Nexo has increased its fund allotment into liquid staking DeFi protocols for boosting yield. According to DeFi strategist Kiril Nikolov, Nexo started employing liquid staking about a year ago and has steadily increased its use. This effectively leaves the staked tokens free to use for other trades.
Nexo is a crypto lending platform that enables users to lend out cryptocurrencies and earn interest on their digital assets. The platform generates yield in a few ways, like lending funds to institutions, staking tokens, and trading tokens. Staking makes a significant part of its business, and Nexo uses it to generate yield for newer tokens like Solana (SOL), Terra (LUNA), and Avalanche (AVA).
In 2021, Nexo started experimenting with liquid staking, as it generates more yield and frees up the liquidity. Since then, it has increased the amount of user capital allocated to such protocols by expanding the number of platforms across different blockchains.
Nikolov stated that liquid staking is "still a very low percentage" of Nexo's business. However, it "will increase as time goes by and ETH 2.0 comes closer."
What is liquid staking?
The method of freeing up liquidity and generating an extra yield on staked assets is called liquid staking. While staking with a liquid staking provider, you receive a token representing your staked assets. These tokens represent an equivalent value, which can be used in other DeFi protocols for generating additional yield or for any other purpose like trading. However, you need to return the tokens for accessing the original staked assets.
As explained by Nikolov, the main problem lies with Ethereum. While Ethereum allows users to stake tokens, the proof-of-stake consensus is yet to be adopted, making it impossible to unstake. All funds staked on Ethereum are locked until the proof-of-stake adoption, which has already been delayed multiple times.
For example, a Nexo user deposits ETH, and Nexo stakes it on Ethereum to generate yield. If the user wants to withdraw their ETH from the platform, Nexo must return their deposit. However, for Nexo, the ETH will still be stuck on Ethereum.
Meanwhile, liquid staking makes it possible to sell the staked tokens on the open market rather than wait for them to unlock. Generally, it roughly reflects the value of the staked assets since it's easy to arbitrage the difference. However, the biggest concern for Nexo remains that there is a premium for those who want to cash out immediately, which can decrease its returns.
According to Nikolov, Nexo uses the "battle-tested" and the largest liquid staking provider on Ethereum and other chains, Lido Finance. In addition, Nexo also tries out new liquid staking protocols on different chains, starting with a small sum and building it up over time if the protocol is safe. Apart from liquid staking, Nexo is also experimenting with DeFi protocols but has avoided using client funds due to the high risk involved.
In contrast, Nexo's rival Celsius Network has a dedicated DeFi team and has been more aggressive in the DeFi industry. However, it lost around $50 million when the Badger DAO protocol was exploited. Moreover, Celsius Network representatives refused to comment on the percentage of customer funds allocated to DeFi protocols.