eIP 47: Promote rETH to collateral tier contingent on chainlink deploying a proper oracle

[eIP] Euler Improvement Proposals
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Author(s): Warden Finance
Submission Date: 04.12.2022
RFC: Promote rETH to collateral tier contingent on chainlink deploying a proper oracle

Simple Summary

This is an RFC to temperature check the idea of promoting Rocket Pool ETH (rETH) as a collateral asset. A subsequent eIP would include increasing the rETH borrow factor and decreasing its reserve factor.

The proposed parameters are: collateral factor (CF) of 0.65, borrow factor (BF) of 0.75 and reserve factor (RF) of 0.10.

This proposal is contingent on Chainlink deploying a proper rETH oracle. This RFC only aims at starting the discussion regarding promoting rETH as a collateral asset and not promoting it as collateral just yet.

Motivation

Listing rETH presents an interesting commercial opportunity for Euler. Traders might want to borrow ETH or other ETH staking products like cbETH and stETH to go long rETH. Traders could profit from the different fee structures of these different ETH staking options or from the different slashing risk profiles of these different options.

rETH stETH cbETH
Fees Variable 10% 25%

If this update goes through Euler would be the only lending protocol offering the 3 major ETH staking options for traders to engage in two-way trading.

rETH stETH cbETH
ETH staked 316,112 4,593,504 2,071,424

While the liquidity of rETH is much lower than for stETH it still has $70M of on-chain liquidity. rETH has a market capitalization of $250M which makes us confident that there is sufficient liquidity to liquidate any undercollateralized account without excessive slippage.

rETH stETH cbETH
Curve liquidity $4 100 000 $745 000 000 $3 500 000
Uniswap liquidity $815 000 $1 900 000 $6 100 000
Balancer liquidity $66 000 000 $245 000 000 $0
Total $70 915 000 $991 900 000 $9 600 000
Trade size rETH to ETH slippage ETH to rETH slippage
1,000,000 -0.14% -0.25%
2,000,000 -0.31% -0.41%
3,000,000 -0.46% -0.60%
4,000,000 -0.60% -0.82%
5,000,000 -0.72% -1.09%
6,000,000 -0.84% -1.39%
7,000,000 -0.95% -1.75%
8,000,000 -1.05% -2.12%
9,000,000 -1.15% -2.66%
10,000,000 -1.25% -3.19%

Should the market grow much bigger than on-chain liquidity, it could be problematic. However, given Euler’s architecture, it is possible for a fund to liquidate users without selling the collateral. This would present an easy trade to buy rETH from users at discount.

The main concern with listing rETH as a collateral asset is to list rETH with a robust Chainlink oracle. The chainlink rETH oracle needs to accurately capture any deviation in the rETH / ETH exchange rate. We recommend waiting until an appropriate oracle is deployed by chainlink to go forward with this proposal.

Specification

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

None. The proposer is an Euler delegate and has no link to rETH.

  1. Provide a brief description of the asset

Rocket Pool is an Ethereum 2.0 staking pool . The protocol seeks to lower both the capital and hardware requirements for staking on ETH 2.0, adding to the decentralization and security of Ethereum. To achieve this, Rocket Pool allows users to stake trustlessly towards a network of node operators.

When you stake ETH with Rocket Pool, you instantly receive a liquid staking token, rETH which increases in value as the decentralized network of nodes earns rewards.

  1. How is the asset primarily used?

rETH allows users to accumulate ETH staking rewards, sell or transfer the ownership of their staked ETH.

rETH is currently traded on Balancer and Curve. rETH was recently listed on Maker as a collateral asset.

  1. What are the volumes and market capitalization?
  • Market capitalization: $250M (Total existing supply * price)
  • Average daily volume on the 30 last days: $1,694,834
  • rETH is currently listed on Uniswap v3, Balancer and Curve. Source

References

Documentation - https://docs.rocketpool.net/guides/staking/overview.html#the-reth-token

Github / source code - Source code | Github

Ethereum contracts - rETH | Etherscan

Audit - Rocket Pool Protocol Review

Twitter - https://twitter.com/Rocket_Pool

Blog - Rocket Pool – Medium

5 Likes
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Hey! That’s interesting proposal. While I particular like the idea that Euler would be the only lending protocol offering the 3 major ETH staking options for traders to engage in two-way trading, I’m slightly afraid of it not reaching the aim. So as of now, the stETH liquidity amounts $207.71K (not included wstETH) and cbETH amounts $144.16K that, unfortunately, is not a great trading activity. To make it short, before moving to some concrete actions for rETH I would wait for the eIP 26: Promote cbETH to Collateral tier to be implemented and see how it will boost the activity.

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I agree. Let’s wait until we have a better idea of the actual demand for cbETH and let’s see if Chainlink deploys an adequate oracle before the DAO implements this.

2 Likes
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Definitely a fan of rETH and would encourage more competition in the staking derivatives market, since it can only benefit Ethereum users. Given the recent decline in overall liquidity in DeFi, I would probably say that adding a conservative supply cap to the market would help limit the potential risks. E.g. if the overall TVL in DEXs is $10m, then perhaps an initial $10-20m supply cap could be used. (Note that TVL on Euler can exceed to some degree liquidity on DEXs, providing a single large position does not need to be liquidated instantly in its entirety, which is very rarely the case).

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Hey everyone! Thank you for the chance to discuss this. Apologies for the late reply, I was away for a week or so.

Demand for cbETH and rETH are very different - this can be seen by cbETH being at a discount and rETH at a premium across DEXs. Demand for rETH since The Merge has accelerated and is growing faster due to some large integrations coming online.

rETH arguably represents the most decentralised and DeFi-native liquid staking derivative. We would love to be promoted as collateral on Euler and there are certainly some cross-marketing opportunities available.

In addition to demand, trade volume has also increased and is very stable. Chainlink have developed our oracle and we are close to meeting their market data requirements.

That dashboard also shows that our liquidity has been growing so it will support large liquidations. Maker have recently made rETH a collateral type to mint DAI (https://twitter.com/MakerDAO/status/1594700128920682503). We wholeheartedly support a debt ceiling that grows over time. We understand the need for responsible risk management.

Please let me know if I can help with anything to support this proposal.

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Thank you very much for the info @langers. This is great. Let us know when the Chainlink oracle is live so we can move forward with this proposal.

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I fully support the idea. rETH is the key player in LSD area.
But as we know, balancer liquidity (the main source of liquidity) is stimulated by Liquidity mining program. If it ever runs out, we probably need to reconsider risk parameters. So maybe it makes sense to start with lower CF.

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Hihi, I’m Valdorff and I currently serve as the treasurer of Rocket Pool’s (RP) Incentive Management Committee (IMC).

The protocol values funding liquidity

RPL has inflation, and some of that is directed to the protocol DAO. Fully half of that (~5400 RPL/28 days) goes to the IMC. The IMC is fairly new - operating since September. In that time we’ve spent about 6.9k/28 days, so we do dig slightly into reserves. Given our current ~43k RPL of IMC reserves, it would take more than 4 years to run dry. Things change, so it might be faster, but I just want to provide a rough ballpark of the finances. The treasury does have a further reserve balance that’s not currently targeted at liquidity, but could be if the DAO sees that as a need.

rETH creates organic liquidity

In terms of liquidity mining, rETH is a very lucky token because it comes with built-in yield. This motivates pairing against it by both the protocol with the paired token and by DEXes that charge a fee against that yield.

Using Balancer on mainnet as an example:
RP incentivizes the rETH/WETH and rETH/RPL pools. Those have a value of $74.8M today. There are additional pools using rETH on Balancer that we don’t incentivize. Those have a value of $36M today. Over time, I expect rETH to replace ETH in many liquidity pools and thus generate organic liquidity - it simply requires less LM to get the same liquidity (from a protocol PoV) because of the built-in yield.

I should also note that changes in funding liquidity are likely to be slow. We value our LPers and our partner protocols, and don’t want them to deal with high volatility from our end. We will change things as we think is best (eg, use different platforms, increase or decrease incentives, etc), but we will not do so abruptly. My expectation is that, liquidity will continue to improve over time, but, even if I’m way off, I don’t think there’s any reason to expect a sudden change that Euler would be unable to respond to.

[addition in response to @river0x] Re Chainlink: CL has acknowledged we’ve met requirements and they plan to move forward here. I don’t have even a rough timeline, unfortunately.

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Thank you for these points. Do you have any news on a Chainlink feed ?

10

I had a couple more thoughts- this time being an RP fanboy rather than IMC treasurer :laughing:

wstETH: CF=.85, BF=.89
cbETH: CF=.7, BF=.8
proposed rETH: CF=.65, BF=.75

This frankly seems off to me.

In the end, the reason we care about liquidity is as a rough estimate on P(liquidation). rETH has kept to its peg far better than stETH, which has a large impact on P(liquidation). I’m not at all convinced that stETH is less likely to get into trouble than rETH.

image
image1587×549 48.4 KB

cbETH is even worse at this than stETH (though I don’t have a nice plot to share).

cbETH liquidity is much worse than rETH.

When I last checked (1/20), to cause a price impact of 1% on RP on mainnet, you’d need to convert 8.5k ETH to rETH, or (going the other way) convert 11k ETH worth of rETH to ETH. (this is without using RP smart contracts themselves as a liquidity source - just market sources)

For cbETH, the equivalent numbers are 3.9k and 7.5k.

I have seen no plan from CB to do any liquidity incentivizing.

For Lido, I’ll note they’ve been spending 4.5M LDO per month on incentives source – they currently have 126M, so 28 months in the tank at that rate.

Anyhow - to me it’s clear that we are a sturdier asset than cbETH by most any metric. For stETH, it’s a mixed bag. I’ll grant they have much more liquidity than us, but I don’t think that’s a full picture.

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I agree and in fact, would suggest moving this to eIP with the current factors:

CF = 0.80
BF = 0.85
IRM = Same as cbETH and wstETH
Oracle = Market-based chainlink oracle (can vote now, and implement once oracle is available)
RF = 0.05 (like cbETH)

Subject to a supply cap to be later determined. As with cbETH, it would take a huge supply to even marginally endanger the protocol and rETH liquidity is better than cbETH’s, so we can implement caps later.

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Given there’s been good demand demonstrated for cbETH as indicated and supply caps incoming I’d say we can move forward with this conditional eIP. Most posters here like the idea.

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In fact i’m suspicious to all xEth…(for it represents split liquidity)

But let’s move on and see what happens…

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Title: eIP 47 Promote rETH to collateral tier contingent on chainlink deploying a proper oracle

Author: @seraphim

Submission Date: 24/01/23

Summary:

Make rETH collateral subject to a market-based Chainlink oracle.

Implementation

Collateral factor: 0.80
Borrow Factor: 0.85
IRM: Same as cbETH and wstETH
Oracle: Market-based chainlink oracle (can vote now, and implement once oracle is available)
RF: 0.05 (like cbETH)

Voting

Yes - make rETH collateral
No - do not make rETH collateral

Snapshot

Link

1 Like