Disclaimer: This strategy has a relative level of market volatility and is not adopted at scale by the Serenity Fund. We delineate the process here to analyse the returns and risks involved for discussion purpose only, and does not mount to an investment recommendation.
Cream.finance is a lending/borrowing platform, which was forked from Compound. Cream rose to fame during this year’s defi bull run, due to its CREAM mining rewards and higher lending rates. We do not favour defi forks, for reasons explained in earlier articles (Hedged Liquidity Providing 4/4) and neither do we opine on the merits of depositing into Cream.Finance.
For the purpose of this Strategy Paper, we explain how Cream.Finance has created an ETH2 staking based product that provides a 30% plus APY with little market volatility.
First of all, Cream is staking as a validator for ETH2 migration. Details for ETH2 is here: https://ethereum.org/en/eth2/ and the economics is dynamic https://launchpad.ethereum.org/ (a few clicks will guide you into the calculations). There’s some technical aspects of being a validator for ETH2, such as a stable node (a powerful computer that always connects to the Internet) and the return is somewhere between 8% to 10% APY as of now. Not appealing to the general public of crypto community.
Cream has then launched a crowd-funding service, for investors to pull the ETH tokens together and delegate Cream as the validator. https://app.cream.finance/eth2/ . Currently, 16,000 ETH are staked with Cream for this purpose.
Put this in a simple way: investors stake ETH with Cream and Cream stake them for its ETH2 node. Investors can redeem their ETH after migration of ETH from 1 to 2 is complete and earn a fee from this (8% to 10% of ETH staked per annum). Migration is expected to be completed in 2021 or 2022, i.e. Locking your ETH for 1–2 years for a fee of 10%.
Further, Cream provides liquidity to investors who stake with Cream. Investors are given a LP token crETH2, which is 1:1 to ETH at the point of staking. This is can be traded. Cream has created a pool (like a Uniswap pool) for crETH2 and ETH, 50% each. So an investor could trade its crETH2 for ETH at any time.
As investors can always mint crETH2 at the price of 1 ETH (and not the other way round), crETH2 is a illiquid version of ETH and it will be trading at a discount of ETH. Currently, it’s about 10%-15% discount of ETH.
Cream incentivises investors to stake ETH for crETH2 by offering CREAM, its platform tokens. It’s 1,000 CREAM tokens per week for several weeks from now onwards. (You can also get CREAM by lending or borrowing crETH2). https://vote.cream.finance/#/cream/proposal/QmVsiKWaFn7CVnEyuSRnSVRo6UkCwGMaTqYK4i4W2q3TAb This link gives the proposal details.
If an investor buys crETH2 and put an equivalent amount of ETH into the pool, at the price today, the crETH2-ETH pool will give a Mining Reward of 30% APY. On top of this, investors will still have: 1) the Basic Earning from trading fees from the crETH2-ETH pool on Cream.Finance (please note that it’s not on Uniswap or Balancer), about 5% APY now; 2) as crETH2 holders, investors still receives the ETH migration incentives described above, i.e. 8%-10% per annum; 3) As there’s an illiquidity discount of crETH2 to ETH and eventually 1 crETH2 can be redeemed to 1 ETH, there’s potential gain of 10%-15% (well, less 1%-2% impermanent loss). Adding all these together, investors are looking at 50% APY.
For this investment (providing liquidity to crETH2-ETH pool), the investors are not exposed to price volatility of ETH, as crETH2 is a version of ETH will be redeemed to ETH.
Investors are exposed to the platform risk, which is the risk of Cream.Finance being default or hacked or dysfunction of whatever reason. Investors are also subjected to the price volatility risks of crETH2 itself, as it’s trading at a discount to ETH, but it’s hard to say how much discount it should be. Currently, out of the 16,000 ETH staked with Cream, about 10,000 are staked into the crETH2-ETH pool. If the rest are all sold, then it will drive the crETH2 price by a maximum of 36%.
Usually, the return is not very high for ETH holders. Cream offers an alternative way of investing your ETH. Value is in the eyes of the beholders.
(Serenity Team, 29 Nov 2020)