ETH validator risk hedging


#1

I would like to thank @danrobinson for previous discussions.

An interesting question is how a validator can participate in staking without taking a risk of
the underlying token. For example, I want to stake ETH, but I do not want to become ETH investor and worry about ETH going up or down. What I want is invest $100, and get my $100 plus a guaranteed profit after, say, 6 months.

Here is a way to do it using options (I assume the current price of the token is $5):

  1. You stake 20 tokens.
  2. You buy an option to sell 20 tokens at the current price of $5 at expiration of 6 months
  3. You underwrite (sell) an option to buy 20 tokens at $5 at expiration of 6 months

So essentially you pay the price of a difference between the two options. Plus in order to underwrite an option, you pay to get for a slashing insurance to from a third party.

An interesting possibility to eliminate slashing insurance is as follows:

  1. If a slashable event occurs:
    a) instead of slashing the token, you pass the ownership of the tokens and the corresponding underwritten option to an escrow “slash later” contract.

b) After 6 months, if the option ends up being executed, the escrow account will get $USD(Tether) instead of the token, and this $USD is slashed. In this case, the underwritten option will not be dependent on slashing and the buyer of the option will not have to take the risk.


#2

Or simply stake Dai and abstract all the complexity? :man_shrugging:


#3

Hedging with derivatives is relatively straightforward. You’re basically describing a protective collar, which is pretty common among oil producers to hedge risk. Another way to do it is to sell futures. You have to put up capital, but it’s a potentially better hedge vs. typical collars, which generally don’t have strike prices that 100% match.

Development of a healthy derivatives market would be good for staking for the reasons you mentioned. Right now, there’s no way to do this beyond shorting, which forces you to put up a lot of capital.

The challenge here is how to construct ways to safely provide implied leverage. I know I’d be hesitant to write these put options for the benefit of your collar. I’d lose an unbounded amount if the price of ETH turns against me, and I can’t hedge this risk by buying your call option (the other half of the collar). People will likely have to develop a foolproof system for risk control on implied leverage before derivatives before this sort of market can develop in earnest.