Guide: Borrowing & Lending on Aave

March 01, 2022 in Guides by Lido

Aave, a lending platform that allows users to borrow and supply assets, has integrated Lido’s stETH as a collateral asset on their platform. Users can now borrow assets against their stETH all the while retaining their Ethereum staking rewards whilst stETH is supplied as collateral.

Lido’s stETH is a liquid token representative of staked ETH. When a user stakes their ETH with Lido, the user will be granted an stETH token. This token rebases once a day to reflect their staking rewards, and will be redeemable for ETH once withdrawals on the beacon chain are supported.

If a user were to supply their stETH as collateral on Aave, they would still retain those staking rewards since stETH rebases daily. This user would then be able to withdraw a greater amount of stETH than they initially deposited! They still earn staking rewards!

Please note: stETH is only supported as lending collateral. Borrowing stETH on Aave is not currently supported.

What is Aave?

For a more in-depth understanding of Aave, please refer to the Aave docs.

Aave is a decentralised, non-custodial lending platform that allows any user to supply their assets to earn rewards, or to borrow other assets by users supplying their own assets as collateral.

Aave creates this market for the DeFi community that helps expose them to a variety of different assets. Suppliers can supply assets to the protocol to earn rewards, and borrowers can then borrow those assets by supplying their own assets as collateral via an over-collateralisation mechanism. In cases of liquidations, the borrower’s collateral will then be sold to cover any expenses.

Staking Strategies with Lido and Aave

Self-repaying Loan

Lido’s stETH is a productive asset which increases in balance every 24 hours through a supply rebase (unless there's a slashing on beacon chain; there has never been one with Lido). This lets you earn rewards on your collateral on a daily basis, lowering your liquidation ratio every day and offsetting the borrow rate.

Leveraged Ethereum Staking

Aave’s integration of Lido’s stETH effectively allows users to leverage their ETH staking, maximising their staking returns beyond the standard Ethereum staking rewards. The way that this works is by supplying your stETH as collateral, borrowing ETH against it (with much less volatility in relation to stETH compared to something like DAI, etc.), and then re-staking that ETH for stETH. You can repeat this process a number of times depending on your risk appetite and limited by Aave's collateralization ratios. Be wary of gas fees, especially since "unfolding" this pattern will take numerous transactions.

How to borrow against stETH

Please note: Liquidations may result in permanent loss of your stETH! Please first understand what you are doing before you do anything carelessly.

Head over to Aave.
Select the “Lido Staked Ether” market under “Assets”.
Connect your wallet by clicking the button in the top right corner.
Select “Deposit”
Input the amount of stETH that you would like to deposit.
Confirm the approval transaction.
Confirm the deposit transaction.
After completing the transactions, select “Dashboard”.
Select “Borrow Now”
Select the asset that you would like to borrow.
Enter an amount that you would like to borrow.
Choose between “Stable APY” or “Variable APY” and select “Continue”. For more information, please refer to these docs.
Select “Borrow” and confirm the transaction.

Ta-da! You have successfully borrowed an asset using your stETH as collateral.

Maximum LTV: The maximum borrowing power of the collateral.
Liquidation threshold: Threshold where loan is liquidated.
Liquidation penalty: Penalty applied when loan is liquidated.

How to repay loans

Head over to your dashboard.
Under “Your Borrows”, select “Repay”.
Input the desired amount that you would like to repay on your loan.
Confirm the approval transaction.
Select “Repay” and finalise the transaction.

You have now successfully repaid your loan.

How to withdraw stETH collateral

Head over to your dashboard.
Under “Your Deposits”, select “Withdraw”.
Input the desired stETH amount that you would like to withdraw.
Confirm the approval transaction.
Select “Withdraw” and finalise the transaction.

You have now successfully withdrawn your stETH collateral.