[IP] Collateral basket change proposal to address liquidity bottlenecks

[ham]

Summary

Background: ETHplus has seen rapid TVL growth and increasing institutional participation, necessitating a review of the collateral basket to support larger minting and redemption flows with minimal slippage.

Problem: The current basket, while diversified, fails to meet slippage thresholds for redemptions above ~22,500 ETH, affecting large LP operations.

Proposal: Rebalance the collateral basket with increased wstETH allocation (55%) and the introduction of OETH (15%), improving redemption performance and increasing basket yield from 2.89% to 2.99%, with only a minor reduction in diversification (0.66 → 0.64).

Alternatives Considered: A “Redemption Curve Maxi” alternative was modeled, prioritizing liquidity over diversification, but was ultimately rejected due to its higher centralization risk.

Risk Considerations: The inclusion of OETH is supported by multiple audits and risk assessments (Prisma Risk, LlamaRisk, Chaos Labs, OpenZeppelin). All other assets are well-established within ETHplus.

Conclusion: The proposed changes provide a balanced approach to scalability, yield, and risk, ensuring ETHplus remains a leading rToken capable of supporting growing institutional demand.

Abstract

This proposal outlines a strategic update to the ETHplus collateral basket aimed at optimizing liquidity and minimizing slippage during large-scale minting and redemption events. As ETHplus has experienced significant growth—404% year-over-year in ETH-denominated TVL—the protocol now supports larger institutional LPs whose activities demand more robust liquidity infrastructure. The proposed changes rebalance the basket to improve the performance of redemption curves while maintaining a high level of diversification and increasing the overall yield profile. The proposal also introduces OETH as a new collateral asset, supported by third-party audits and risk assessments. This optimization enhances ETHplus scalability and positions it for continued sustainable growth.

Problem Statement

ETHplus has seen significant TVL growth recently with 465% year on year growth in ETH-denominated TVL. While this growth is monumental we now have more institutional LP providers operating with much larger volumes than we did in the past. Given the larger size of these providers it has become more prudent to optimize the minting and redemption curves of the collateral basket so these larger LPs can conduct their operations quickly and with minimal slippage. The collateral basket change aims to support ETHplus scalability, putting the collateral basket in the best position to maintain the growth we have seen over the past year.

Rationale

The ETHplus mandate has always been to maintain an Ethereum-aligned LST basket, positively impact the Ethereum staking distribution and provide value to ETHplus holders through diversification and as such has been at the forefront of all collateral basket changes.

However, while a vital part of a RTokens make-up clear minting and redemption curve guidelines have not been set despite being discussed previously, most notably in @0xSleepy contributions to address ETHplus liquidity constraints - first RFC, second RFC and @StableScarab comments on how to address diversification here.

The outcome of these discussions add a few more considerations which we can consider when considering collateral basket changes.

• Threshold Slippage - 0.5%
• Target size under Redemption Threshold - 30k ETH
• Largest collateral basket allocation - 50%
• Diversification Ratio - previously ranged between 60-70%

Liquidity Analysis - Collateral Asset and ETHplus basket

Below I have modeled the minting and redemption curves of the collateral assets available for inclusion in the ETHplus collateral basket up to a mint and redemption size of 10,000 ETH.

As you can see from the graphs the price impact curve for minting collateral assets starts higher but climbs at a much shallower gradient when compared to its redemption curve counterpart on the left side of the curve when we move over to the right we see significant kinks along the redemption curve for collateral assets where there is not enough liquidity to satisfy the redemption size; first ETHx at 2000 ETH, sfrxETH at 5000 ETH and OETH at 9000. rETH has a smoother curve and wstETH a near flat line due to its deep on-chain liquidity.

Current basket

Collateral Asset	Allocation	Yield	Basket Yield
wstETH	50.00%	2.85%	1.43%
rETH	21.00%	2.58%	0.54%
sfrxETH	21.00%	3.04%	0.64%
ETHx	8.00%	2.86%	0.23%
Total Yield Profile	2.83%
Diversification Ratio	0.66

While well diversified with a diversification ratio of 0.66 the current basket operates poorly on the redemption curve crossing the 0.5% threshold at 22,500 ETH with only wstETH sitting below the threshold past the 30,000 ETH redemption target severely impacting LPs conducting activities with significant size.

Proposed basket

Collateral Asset	Allocation	Yield	Basket Yield
wstETH	55.00%	2.85%	1.57%
rETH	15.00%	2.58%	0.46%
sfrxETH	10.00%	3.04%	0.26%
OETH	15.00%	3.04%	0.46%
ETHx	5.00%	2.86%	0.14%
Total Yield Profile	2.88%
Diversification Ratio	64%

The proposed basket optimises for price impact along the redemption curve while also maintaining a well diversified collateral basket with a diversification ratio of 0.64 and a slight jump in the yield profile from 2.89% to 2.99%.

The new basket has a heavy allocation OETH, a new collateral asset, given it’s strong on-chain liquidity second only to rETH and wstETH. The new allocation pushes the price impact threshold of 0.5% well past the 30,000 ETH target and, while still not ideal, a much smoother minting curve. The proposed basket composition does push us over a 50% wstETH allocation at 55% but I feel we are pressed right up against the upper bound of the liquidity constraints of the other collateral assets forcing us to over-allocate.

Alternate Option - Redemption Curve Maxi

Collateral Asset	Allocation	Yield	Basket Yield
wstETH	65.00%	2.85%	1.85%
rETH	15.00%	2.56%	0.38%
sfrxETH	10.00%	3.04%	0.30%
OETH	10.00%	3.04%	0.30%
Total Yield Profile	2.84%
Diversification Ratio	54%

In this alternate proposal I have prioritized the minting and redemption curve over diversification, heavily weighting wstETH due to it’s far superior on-chain liquidity. While this does push the redemption curve slightly further past our 30k redemption target and pushes the minting curve under 0.5% for sizes under 20,000 ETH we have heavily sacrificed diversification with a diversification ratio of 0.54. I’m of the opinion that these marginal gains don’t out-weight the risk of centralisation and therefore it hasn’t been put forward as the proposed basket.

Comments on Data Collection and Methodology

All of the data was collected via Llamaswap using the Odos and Paraswap aggregators, with the best price impact between the two being recorded.

For the price impact Vs mint / redemption size models for the ETHplus collateral basket accurate collateral basket allocations were used rather than an extrapolation of the mint and redemption curves for each collateral asset, ensuring accurate slippage values. The data used to model these graphs and other collateral baskets was collected on 28/05/2025 and can be found here.

Risks and Audits

ETH+ is the largest rToken by TVL on the reserve platform; when changing the collateral basket of a rToken of this size slippage and liquidity constraints, if not considered, can lead to under-collateralization of the rToken, resulting in the sale of staked RSR to recollateralize the collateral basket.

While each LST needs to be evaluated on its own merits for liquidity, smart contract risk, dependencies and decentralisation all the assets apart from OETH are already part of the ETHplus collateral basket and have been for some time. However OETH is a new entrant to the basket and should be considered carefully.

OETH has been operational for over 2 years with a TVL of 44,500 ETH ($116m), zero exploits or security incidents to date and has demonstrated a strong commitment to smart contract security as shown by their past audits and active ImmuneFi bug bounty with a max bounty of $1,000,000 for critical findings. Origin has a continuous auditing agreement with OpenZeppelin to review 100% of the OETH and OUSD smart contract changes. Audits can be found here.

August 2024 - Prisma Risk collateral risk assessment

Oct 2024 - LlamaRisk full collateral risk assessment supporting the onboarding of OETH to the Aave V3 instance.

Oct 2024 - Chaos Labs collateral risk assessment supporting the onboarding of OETH to the Aave V3 instance.

Conclusion

The proposed update to the ETHplus collateral basket is a strategic and necessary evolution to support the protocol’s continued growth and scalability in response to increasing institutional participation. By rebalancing the basket to prioritize improved redemption curve performance while maintaining a strong level of diversification and enhancing the yield profile, we address current liquidity constraints without compromising the core principles of ETHplus—Ethereum alignment, sustainable staking diversification, and yield.

This reallocation enables ETHplus to accommodate significantly larger minting and redemption operations with minimal slippage, extending the 0.5% slippage threshold well beyond the 30,000 redemption target. While the increased allocation to wstETH puts us at centralization limits, it reflects a pragmatic response to the liquidity constraints. Overall, the proposed basket remains within an acceptable diversification range and represents a balanced compromise between performance and risk.

The inclusion of OETH, supported by comprehensive audits and multiple third-party risk assessments, introduces an additional high-yield, liquid asset to the basket. This helps improve overall performance without introducing undue centralisation risk, provided its integration is monitored carefully.

Ultimately, this proposal ensures ETHplus remains positioned as a robust, scalable, and resilient RToken for the Ethereum ecosystem, prepared to meet the demands of both current and future large-scale participants.

• Ye, I am in favour of the proposed collateral basket change
• No, I am not in favour of the proposed collateral basket change
• Abstain

[Mr_Bones]

This is an extremely well thought out proposal and I agree with your overall thesis. We have seen huge mints of ETH+ which will most likely also lead to huge redemptions down the line. You do lose a bit of diversity as you mentioned, but you enhance the yield while making it an even more attractive asset to defi liquidity pools which I believe is a key strategy to overall ETH+ growth. I think the proposed basket is the best way to move ETH+ forward.

[ham]

Amendment 1

Updated the yield profiles of the baskets using the defillama 30D moving averages and replacing some yield data for ETHx. Yield profiles dropped roughly but 0.1% across all baskets in the RFC with the proposed basket still slightly outperforming.

[signal]

Regarding the rETH peg, we’re already exploring the implementation of a force quit mechanism, which is expected to significantly improve its performance going forward.

[RPIP-71] rETH Withdrawal liquidity via EIP-7002 (i.e., forced exits)

[rspa_StableLab]

Excellent and well-researched proposal! Adding OETH for liquidity now that we have their plugin ready seems to be a good next step.

[pete]

Thank you for thinking of OETH for this ETH+ proposal Ham It will be a great addition that is sure to increase the combined ETH+ yield as is confirmed from your research.

Since the initial OETH RFC back in September 2024, Origin has completed 6 additional audits, 3 of which were relevant to the OETH codebase. These 3 were proactive audits scheduled from Origin’s continuous auditing agreement with OpenZeppelin.

I would also like to draw attention to the “Risk mitigation” section of Origin’s risk framework, which has some good information on how Origin tackles security: Risk Framework | Origin

[akshatmittal]

Hey Origin Team,

I wanted to drop you some details around our hesitation with including OETH into ETH+. These are not exhaustive and we currently do not have the capacity to perform the due diligence necessary here.

1. ETH+ is extremely large and we need to take extra care about introducing additional collaterals into the basket. One thing that jumps out is that inclusion of OETH based on the proposal would mean ETH+ would be holding ~30% of entire OETH TVL. That is extremely high risk, not just for liquidity reasons mentioned later but also just for shear size and dependence.
2. Given that ETH+ needs to rebalance into OETH (and also need to consider rebalancing out of it in future), the current liquidity levels do not support this size given that we’d have a price impact of ~20% going out of OETH even though going into OETH is zero slippage. This creates another bottleneck for ETH+ and undermines it’s security.
3. OETH is a fairly complex system which includes a native LST as well as an AMO, we’re uncertain at the moment if the latter fits into the ETH+ mandate.
4. We’re uncertain about the overall governance structure of OETH, especially given that the token is upgradable.

Given all we know right now, we’re comfortable supporting OETH inclusion into dgnETH, however we are currently not able to support OETH’s inclusion into ETH+ due to the reasons mentioned above. I’d also like to emphasize that we currently do not have the capacity to do the necessary due diligence to get to a point where we would be comfortable going forward with this.

[pete]

Hi @akshatmittal, addressing your concerns:

1. Would you be more comfortable starting with the original OETH allocation % I suggested in my OETH RFC from September 2024 and ramping up from there? I believe 8% is also where Stader’s ETHx started when it went through its onboarding to ETH+.

2. There were similar concerns about this with exiting superOETH, we will make sure there is adequate liquidity available to handle exits from OETH. We have facilitated larger exits for whales in the past and it has not been an issue. We will also soon be moving to a new Curve pool that will support much larger trades with less slippage (pool is live but haven’t been fully transitioned to yet). There are also multiple options for exiting OETH beyond what is available in the DEX pools.

3. OETH is a less-complex version of superOETH, which was onboarded to bsdETH several months ago. AMOs are already used within ETH+ with having frxETH as a collateral LST. frxETH uses various Curve AMOs as a strategy for investing idle ETH. The frxETH AMO also has direct exposure to ezETH and pzETH, whereas the OETH AMO only has exposure to ETH and WETH.

4. The OETH protocol is 100% controlled by xOGN and the 48 hr timelock, you can read more about that in the governance page in the docs. Upgradable contracts have allowed us to strengthen the protocol with more secure code over the years from the various audits done by OpenZeppelin, Narya, Trail of Bits and Solidified. Some projects that have immutable code (i.e. Liquity) haven’t been so fortunate.

[pete]

Following up on this, I am proposing an ETH+ basket change that is more in line with what I proposed in September 2024 on the original OETH RFC:

New ETH+ Collateral Basket

Token	Allocation	APY = 2.829123%
rETH	21%	2.58%
wstETH	50%	2.81%
sfrxETH	16%	3.07%
ETHx	5%	2.91%
wOETH	8%	3.07%

Diversification Ratio: 0.6714

[ham]

Thanks for you comments @akshatmittal and your follow-up @pete.

While it’s a shame that adequate DD hasn’t been completed on Origin’s OETH given that we’ve been discussing their integration into the ETHplus collateral basket since Pete posted the original RFC back in Sept 2024 I do think Akshat raises some good points. I completed this work and posted this RFC focussing solely on optimising for liquidity and the redemption curve of ETHplus giving some of the comments of our larger LPs expecting some concerns over OETH allocation and then after some discourse to settle on a lower allocation so i’m grateful for you comments.

Personally, I support your first two points and would also be concerned with holding 30% TVL of OETH in the collateral basket for the points you mentioned. I also don’t like the fact that liquidity levels may not support large redemptions without OETH facilitating these on a case by case basis, this is a centralised process and could be a point of failure in a crisis. On the first OETH RFC there was some comments about the ARM from @river0x, has anything changed to address River’s previous concerns @pete? Are there any external LPs providing ETH to the ARM now?

I do feel these first two points can be mitigated by opting for a smaller allocation and Origin pushing their new Curve pool live reducing dependency and centralisation risks and mitigating any price impact if ww decide to rebalance out of OETH at a later date.

Points 3 and 4 are less of a concern for me, especially as Pete pointed out that sfrxETH operates a AMO with some exposure to restaked ETH and feel this is maybe something that should be highlighted and discussed at a later date with ETHplus governors.

I also have another concern with completing the collateral basket rebalance at this stage, staked RSR slashing. In the past few quarters we’ve seen avoidable slashing events during collateral basket changes on both dgnETH and hyUSD, which rightly so caused some upset with our most aligned RSR holders. Where possible I want to avoid RSR slashing especially on our largest RToken. My concern is since ABC labs doesn’t currently have the bandwidth to complete the OETH DD required to support this proposal they definitely don’t have the bandwidth to support a collateral basket rebalance either which means a higher risk of a slashing event for stakers. It’s for this reason that I encourage the Origin team to hold off moving this proposal to IP until the necessary bandwidth is available to complete the DD and support the basket rebalance sometime in late Q3.

Collateral basket

Thank-you for posting an updated collateral basket @pete. I feel this basket takes into mind the liquidity analysis and previous comments on the RFC and I would support it once ABC labs are ready to take on the rebalance. We could also consider a two-step process giving you 4/5% until some TVL and on-chain liquidity criteria has been met when. we can double the allocation similar to what we did with ETHx.

[pete]

Thank you @ham, with the new basket allocation I posted above ETH+ would no longer be 30% of the OETH TVL, it would be less than half of that amount. The OETH ARM is not yet available for external LP’s to provide ETH, but OETH can still fully support large redemptions with ease, as mentioned in the comments of the OETH RFC and as seen on the OETH redemption page: