[RFC] Collateral Basket Change Proposal: Adding Staked frxETH (sfrxETH) to the ETH+ Collateral Basket
Summary
This proposal recommends integrating staked frxETH (sfrxETH) into the ETH+ collateral basket to enhance the diversification of our index LST following the mandate to add value to ETH+ holders through diversification.
Abstract
Staked frxETH (sfrxETH) represents a staked version of frxETH that accrues yields from Frax Ether validators. All profits generated are passed to sfrxETH holders, making it an attractive option for staking. This proposal suggests allocating 33.3% of the ETH+ collateral to sfrxETH, evenly distributing staking diversification across Lido ETH, Rocket ETH, and Frax ETH.
Problem Statement
The ETH+ collateral basket currently comprises only two types of diversified staking collaterals, limiting the risk spread and potential yield enhancement. There is a clear opportunity to broaden this spectrum by incorporating trusted, high-performance tokens like sfrxETH, further aligning with our diversification mandate.
Rationale
Frax.Finance is a pillar within the DeFi ecosystem. All their products are audited and have stood the test of time against exploit risk. The current APY for sfrxETH stands at 4.81%, which is higher than ETH+'s existing components (rETH at 2.66% and Wrapped stETH at 3.10%).It seems to be a logical next step to integrate a product such as this into the ETH+ collateral basket.
Enhanced Diversification: Adding sfrxETH diversifies the sources of yield within the basket and mitigates risks associated with the concentration in fewer staking platforms.
Yield Improvement: frxETH is designed to be loosely pegged to ETH, capitalizing on Frax’s proven strategies in the synthetic asset market to potentially offer higher yields.
Adding another asset as collateral adds additional counterparty risk. However, frxETH has gone through rigorous smart contract audits and has existed for a long time with no exploit occurring.
It’s important to understand the staking and yield dynamics between staked frxETH (sfrxETH) and frxETH. The documentation to frxETH is linked here for the community to explore further.
Conclusion
Please provide any questions or feedback in the comments to enhance the discussion and help the DAO in making this decision.
I am in favor of adding sfrxETH to ETH+ collateral
I am not in favor of adding sfrxETH to ETH+ collateral
Thank you sleepy for getting the conversation rolling around diversification of the ETH+ collateral basket, with so many exciting LST hitting the market since ETH+ inception it’s definitely time to think about it!
The addition of sfrxETH to the collateral basket makes sense for the reasons you mentioned - Frax’s reputation within DeFi, the fact that sfrxETH is now well battle-tested and still provides a good yield despite a TVL of roughly $700 million.
However, I’d like governors to consider the addition of apxETH to the collateral basket instead of or in addition to sfrxETH. Redacted’s offering, pxETH is fundamentally a similar offering to frxETH. While both are based on a two-token model there are some key differences regarding validator tech and withdrawal mechanisms.
The predominant reason for consideration is yield, pxETH is currently yielding 9.6% compared to sfrxETH’s 4.81%. This would mean with the same allocation to pxETH total basket yield would be at 5.2% compared with the proposed collateral basket with 3.5%. While a 16% allocation to apxETH would yield the same APY as the proposed collateral basket. I do expect pxETH to come down slightly in the coming months as TVL increases but feel Redacted have enough treasury assets (Redacted hold 11% of total CVX between it’s treasury, 2.4% and it’s pxCVX offering, 7.9%) to scale yield well beyond it’s current TVL.
While I will concede that pxETH is less battle tested in a live DeFi environment, they still take security seriously as demonstrated with reputable audits from spearbit and pashov, have an active bug bounty programme with C4 and are a member of the secure staking alliance and feel that the benefits of having 2x yield on a portion basket collateral outweighs a marginal increase, if any in it’s risk profile.
Also the pxETH withdraws mechanism is also quite intuitive, it includes a ETH buffer and incentivised withdrawal pool for periods of high demand improving liquidity for ETH unstaking allowing for smoother withdrawals from the protocol. I think this would directly translate to a smoother experience for people exiting ETH+ but would love someone who is more technical to chime in on this.
In summary, I’d like to see a change to the collateral basket but would like to have more discussion around the collateral assets we can choose from.
I appreciate your insights, and I agree that this is a valuable discussion.
Regarding the timing of this conversation in relation to the onchain vote for sfrxETH, it might indeed be beneficial to hold off until after the vote. This could provide us with a clearer perspective on where sfrxETH stands in terms of standardization and acceptance, which seems essential for its inclusion in a diversified product like ours.
Organizing potential collaterals, as you suggested, is an excellent approach for a few reasons:
It allows us to comprehensively evaluate all possible collaterals along with their associated APYs.
Applying a standard risk matrix can facilitate a transparent discussion about the inclusion of these products. A simple yet effective design that considers factors such as duration, yield areas, audits, bug bounties, and security practices would help us identify and segment products that align with the ETH+ Vision.
Regarding the withdrawal mechanism for apxETH, I find the design effective. However, as you mentioned, large withdrawals could potentially slow down ETH+ redemptions on our end—a challenge we also face with sfrxETH.
Designing a risk matrix and applying it to apxETH would be an excellent starting point for addressing these concerns.
Makes sense to me. I don’t see a downside here. Adding more diversification to the basket, especially from a respectable project like FRAX, with more yield is a no-brainer.
I appreciate the thorough post, Sleepy. I am in support of this change and all eth+ proposals to increase the diversity of safer assets and would like to see this move forward to an on-chain vote.
Well-documented proposal - more diversification is a good thing, the additional counterparty risk is low seeing the thorough audits and the fact frxETH is around for a long time already without exploits. I support the proposal.