  In the Proof of Stake (PoS) Ethereum ecosystem, users can stake ETH on Lido
to receive stETH, a Liquid Staking Derivative (LSD) that represents staked ETH
and accrues staking rewards. LSDs improve the liquidity of staked assets by
facilitating their use in secondary markets, such as for collateralized
borrowing on Aave or asset exchanges on Curve. The composability of Lido, Aave,
and Curve enables an emerging strategy known as leverage staking, where users
supply stETH as collateral on Aave to borrow ETH and then acquire more stETH.
This can be done directly by initially staking ETH on Lido or indirectly by
swapping ETH for stETH on Curve. While this iterative process enhances
financial returns, it also introduces potential risks.
  This paper explores the opportunities and risks of leverage staking. We
establish a formal framework for leverage staking with stETH and identify 442
such positions on Ethereum over 963 days. These positions represent a total
volume of 537,123 ETH (877m USD). Our data reveal that the majority (81.7%) of
leverage staking positions achieved an Annual Percentage Rate (APR) higher than
that of conventional staking on Lido. Despite the high returns, we also
recognize the risks of leverage staking. From the Terra crash incident, we
understand that token devaluation can greatly impact the market. Therefore, we
conduct stress tests under extreme conditions, particularly during stETH
devaluations, to thoroughly evaluate the associated risks. Our simulations
indicate that leverage staking can exacerbate the risk of cascading
liquidations by introducing additional selling pressures from liquidation and
deleveraging activities. Moreover, this strategy poses broader systemic risks
as it undermines the stability of ordinary positions by intensifying their
liquidations.
