sfrxETH earns more yield than stETH

sfrxETH delivers a 3% APY by concentrating validator rewards among vault stakers, while Lido’s stETH provides a 2.2% APY after the protocol takes a 10% fee. This yield difference exists because sfrxETH uses a dual-token design where frxETH stays pegged to ETH and sfrxETH accrues the rewards. The Frax system distributes 90% of rewards to sfrxETH holders, 8% as a protocol fee, and 2% to an insurance fund to cover slashing or unforeseen penalties. Lido remains the largest protocol with $23.8 billion in TVL, but its reward accounting relies on a rebasing model where the stETH balance in your wallet grows.

Frax handles rewards by minting additional frxETH and adding it to the sfrxETH vault. This autocompounding mechanism increases the exchange rate of frxETH per sfrxETH over time. Users deposit frxETH into the ERC-4626 compliant vault to become eligible for these rewards. Frax also uses a syncRewards() function to smooth reward distributions over time cycles and prevent malicious users from stealing validator yield. This engineering allows sfrxETH to capture staking rewards, transaction fees, and MEV. The system relies on the frxETHMinter to spin up new validators when the minter balance exceeds 32 ETH.

Lido dominance and liquidity

Lido manages roughly 25% of all staked ETH and holds a market capitalization of $17.9 billion for stETH. The protocol uses a curated set of approximately 30 professional node operators to run validators. Lido V3 introduced stVaults to provide institutional users with tailored validator configurations. These vaults allow institutions to maintain custody while accessing stETH liquidity. The Lido DAO manages fee parameters and the addition or removal of node operators through the LDO token. Lido’s 10% fee on staking rewards split evenly between node operators and the DAO treasury.

You might prefer Lido if you require the deep secondary liquidity found in the stETH-ETH pool on Curve. Lido’s scale ensures minimal slippage when you exit large positions, but the protocol faces centralization concerns because of its concentrated validator set. The protocol also manages a withdrawal queue for users exiting their positions. Lido’s community staking module and distributed validator technology attempt to address these concentration risks by using Obol and SSV.

Comparing vault mechanics and risks

Frax separates liquidity from yield through its two-token model. frxETH acts as a stablecoin loosely pegged to ETH within a 1% range. The sfrxETH vault captures the rewards generated by Frax Ether validators. This separation allows frxETH to stay in liquidity pools to earn trading fees while sfrxETH holders capture the higher staking yield. Frax v2 also lets node operators borrow ETH from a lending pool at a variable interest rate, which adds interest income to the sfrxETH rewards.

Lido’s stETH functions as a rebasing token, which means the quantity of tokens in a wallet increases as rewards accumulate. Users also use wstETH, which uses an exchange-rate appreciation model that works well in DeFi. Frax’s sfrxETH model is similar to Aave’s aUSDC because the exchange rate of frxETH per sfrxETH increases as rewards enter the vault. Both protocols face smart contract risk and slashing risk if validators violate network rules. Will the concentration of rewards in the sfrxETH vault eventually drive more users away from the liquid frxETH token?