Summary
This proposal discusses three changes to the Degen ETH, dgnETH collateral basket including the removal of apxETH, the re-introduction of the Re7 WETH Morpho Vault at 25% and increase of of the Convex ETH+/ETH LP to 75%. While these changes reduce the diversification ratio of the basket and concentrate risk on the Convex ETH+/ETH strategy, they are proposed to boost sdgnETH yield providing closer alignment with the dgnETH mandate of capturing high yields which consistently outperform the LST market rate.
Abstract
This proposal recommends replacing apxETH with the Morpho Re7 WETH Vault and rebalancing the dgnETH collateral basket to optimize yield. The proposed basket allocates 25% to the Re7 Vault and 75% to the Convex ETH+/ETH LP, increasing sdgnETH APY from ~15% to ~20%. DINEROs apxETH, included in July 2024, has experienced a significant yield decline from ~9% to ~4.4% APY, no longer meeting dgnETH’s mandate. In contrast, the Re7 Vault and Convex LP offer superior yields of 9.2% and 12.9%, respectively. This rebalance aligns the basket with its high-yield objective, albeit with reduced diversification and slight concentration of risk.
Problem Statement
While the Staked Degen ETH, sdgnETH yield currently vastly outperforms the LST market rate, the yield provided from DINEROs apxETH has significantly deteriorated since its inclusion in July 2024 from ~9% APY to where it currently sits at ~4.4%. With apxETH at this APY it no longer aligns with the dgnETH mandate and should be removed from the collateral basket.
*Please note that while the current APY of DINERO sits at ~4.4% this isn’t a true reflection of the maximal yield of the LST. Currently a significant proportion of the validators are offline while they wait to be updated to a new provider, even with all ETH deployed into validators the yield will only increase to ~5.3%. While this is a significant boost it is felt this is still too low to warrant an allocation in the dgnETH collateral basket given the mandate.
Rationale
While it has been great to see one of dgnETHs collateral basket protocols TVL increase rapidly over the last couple of months its yield has not scaled sufficiently alongside for it to continue to meet the high yield seeking nature of dgnETH. This proposal therefore advocates for its removal in favour of a basket composed of the Re7 Morpho vault and the incumbent ETH+/ETH Convex LP which are currently the highest yielding strategies available to us yielding 9.2% and 12.9% respectively.
Convex ETH+/ETH: token obtained by providing liquidity to the ETH+/ETH liquidity pool on Curve Finance and staking the LP token on Convex Finance. This variable yield is generated from a combination of native asset yield, CVX rewards, and boosted CRV rewards leveraging Convex’s veCRV power.
Morpho Blue ETH (Re7): ETH lent to a vault which supplies deposited assets to Morpho Blue markets whitelisted by the vault Curator. The Curator can set supply caps for each market. If the supply cap is reached, deposited assets will be supplied to another whitelisted market. This vault is curated by Re7 and aims to outperform staked ETH yields by lending WETH against a diverse set of Liquid Staking and Liquid Restaking Token collateral markets.
With regards to basket weighting the proposal advocates for a heavier weighting towards the ETH+/ETH LP for two reasons; firstly the yield of the LP strategy is higher than the Re7 Morpho vault, while this will come down as we deploy further capital into the LP the APY buffer will also dgnETH TVL to scale while still providing ETH yields much higher than the current LST market rate and secondly the WETH Re7 Morpho Vault APY is hugely dependent on Morpho token incentives which means APY varies with MORPHO token price fluctuations. If a rapid appreciation of Morpho token price and a subsequent boost in the APY offered by the vault is observed and maintained a new proposal can be brought onto the forum to rebalance the basket weighting at a later date.
Current dgnETH Collateral Basket
| Collateral Asset | Allocation | APY (8.69%) |
|---|---|---|
| apxETH | 50% | 4.45% |
| Convex ETH+/ETH LP | 50% | 12.92% |
Staked Degen ETH APY - 14.94%
Diversification Ratio - 50%
Proposed dgnETH collateral basket
| Collateral Asset | Allocation | APY (11.99%) |
|---|---|---|
| Morpho RE7 WETH Vault | 25% | 9.2% |
| Convex ETH+/ETH LP | 75% | 12.92% |
Staked Degen ETH APY - 20.63%
Diversification Ratio - 38%
Risks
While this proposal does reduce the diversification ratio and increases counterparty and smart contract risks with an increase in the Convex ETH+/ETH LP basket weighting this is a battle tested protocol which has undergone multiple rigorous audits with $1.3B in TVL. Governors must weigh-up the increased risk and balance it against the high yield seeking nature of the dgnETH mandate.
Conclusion
This proposal outlines adjustments to the dgnETH collateral basket, aimed at enhancing yield performance. The removal of apxETH addresses its declining APY, while the inclusion of the Morpho Re7 WETH Vault and increased weighting for the Convex ETH+/ETH LP aligns with dgnETH’s high-yield mandate, boosting sdgnETH APY from ~15% to ~20%.
Although the diversification ratio is reduced, the expected yield increase and alignment with dgnETH’s mandate justify the change. The increased allocation to Convex LP introduces some increased risk, but its proven performance and robust audits mitigate concerns. Governors should weigh these trade-offs against the high yield seeking nature of the dgnETH mandate.
Poll
- Yes, I am in favour of the proposed dgnETH collateral basket
- No, keep the current basket