eIP 17: Promote stETH to Collateral Tier

[eIP] Euler Improvement Proposals Voted Proposals
1
  • Title: Promote stETH to Collateral Tier
  • Author(s): Seraphim Czecker (delegate)
  • Submission Date: 24.08.2022

eIP 17: Promote stETH to Collateral Tier

Simple Summary

Proposal includes a batch of changes to the Lido Staked ETH token (stETH) on Euler. These include: promotion of stETH to the collateral tier. Increase of stETH collateral factor to 0.87. Increase of stETH borrow factor to 0.91. Enable cross borrowing. Reduce reserve factor to 0.10.

Motivation

This is a proposal to promote stETH to the collateral tier on Euler, enabling Euler users to borrow against it. stETH fits the collateral eligibility criteria of a collateral asset. Post eIP16, it will be backed by a robust oracle (chainlink). It is widely distributed and decentralised. It has very high liquidity on numerous decentralised exchanges. Smart contract risk is relatively low.

At the moment, the wrapped version of stETH (wstETH) is collateral on Euler and can be effectively used to go levered long and short on Lido’s staked version of ETH.

In fact, Euler is the only place on-chain where users can short wstETH, which so far has led to additional 2% yield for lenders. This is possible because wstETH has a robust oracle on Uniswap V3.

However, the more popular unwrapped version of stETH does not have a strong oracle on Uniswap V3 because Uniswap does not support rebasing tokens. This is why Chainlink is necessary and finally possible after implementing eIP14 and eIP16.

Implementation

Given the presence of a high-quality price feed (ie Chainlink), I am proposing a collateral factor of 0.87 (below WBTC and WETH but higher than DAI) and a borrow factor of 0.91 (same as WETH and WBTC).

This would make Euler’s LTVs extremely competitive while not overly increasing systemic risk.

Also, I propose reducing the reserve factor to 0.10 (just as wstETH) to decrease the Borrow/Supply APY spread and enable cross borrowing for capital efficiency’s sake.

Risk Assessment

Lido audits:

stETH is one the most traded assets in DeFi with over $500mil supplied on Curve, but also Uniswap and Balancer (wrapped version of stETH).

It has been listed as collateral on Aave and became immediately successful due to appetite for long basis trades. Its wrapped version (wsETH) has become one of the most utilised pools on Euler, and performed extremely well even during heighted market volatility.

Vote

Snapshot link to vote can be found here:
https://snapshot.org/#/eulerdao.eth/proposal/0x8d246cae198f742f057e237314c6855768b83994d4a0bbdebf93b34e5ad40212

Implementation

Contract Method Token Token Name Token Address Updates
governance setAssetConfig STETH Lido Staked Ether 0xae7ab96520de3a18e5e111b5eaab095312d7fe84 borrowIsolated:false, collateralFactor:0.87, borrowFactor:0.91
governance setReserveFee STETH Lido Staked Ether 0xae7ab96520de3a18e5e111b5eaab095312d7fe84 reserveFee:0.1

Conclusion

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

4 Likes
2

Solid proposal @seraphim. stETH’s success on Aave seems definitely like something the Euler community should take heed of. It also makes sense as an asset for collateral like you said because of the fact that it is a classic long that users buy to hold.

One potential issue could be if stETH’s price were to see massive impact again due to liquidity concerns, etc like it did during the May/June crash, which could cause liquidations to the detriment of Euler. However, I know the Lido team said stETH is backed 1:1 with ETH and that this is not affected by the exchange rate, so pricing between stETH and ETH will most likely even out soon enough (as it already almost has).

Seems like stETH might be too big to fail and with so much already being supplied on Curve and as collateral on Aave, it seems to be an asset we should be able to borrow against here as well.

3

How will the timing here work relative to eIP 16? I support this proposal but would prefer to see the stETH market and its interaction with the Chainlink oracle data operating smoothly for at least 1-2 days before elevating stETH to collateral tier.

1 Like
4

Yup so this is subject to eIP16 passing and functioning for at least a day before eIP17 can pass.

1 Like
5

Yes, yes. Perfect timing

1 Like
6

We couldn’t be more excited to continue expanding the collaboration between Lido and Euler. We have been so impressed by the Euler team and community, I’m certain this improvement proposal is another step in the right direction.

1 Like
7

I think that not only a “high-quality price feed” should influence the collateral factor and borrow factor. Given the recent stETH price fluctuations and the upcoming merge, it seems to me that the collateral factor and borrow factor are too high (it is especially strange for me that they are higher than DAI).

So despite the fact that I am in favor of promotin stETH to a collateral tier, I vote no for this proposal.

8

We support this proposal as the stETH from Lido is the highest market share of ETH 2.0. Promoting stETH to the collateral tier will allow users to cross borrowing. Additionally, the implementation of the Chainlink oracle (from eIP16) will ensure the stETH to be backed by a healthy oracle.

Upgrading the asset tier will give Euler a higher LTV while controlling the systemic risk.