xTokens.market: managed staking of governance tokens
A look at xTokens and how they compare to the native governance tokens
Introduction
I like passive products, tokens that allow you to buy and hold and let others take the key decisions and spend the gas. This is why I’m heavily involved in INDEXcoop, and invested in $DPI.
Another project that I’ve been using for the last 6 months is xtoken.market, I’m mainly attracted to the fact that they pool governance tokens and take the work out of managing the staking process.
xToken currently have pools for KNC, SNX, AAVE with 1Inch launched today.
What does xToken do?
The simplest benefit is capturing the compounding yield on staked tokens. For many tokens (e.g. AAVE), the rewards need to be claimed and then added to the staked tokens to maximise the yield. For example $12,000 of staked tokens earning 10% APY income will produce ~$100 or rewards every month. If the user claims and restake every month they could easily buy $25 in gas every month. Claiming weekly may well burn all the income as gas.
Buy pooling the tokens in a single batch, the relative gas cost to value claimed for each claim is reduced and so each individual token staked is generating a higher APY. In addition, the user is taking fewer actions to schedule and record (for taxes etc).
In addition to managing the claim and restaking, xtoken also manage on-chain votes (required for KNC) and governance votes (AAVE). For both tokens, there are different pools with different voting mandates.
Note for some tokens (e.g xSushi / Sushi) staking automatically compounds the gains, so a xToken pool is unnecessary.
SNX staking is a much more complex process. Personally, I’ve never taken the time to understand it, and my exposure to SNX has been by lending on AAVS (as aSNX) and now within xSNXa. For SNX, the xToken pool does the following:
Stakes SNX and mints sUSD
75% of the sUSD is placed in ETHRSI6040Tokenset
25% of the sUSD is used to buy ETH
Claim weekly SNX rewards
Given the 12 month vesting period for SNX rewards, this pool is only really suitable for long term holders, otherwise when you leave the pool, the vested rewards will be retained by the pool (and users who stay in the pool).
In addition, the complexities mean that exiting the pool is done to $ETH using a 3% buffer of $ETH in the pool. This means that large withdraws may prevent others exiting the pool until the $ETH has been replenished (i.e. by minting xSNXa using $ETH).
Gaining / disposing of xTokens
All xtokens can be minted from $ETH or the native token.
The KNC, and AAVE xtokens can be redeemed for $ETH or the native token.
xSNXa can only be redeemed for $ETH.
For xSNXa, xAAVEa and xAAVEb there are secondary markets (balancer pools) that allow trading the tokens for $ETH or the native token (so it is possible to sell xSNXa for SNX even though you can not redeem SNX from the pool). When buying or selling the xtoken.market website offers both options. Note that quite often there is a price difference between the mint value and the secondary market. In Figure 1 below the balancer pool offers 11% more xAAVEa than direct minting.
Performance
AAVE
As there are balancer pools for xAAVEa, xAAVEb and xSNXa, coingecko record the price information which can be used to assess the performance over time.
Figure 2, shows the relative performance of AAVE and xAAVEa/b from the 5th December (a couple of days after the launch of the xTokens) to the 30th January 2021. Given that both xAAVEa and xAAVEb should be compounding the rewards, it’s a little surprising that they regularly trail the native AAVE performance.
This is most likely due to a combination of the rapid increase in AAVE price during the period, and the secondary markets being small with infrequent trades (There are some days with no price info on coingecko for the xTokens). If we compare the coin gecko prices and assume a perfect 1/100th fraction of xAAVEa/b at launch, then we can calculate the total performance over the same time period. As the xToken market website price is currently $3.12, this shows much better performance than the CoinGecko prices. This agrees with the observation, from figure 1, that the balancer pool has the xAAVE tokens at a lower price than direct minting.
Looking at the xtoken.market prices, it’s clear that the xAAVE tokens have out performed the native AAVE price. This is presumably due to a combination of the staking rewards from stAAVE, and the compounding offered by the xToken pool. Note, I don’t have a historical price for the stAAVE tokens for a comparison with staking.
Given the difference in the mint prices and the balancer pool, there may be scope for arbitrage (ETH —> xAAVE —> ETH). However, at the time of writing for trades between 2 and 5 ETH, it looks like it would only yield ~0.1 ETH before gas. So the price discrepancy is only really available to users wanting to enter the pool
SNX
As the SNX pool has more liquidity ($1,300k vs $400 k for xAAVEa and $500 k for xAAVEb) and swaps (2,000 vs 259, and 352 respectively), the CoinGecko data is more complete. In addition, it can be compared to the aSNX vault on AAVE.
AVVEscan in Figure 3, shows ~3% APY for aSNX over the last month. This is reflected Figure 4 showing aSNX giving little difference to SNX.
In contrast, xSNXa shows significant improvement over both SNX and aSNX. This is expected as SNX staking is expected to produce a significant yield over the native token.
This is also seen in Table 2 which presents the average performance for all three since the 5th October and the relative performance compared to SNX.
Risks and Fees
Obviously, compared to holding the native token in a cold wallet, use of a staking service like xToken adds risk. This can include smart contract, metagovernance, and management of the tokens. Each fund has a fee structure which can include issue and redemption fees (avoided if you use the secondary market) and a performance fee taken from the staking rewards.
The xToken website includes a FAQ, and each token has research and FAQ:
Final thoughts
I like the passive hands off nature of using xTokens, I don’t think I’ll ever hold enough SNX to make it worth my while to learn how to (and pay gas for) staking. For the other products the frequent harvesting to auto compound the staking rewards is a bonus compared to self staking and the need to complete the required transactions.
Disclosure and Disclaimer
I’m a long term investor in crypto currencies including DeFi. I am an active member of the INDEXcoop which manages the $DPI fund. I have been holding a number of xToken products.
This is not financial advice, all investments are risky, crypto investments are more risky than most. Do your own research. Do not invest more than you can afford to lose.
@over-analyser on twitter