eIP 11: Promote wstETH to collateral tier

[eIP] Euler Improvement Proposals Voted Proposals
1
  • Title: Promote wstETH to collateral tier
  • Author(s): Seraphim Czecker
  • Submission Date: 04.05.2022

eIP 11: Promote wstETH to collateral tier

Simple Summary

Proposal includes a batch of changes to the wrapped Lido Staked ETH token (wstETH) on Euler. These include: promotion of wstETH to the collateral tier. Increase of wstETH collateral factor to 0.85. Increase of wstETH borrow factor to 0.89. Enable cross borrowing. Amend the interest rate model. Reduce reserve factor to 0.10. Direct EUL reward gauges towards wstETH.

Abstract

This is a proposal to promote wstETH to the collateral tier on Euler, enabling Euler users to borrow against it. wstETH fits the collateral eligibility criteria of a collateral asset. It is backed by a robust oracle on Uniswap v3. It is widely distributed and decentralised. It has very high liquidity on numerous decentralised exchanges. Smart contract risk is relatively low. On the upside, adding a new collateral asset to the protocol would increase capital efficiency and provide more utility for users. On the downside, adding a new collateral asset always introduces a degree of systemic risk. In the case of wstETH, the benefits outweigh the potential risks.

The proposal also includes a simplification of the Gauges on offer from 13 in epoch 3 to 10 in epoch 4. The four gauges sacrificed to make way for a new wstETH gauge will be those distributing EUL least efficiently (by ‘mining rate’), since these are the gauges that are failing to decentralise the supply of EUL. They include: SHIB, MATIC, oSQTH, and ENS.

Motivation

The goal of the proposal is to create a vibrant market around stETH on Euler. The underlying features of the Euler protocol will allow DeFi users to efficiently lever up on staking rewards as well as hedge their stETH exposure using the shorting mechanism.

Promoting wstETH to collateral status with more competitive risk factors than the rest of the market will allow the DeFi community to utilise their balance sheet more efficiently.

Specification

1. What is the link between the eIP author and the asset?

None. The proposer is the head of risk at Euler Finance and has no link to wstETH.

2. Provide a brief description of the asset

wstETH is the wrapped version of stETH. stETH is a token that represents staked ether in Lido, combining the value of initial deposit + staking rewards. stETH tokens are minted upon deposit and burned when redeemed. stETH token balances are pegged 1:1 to the ethers that are staked by Lido. stETH token’s balances are updated when the oracle reports change in total stake every day.

3. How is the asset primarily used?

stETH is currently used to earn leveraged yield on Aave and is heavily used for LP fees on Curve.

4. Explain why the eIP would benefit Euler’s ecosystem?

Promoting wstETH to collateral status with more competitive risk factors than the rest of the market will allow Euler to increase its market share in the staked ETH industry.

5. Where does the asset trade?

stETH and wstETH are actively traded on Curve but also Balancer and Sushiswap. The Uniswap v3 market has started to grow recently as well.

Consequently, it would allow liquidators to relatively easily offload wstETH on DEXes in the event of a liquidation.

6. What are the volumes and market capitalisation?

Market capitalisation is $11 billion with $7 million traded in the last 24h.

7. What is the liquidity like in the Uniswap V3 liquidity pool versus ETH?

The 0.05% wstETH/WETH Uniswap V3 pool has been growing in terms of liquidity and has full-range liquidity. We see arbitrage activity from several protocols and traders, meaning the pool is watched for mispricings.

8. What security/auditing reports have been done?

Lido has been audited by Sigma Prime, Quantstamp and MixBytes.

Implementation

Contract Method Token Token Name Token Address Updates
governance setAssetConfig WSTETH Wrapped stETH 0x7f39c581f595b53c5cb19bd0b3f8da6c935e2ca0 borrowIsolated:false, collateralFactor:0.85, borrowFactor:0.89
governance setIRM WSTETH Wrapped stETH 0x7f39c581f595b53c5cb19bd0b3f8da6c935e2ca0 IRM:MEGA
governance setReserveFee WSTETH Wrapped stETH 0x7f39c581f595b53c5cb19bd0b3f8da6c935e2ca0 reserveFee:0.1

Risk Assessment

Oracle Grading

According to our inhouse research, meaningful attacks on the 0.05% wstETH/WETH Uniswap V3 oracle appear unfeasible. The TVL spread across the entire price range is able to prevent both artificially elevated and depressed oracle prices.

We therefore give wstETH a strong oracle rating. Here’s the oracle report.

Decentralisation

wstETH appears well-distributed amongst different holders.

Volatility

wstETH/WETH price has been historically stable around 1:1 + reward accumulation.

Liquidity

wstETH trades on Uniswap v3, Balancer and Sushiswap with decent arb activity. stETH, is traded heavily on Curve and is one of the most liquid pools in DeFi.

Smart Contract Risk

stETH has been audited by multiple teams of engineers and auditors.

Conclusion

wstETH ranks high on oracle security, volatility, liquidity, decentralisation and smart contract risk. We therefore recommend implementing the proposed eIP.

Relevant Links

Oracle grading tool: https://oracle.euler.finance/

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I’m very much supportive of promoting wstETH to collateral tier.

With regards to changes to the gauges I’m less in favor. Allthough I agree the four gauges that are to be sacrificed are the least efficient ones, I would rather see these kind of changes be made through the gauges voting mechanism and thus letting the community decide. Can we not come up with an interim solution (untill TGE) where we can vote with the pending EUL allocation from previous epochs as voting power.

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frankly speaking this is my first time hearing wstETH lol

4

Interesting – that is actually a good idea for a fair distribution pre-TGE. However, we believe that the handing over to the gauges voting system will be quite soon, so the development effort to implement your suggestion might not be worth it.

5

@seraphim Can you please help me find oracle report for wstETH?
Since, as far as I can see, a pair of wstETH/WETH on Uniswap (that you mention in your proposal) does not have enought liquidity and TVL doen’t spread across entire price, almost all liquidity is inside the 1.5% value range (1.0618 eth - 1.0714 eth). And looks like the cost of attack on this pair is much less than the $500 million over 2blocks that you voiced before as necessary conditions for acceptance into the cross-tier.

Another thing that worries me at the moment is that it only takes two days from the moment this proposal is published until it was executed, which does not give a sufficient time window for the proposal to be discussed and fully considered.

If already adopted decisions are published in this way, then perhaps it is necessary to change the name “proposal” to something else? If this is still a proposal for discussion by the community, then let’s leave at least 5 days for discussion, and after that make a decision on the implementation or not implementation of this proposal.

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Hey cp287,

You’re bringing up fair points, let me address them.

So WSTETH/WETH on Uniswap does have full range (non-zero% at 100%):

image
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In fact, this is a result of us lobbying key DeFi participants to lock in their liquidity full range. This is why at the moment it’s hard to attack wstETH/WETH:

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However, the current cost of attack is about $300mil, which, albeit substantial, is indeed below what we’ve voiced as informal prerequisite for being promoted as collateral, namely $500mil.

We are still waiting on one key participant in the space to provide full range liquidity that will push the cost of attack much higher. Why did we approve this eIP prematurely? Frankly speaking, as EUL has not been distributed yet and the protocol still operates based on a multisig, the change was pushed a bit prematurely by mistake. Before everyone panics, 2 things:

  1. We only submit proposals for approval that are ready or almost ready for approval. As you see, the cost of attack is already significant, which is why we felt comfortable with submitting it.
  2. This is an operational misstep and we acknowledge it, so we’re working on improving the process before token holders are completely in charge. This will help to prevent premature pushes in the future.

Overall, thank you for pointing this out. I was actually planning to address this in a few days once more liquidity was in, but I figured I’d address this now.

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Thanks for your explanation and transparency, seraphim!

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Quick update:

We’ve lobbied FTX ventures to provide $2.3mil liquidity. The cost of attack is extremely high now:

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