How to Escape Staking Lock-up Periods with Perpetual Contracts

Find out how you can use perpetual contracts to escape lock-up periods

Before diving into today’s tactic, we must first understand what staking is.

In the cryptocurrency space, if a token is stakable, it means that the holders of that token can voluntarily lock up, or “stake,” their tokens in the protocol’s smart contracts for a particular duration. In return, they will receive some benefits from the protocol, such as revenue sharing, governance rights,  staking rewards (usually in the protocol’s token), or some combination of these.

However, since you cannot move your tokens while they’re staked, your investment is subject to market risks during the lock-up period.

Now, by using perpetual contracts, you can escape these staking restrictions. The following is a step-by-step guide on how you can do it. 

  1. Open a short position
    When you think the price of your staked token is high, what you can do to secure your gains is to open a short position with the position size the same as the staked amount. As a reminder, you need to have collateral to open a short position, so remember to deposit some assets to the exchange where you want to execute this step.
  2. Initiate the cooldown period
    For tokens like AAVE and PERP, you need to send out a transaction on-chain to “notify” the smart contracts to initiate the cooldown period. This step varies by the design of the tokens and usually each platform provides an interface for doing so.
  3. Withdraw the tokens and sell them
    Once the cooldown period has passed, you need to send out another transaction on-chain so that the smart contracts will return your staked assets to your wallet. Next, what you need to do is to sell the returned tokens on the market. 
  4. Close the short position
    The last step is to close the short position, which will realize this position's profit (if the price drops after step 1) or loss (if the price increases after step 1). Besides the profit (or loss) from this position, you are likely to get paid funding payments if we’re in a bull market. Again, if you’re not familiar with funding payments, please check this article.

You can learn more about the math behind this method by checking these slides.

Or check the mini-workshop video on our YouTube channel for this topic.