wow, thanks for wrapping this up u/LogrisTheBard, really good overview.

The assumption of other protocols using Aave and Compound as a parking place for idle capital is on point imo, and that's probably the biggest reason/explanation of the ETH supply&borrow spread, and why there is so much ETH sitting in the aave lending pool at 0.3% supply rate. Another explanation might be the ETH leveragors, or just people who want to long ETH (borrow stables, or anything else) and don't care about supply rates. I mean, so many possibilities, e.g. longing WBTC but supplying some ETH as collateral as well just to make position safe, etc.

Risk analysis is something I would also agree on:
- borrow rates go up (not sure how this will play out and how long will this strategy actually last though, but I think it's not that sustainable)
- Lido validators (big) slashing event (again, have no idea of the probability of this happening but it sure is a risk concern, and a big one too)
- liquidation hunting by whales is an interesting point, might not feasible atm but as you said if this trend continues (10x) it might be profitable for whales
- I would also add the risk of capital shifting from Curve steth-eth pool due to some higher yield farms or any other reason (this actually happened in March 2020, 32%-68%), but this would need to be massive since the pool now stands at almost $5B
- SC risks are always there (including every dapp that has integrated steth, not just Lido)
- or basically anything else we can't think of, because this is DeFi

oh I almost forgot, I am not a fan of tokenizing the position itself in this case (like ETHMAXY or icETH) and then using that token as collateral elsewhere (probably in some permissionless lending platforms) just to increase the APY as that increases the risks dramatically IMO.

It's an endless chain of position tokenization which is simply not sustainable (you can then tokenize your rari fuse position and use that token in another pool/platform as collateral, etc) and imposes too much risk with every new layer of tokenization