ETH validator risk hedging


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.


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


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.