Auto-Compounding Pendle & Renzo yields with Factor Strategies

Introduction To Restaking Auto-Compounded Yields

DeFi users are increasingly turning to restaking protocols like Pendle and Renzo to generate additional yield from their staked ETH. However, managing multiple protocols and optimizing yields can be complex. Factor’s auto-compounding strategies simplify this process, allowing users to easily access amplified yields from various protocols with a single deposit.

While restaking remains a relatively new DeFi innovation, protocols like Pendle are already capitalising on the yield-generating potential of restaked ETH, creating markets for yield trading. These developments offer more options for yield generation based on differentiated risk profiles, but they also add significant complexity to the already intricate DeFi ecosystem.

Much of this complexity is hidden behind user-friendly dApp interfaces, enabling users to seamlessly interact with diverse yield streams.

This article pulls back the curtains to showcases how multiple DeFi primitives are combined to realise amplified yields for the Factor ezETH Auto-Compounder strategy.

Sit back and Discover how you can take advantage of the restaking narrative.

TLDR

• By depositing into the Factor auto-compounding strategies, depositors get easy access to multiple yield streams from all the underlying protocols.
• Depositors also earn additional Renzo ezETH Points and Eigenlayer restaking points by providing liquidity to the Penpie contracts.
• While the higher yields comes with greater risks, primarily temporary ETH price fluctuations, we can expect these to resolve itself as all ETH derivatives are ultimately redeemable for underlying ETH on the Ethereum mainnet.
  *Note: Renzo is actively working on enabling withdrawals at the time of writing.

Related Links

PendlePenpie: Renzo Pool Auto-Compounder Strategy — Powered by Factor

Yield Strategy Explainer — Technical Overview & Examples

Auto-compound Your Yields — User Guides

Yield Sources + Points Multipliers

Factor’s ezETH auto-compounding strategy with Renzo conveniently stacks yield from multiple protocols and sources to generate even greater returns on ETH.

Additionally, depositors can also rack up point multipliers to supercharge their points accumulation therefore positioning themselves better to benefit from any future points-based giveaways.

Stacking yields and points

Factor

• Auto-compounded Yields: Factor’s yield protocol automatically harvests liquidity incentives from underlying protocols and reinvests the rewards back into the position. This automation enables more frequent compounding, amplifying yields while spreading transaction costs.
• Factor Protocol Emissions: Factor enables community-directed protocol emissions of up to 100,000 FCTR weekly to Factor Scale strategies. FCTR stakers can vote on the distribution of Factor emission rewards which are distributed amongst strategy depositors.
• Direct Liquidity Incentives: Factor strategy depositors may also receive direct liquidity incentives via Factor Boost. Anyone can allocate any ERC20 token as additional rewards for depositors in a target strategy vault.

Penpie

• Amplified Pendle Voting Power: Stake LP ezETH to earn boosted Pendle rewards via amplified Penpie voting power. Penpie shares its yield-boosting benefits with liquidity providers on the protocol.
• Penpie Protocol Emissions: Penpie allocates PNP emissions to liquidity providers on target pools on Penpie.
• Penpie Bribery Market: Benefit from the Penpie Bribery Market for boosted emission influence.
• Renzo ezPoints Multiplier: Penpie’s ezETH pool earns 4x Renzo ezPoints.

Pendle

• Discounted Principal Tokens: Pendle splits the principal (PT ezETH) and yield-bearing portion (YT ezETH) of ezETH, allowing depositors to acquire PT ezETH at a discount relative to its maturity date.
  *Note that Renzo ezPoints accrues to Pendle YT ezETH holders and is therefore indirectly accounted for as an additional discount to PT ezETH (i.e. holders that do not want the uncertainty of yield and points just hold PT ezETH).
• Market Making Fees: Earn swap fees on LP ezETH as PT ezETH is added as liquidity the Pendle ezETH/PT ezETH pool. This pool enables the yield trading with minimal impermanent loss, as the value of PT ezETH approaches that of ezETH upon maturity.
• Pendle Protocol Emissions: Receive boosted liquidity incentives as staked PENDLE (via Penpie) is used to direct Pendle weekly emissions (weekly emission as of Oct-2022 is 667,705 with a 1.1% decrease each week until April 2026).

Renzo

• Restaking Yields: Earn additional restaking yields as underlying ETH is used to secure other applications in exchange for a fee.
• Renzo ezPoints: ezETH holders earn Renzo ezPoints which tracks their contribution to the protocol. Points enable the fair distribution of any future Renzo protocol rewards.
• EigenLayer Restaking Points: ezETH holders will earn EigenLayer points in addition to Renzo ezPoints, as Renzo will be restaking on EigenLayer. Points enable the fair distribution of any future EigenLayer protocol rewards.

Lido

• Execution Layer Reward Compounding: Lido reinvests any accrued Ethereum execution layer rewards (i.e. priority fees and MEV rewards) into setting up more validators. This enables more yield to accrue to stETH holders.

Ethereum

• Consensus Layer Rewards: By staking ETH to secure the PoS network, stakers get rewarded for the honest sequencing and validation of new blocks. These rewards take the form of attestation, block proposal, and slashing.
• Execution Layer Rewards: ETH stakers may also generate additional yield through Priority Fees (tips) or MEV Rewards.

Behind The Scenes

To make the strategy accessible to the average DeFi user, various abstractions are necessary due to the multitude of protocols involved.

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Currently, users must complete three separate actions before earning auto-compounded yields on Factor. As Factor’s interface continues to abstract more complexities behind the scenes, the goal is to eventually consolidate these steps into a single process:

• Source ezETH: Depositors must first obtain ezETH on Arbitrum. The easiest way to do this is via a swap on DEXs (e.g. Camelot, Uniswap, etc.) or Aggregators (1inch, KyberSwap, etc.). Alternatively, depositors can stake stETH (or other liquid staked ETH tokens) on Ethereum Mainnet and bridge ezETH to Arbitrum via Connext canonical message bridge.
• Exchange ezETH to LP ezETH: Depositors can convert their yield-bearing ezETH to the newly minted fixed income PT ezETH via Pendle. The PT ezETH is then used to market make on the ezETH/PT ezETH pool with the user receiving LP ezETH representing their share of the pool liquidity and accrued fees.
• Deposit LP ezETH into Factor auto-compound strategy: By allowing Factor to manage the LP ezETH, the yield harvesting and reinvestment process can be automated thereby resulting in higher compounded yields.

The flowchart below provides a comprehensive overview of the process as well as showcases the yield sources for the ezETH strategy.

There are a few important things to take note of:

• Ethereum (Re)Staking Yield: All the yield for restaked ETH is captured on Ethereum mainnet. This includes: Ethereum PoS rewards, Lido execution layer rewards compounding, Renzo additional restaking yields. These yield sources all accrue to Renzo’s ezETH token.
• Arbitrum Representation: ezETH is bridged to Arbitrum One via Connext which supports canonical bridging.
• Protocol Gauge Rewards: Pendle, Penpie, and Factor all implement their own community-directed emissions which enable greater yields through boosted votes and various bribery markets.
• Yield Tokenization: By wrapping yield-bearing tokens such as ezETH, Pendle is creating a market for yield trading. This creates the opportunity to earn fixed yields with minimal market making risks.
• Yield Harvesting Orchestration: Factor automates the reinvestment and compounding of yield which would otherwise require multiple manual transactions: harvest yield, swap reward tokens for pool tokens, add pool tokens to position.
• Protocol Fees: Each protocol utilized is in charge of setting its own set of fees: Lido, Renzo, Connext, Pendle, Penpie, Factor, Uniswap, Balancer, Camelot.

By combining the various DeFi building blocks above, the Factor Renzo Auto-Compounder strategy is able to reliably amplify ETH restaking yields via just a single deposit on the Factor dapp.

Strategy Risk Considerations

Given that this restaking strategy revolves around ETH as the base asset, the majority of the risks are focused on assets or mechanisms which are derivatives of ETH. Note that all the protocols involved are permissionless hence ownership of your asset is never transferred throughout the process.

• Liquid staking (i.e. stETH) depeg: Given the ubiquity of stETH, depeg risks are minimal but not impossible. Nonetheless, market forces will likely balance out any short term swings as stETH is redeemable 1:1 for ETH on Lido.
• Restaking (i.e. ezETH) depeg: While withdrawals for ezETH have yet to be enabled, Renzo is working towards enabling redemption for the underlying ETH 1:1 on the Renzo dapp. As long as withdrawal requests are honoured, any depegs are temporary.
• ezETH unstaking period: Unstaking ezETH will take a minimum of 7 days during which the underlying liquidity is locked.
• Principal token depeg: PT ezETH is redeemable 1:1 for the accounting asset upon maturity. As such, any price deviations will be effectively nullified upon marutity. Note that PT ezETH holders can also decide to sell early if PT ezETH ever goes above the peg.
• Slashing of stake: In addition to the base slashing rules implemented by the base Ethereum PoS, restaked ETH also adopts Renzo’s services slashing rules. As such, restaked ETH gains incremental slashing risks with every additional application secured.
• Vesting Of Rewards: Factor Scale rewards are linearly vested as esFCTR over 90 days hence are not automatically compounded. While this vesting period ensures Factor ecosystem sustainability, you will be exposed to the FCTR price during the vesting period. The FactorDAO has been implementing long term tokenomic incentives to ensure the growth and evolution of a resilient platform via an actively involved community.
• General smart contract vulnerabilities: The above strategy makes use of multiple DeFi contracts spread across both Ethereum and Arbitrum. Every contract within this process introduces additional risks however all protocols involved have rigorous audit and security practices in place.

Additional Reference

Assets Involved

• ETH -> Core underlying asset
• ezETH -> Renzo’s liquid restaking token which staking rewards accrue to. Primary token for depositing into Pendle.
• PT ezETH -> The principal token of the Pendle ezETH pool representing the principal portion of the locked ezETH on Pendle
• LP ezETH -> LP tokens representing share of Pendle ezETH liquidity pool. Used for depositing on Penpie
• PENDLE -> Governance token of Pendle. Distributed as farming rewards for providing liquidity on Pendle (via Penpie).
• PNP -> Governance and revenue-sharing token of Penpie. Distributed as farming rewards for staking LP ezETH in Penpie
• wETH -> Intermediary swap output token with deeper liquidity
• esFCTR -> Factor vested emission rewards
• Boost ERC20 rewards token -> Factor permissionless liquidity incentives

“ Disclaimer: The original post can be found on the Factor Blog and has been reposted here purely for educational purposes. As a technical writer with Factor, our end goal is to empower users by increasing their awareness of DeFi ecosystem, mechanisms and value flows.”