repeated borrowing buys more LST, which is supplied as collateral. Each round respects a fictional 70% borrowing limit. Entry prices stay fixed and costs are deferred in this simplified sequence.
Supply your $1,000 LST
- LST collateral
- $1,000.00
- Borrowed cash
- $0.00
- Debt
- $0.00
- Equity
- $1,000.00
Equity = collateral + cash − debt. Borrowing does not create wealth. The year-end calculation below always uses the completed 2.0× position, regardless of the step displayed.
02 · Where the net return comes from
Start with equity. Add staking rewards, then revalue that backing for the underlying price and the LST discount. Subtract borrowing interest and costs.
| Starting equity | $1,000.00 |
|---|---|
| Staking reward / penalty | $100.00 |
| Underlying price change | $0.00 |
| LST market discount | -$0.00 |
| Borrow interest | -$30.00 |
| Transaction costs | -$10.00 |
| Net equity after costs | $1,060.00 |
- Leveraged net return on $1,000
- 6.0%
- Unlevered LST net equity
- $1,045.00
- Leverage advantage / disadvantage
- $15.00
- Assets minus debt, before costs
- $1,070.00
Comparator: hold $1,000 of the same LST for the same year, with the same staking return, price change and discount, without debt. This is not a comparison against holding cash or unstaked ETH.
03 · Can the position survive?
- Year-end collateral value
- $2,100.00
- Debt including interest
- $1,030.00
- Starting health factor
- 1.600
- Year-end health factor
- 1.631
Not below the liquidation boundary at this endpoint.
HF = collateral value × fictional 80% threshold ÷ debt. Below 1 means eligible. This model assumes the oracle follows the discounted market price; real collateral feeds may value LSTs differently. Exit costs are not deducted from collateral when computing HF.
These are hypothetical marks before liquidation execution, not promised proceeds. A liquidator may repay debt and take collateral plus a bonus. Execution, penalties and timing change the outcome. A position can breach the boundary during the year even if its final mark recovers.
An exit needs more than a positive number
Debt must be repaid before enough collateral can be released. Selling LST needs a buyer and available liquidity; redeeming it may involve a withdrawal queue. A discount can widen and slippage can exceed the cost budget. The balance sheet does not guarantee an atomic unwind or a sale at the displayed price.
Variable borrowing rates can change during the year. Staking penalties, smart-contract failures, oracle errors, stablecoin depegs and collateral-rule changes add risks beyond these sliders. Combining protocols creates dependencies: a failure in one can obstruct an exit through another.
Liquidation can remove collateral before a later recovery. This lesson checks entry and endpoint balances, not a price path, liquidation execution or the resulting realised return. A health factor above 1 at year end does not establish that the position survived the year.
Source: Aave’s health factor and liquidation explanation. Actual rules and oracle designs depend on the market. These fictional settings do not select a strategy or borrowing level.