[IP] ETHplus Rebalance Proposal Q1 2026

[ham]

Summary

This proposal seeks to rebalance the ETHplus collateral basket to meet compliance with the liquidity standards as defined in the proposed ETHplus DTF methodology. The December 2025 liquidity analysis identified a material deterioration in redemption performance, driven primarily by rETH and frxETH, with basket-level slippage breaching the 0.5% threshold at redemption sizes around 5,000 ETH, well below the required 20% of supply. While liquidity conditions for these assets have improved in early January 2026, the ETHplus redemption curve remains non-compliant and continues to take on substantial frxETH concentration risk.

To address this, the proposal introduces a staged rebalance that reallocates weight toward assets with deeper and more reliable exit liquidity, most notably through the inclusion of weETH following the proposed mandate expansion to allow LRTs. The rebalance materially improves executional depth and reduces concentration risk, while preserving a competitive yield and improving diversification metrics. Redemption capacity within the 0.5% slippage threshold increases by more than fivefold in the final basket, with only a modest impact on blended yield.

Given the execution risk associated with exiting liquidity-constrained positions, the proposal adopts a two-step governance flow. An interim basket is used to manage reallocation risk, followed by a transition to the final target basket subject to a one-week observation period and defined liquidity criteria. This approach ensures capital preservation during execution while delivering a more resilient, predictable, and methodology-compliant end-state for ETHplus.

Background

Since launch, governance has refined the collateral basket to balance three competing objectives: capital efficiency, liquidity, and sustainable yield. The most recent liquidity analysis, completed December 2025, highlights that the liquidity of its constituent collaterals has continued to deteriorate. In particular, redemption slippage has become increasingly sensitive to rETH and frxETH, which now disproportionately influences the redemption curve. Against this backdrop, and consistent with the ETHplus mandate, this proposal seeks to rebalance the collateral basket in a way that improves liquidity resilience while preserving diversification and maintaining a competitive yield profile, ensuring ETHplus continues to meet its core objective under both normal and stressed market conditions.

December 2025 Liquidity Report Findings

The current ETHplus collateral basket is no longer compliant with the proposed ETHplus DTF methodology. Liquidity analysis shows that basket-level redemption slippage is now dominated by rETH and frxETH, which together account for a disproportionate share of aggregate redemption slippage despite representing a minority of total basket weight, 42%. As a result, in December 2025 the ETHplus redemption curve saw liquidity exhaustion and broke threshold slippage (0.5%) at redemptions above 5,000 ETH. This remains well below the liquidity standard outlined in the proposed ETHplus DTF methodology, which requires that minting or redeeming up to 20% of ETHplus supply incur no more than 0.5% slippage. At current ETHplus supply levels, this corresponds to a minimum single mint or redemption capacity of approximately 7,400 ETH. If left unaddressed, this increases the probability that ETHplus redemptions breach governance-defined slippage tolerances, weakening the reliability of the DTF.

Comments on the changing liquidity conditions between December 2025 and January 2026

While the findings from the liquidity report are severe, the RocketPool team have already taken steps to improve the executional depth of rETH. These steps as outlined in the Mainnet rETH liquidity recovery plan include the RockSolid rETH Vault depositing funds into the new rETH/WETH Balancer v3 LP and a 4-week Balancer incentive programme to expedite liquidity recovery.

Given this quick response to the unfavourable liquidity profile of rETH, liquidity was modeled again on 06/01/2026 to assess the extent rETH liquidity has recovered over the holidays. Despite the 4-week Balancer incentive programme not coming online until the 8th Jan there has been a marked improvement in rETH liquidity, with the point liquidity exhausted doubling from 1,000 ETH in December 2025 to 2,000 in January 2026.

It is also worth noting that there has been no public discussion on improving frxETH liquidity, to the best of my knowledge, it has also improved significantly over the same timeframe with the point at which liquidity exhaustion occurred improving by a factor of 4, from 1,000 ETH to 4,000 ETH.

Problem Statement

Despite observable improvements in rETH and frxETH liquidity since the December 2025 analysis, rETH continues to act as the primary bottleneck on ETHplus redemptions. While the point at which rETH liquidity is exhausted has roughly doubled, the redemption size at which ETHplus breaches the 0.5% slippage threshold has increased only marginally, from approximately 5,000 ETH to around 5,250 ETH. As a result, the ETHplus redemption curve remains non-compliant with the liquidity requirements set out in the ETHplus DTF methodology, which require minting or redeeming up to 20% of supply to clear within a 0.5% slippage tolerance.

In parallel, frxETH concentration risk has continued to increase, with ETHplus now holding 9.19% of total frxETH TVL, approaching the 10% single-asset cap defined by the methodology. This level of concentration materially reduces headroom and limits flexibility should liquidity conditions deteriorate further. This risk has been explicitly highlighted by BlockAnalitica in their external review of ETHplus and strengthens the case for a proactive reduction in frxETH exposure, notwithstanding its positive contribution to the blended yield of the basket.

Current Basket

Proposed Basket

The proposed rebalance aligns with the newly proposed ETHplus mandate, which expands the eligible asset universe to include LRTs and enables the inclusion of weETH, the most established LRT, within the basket. weETH combines deep and durable liquidity with a strong performance record relative to LSTs and broad market recognition across DeFi. Further discussion on the architecture of Ether.Fi’s weETH, its yield and liquidity profile, and the risks associated with including LRTs in the basket can be found here.

By introducing weETH at 22%, funded through an 11% reduction in both rETH and frxETH, the proposal optimises multiple aspects of the basket without materially impacting either blended yield or diversification. As shown in the tables and charts above, redemption capacity within the 0.5% slippage threshold increases from approximately 5,000 ETH to 27,500 ETH, while frxETH concentration within ETHplus falls from 9.19% to 4.38%. At the same time, basket yield declines by only 4 bps, from 2.71% to 2.67%, and the diversification ratio improves from 66% to 68%.

Taken together, this rebalance meaningfully improves the structural quality of the ETHplus basket by materially increasing executional depth and reducing reliance on asset-specific liquidity constraints. By shifting weight toward assets with deeper and more reliable exit liquidity, the basket becomes less sensitive to large redemptions and more robust to periods of market stress, reducing the likelihood of breaching methodology-defined tolerances. The resulting configuration delivers a more predictable and resilient collateral profile, better aligned with the requirements of institutional allocators, while preserving ETHplus’ core yield and diversification objectives.

Risks and Rebalancing Considerations

As with all ETHplus basket rebalances, this proposal is subject to the standard risks inherent to DeFi and to ETHplus’ operation on the Reserve Protocol. These include smart contract risk, oracle risk, and dependencies on underlying protocols and infrastructure. Given the proposal maintains a majority allocation to incumbent collaterals, the risk profile of ETHplus remains largely consistent with the current basket with the only new risk layer being introduced from the inclusion of weETH into the basket, further discussion on the risks and mitigations of this asset can be found here.

Beyond these baseline considerations, the proposed rebalance introduces execution risk related to the act of reallocating collateral, particularly when reducing exposure to assets with comparatively constrained exit liquidity such as rETH. Executing large reallocations in a single step could introduce avoidable slippage, complete depletion of the backing buffer and temporary value loss at the basket level which would lead to RSR seizure to recollateralise the basket.

To mitigate this risk, the proposal anticipates the use of an interim basket configuration during the rebalancing process. This approach allows rETH exposure to be unwound gradually and under more favourable market conditions. The use of an interim basket is intended as a transitional risk management measure, mitigating the risk of loss.

Interim Basket

Conditions required to progress to the final target allocation

Progression from the interim basket to the final target allocation will be conditional on both the execution quality of the initial rebalance and market conditions. Specifically, governance should confirm that the final allocation can be completed without introducing material slippage, that basket-level redemption curves remain within methodology-defined tolerances, and that no single asset re-emerges as a binding liquidity constraint. These conditions will be assessed over a one-week period following implementation of the interim basket.

To minimise execution delays, these observations will be compiled and posted as a follow-up comment under this RFC. If the criteria are met, governance will proceed directly to an onchain vote to finalise the allocation, without the need for an additional RFC.

Expected Outcome, Risks and Trade-offs

If implemented as proposed, the rebalance is expected to deliver a material improvement in the performance of ETHplus minting and redemption, with a significant rightward shift in redemption curve which reduces the chance of breaching methodology-defined slippage thresholds at scale. These liquidity improvements are achieved with only a modest reduction in basket-level yield and improvements in the diversification and concentration profiles, resulting in a more balanced risk profile overall. Post-implementation success is defined by predictable, low-slippage execution, alongside a basket composition that no longer exhibits concentration in frxETH.

These outcomes must be weighed against a set of acknowledged risks and trade-offs. Rebalancing introduces execution risk, particularly when exiting less liquid positions. Finally, there is also the potential for second-order effects, including short-term yield variability or shifts in relative liquidity across underlying markets as the basket adjusts.

Governance ask and timelines

The first Implementation Proposal will authorise the rebalance into the interim basket and will also include a vote to ratify the updated ETHplus mandate and DTF methodology as outlined in the RFC. While this vote establishes governance approval of the updated mandate, full onchain enforcement of the mandate is not yet possible due to ETHplus currently operating on a protocol version without mutable mandate support.

The onchain mandate will be updated to reflect the ratified ETHplus mandate following the upgrade to Protocol version 4.2.0, which enables mutable mandates and restores full alignment between governance intent and onchain enforcement later in the quarter.

A second Implementation Proposal will follow approximately one week later, contingent on successful execution of the interim rebalance and the liquidity criteria outlined above being met. Subject to a favourable interim execution report published under this RFC, the second IP will authorise the transition from the interim basket to the final target allocation.

Poll

• YAY, I’m in favour of ratifying the updated mandate and rebalancing into the interim basket
• NAY, I am not in favour of ratifying the updated mandate and rebalancing into the interim basket

[zeb]

Great post. This is the type of work a protocol like Reserve needs consistently.

Some questions as a relatively new gov forum participant.

1. First a general question.

   In parallel, frxETH concentration risk has continued to increase, with ETHplus now holding 9.19% of total frxETH TVL, approaching the 10% single-asset cap defined by the methodology.

   For future posts, would like to request if you could link the methodology. Also tried finding it on the 1. website page but couldn’t. Where can I find methodology of each DTF? Or is 1. this forum post you share towards the end the official methodology? If so, probably would be helpful if these mandates/methodologies would be shown somewhere on the website in a more ‘formal’ way as well.

2. But on topic of this section, although likely better to be discussed elsewhere… Why is this part of the methodology? Let’s say a DTF becomes hugely successful, wouldn’t it be a sign of success and PMF if it absorbs a certain underlying token completely? Like Convex at some point did to Curve. My guess is that it is part of the methodology due to the Governance mandate saying the following

1: Maintain an Ethereum-aligned Liquid Staking Token basket. 2: Positively impact the Ethereum staking distribution.

and absorbing a certain ETH staking token could be seen as negative due to smart contract risk?

3. @ham

   Further discussion on the architecture of Ether.Fi’s weETH, its yield and liquidity profile, and the risks associated with including LRTs in the basket can be found here.

Think this is missing the actual link to the discussion?

4. Do I understand correctly that the rebalance will happen in 2 swaps instead of 1?

   @ham

   To mitigate this risk, the proposal anticipates the use of an interim basket configuration during the rebalancing process.

5. @ham

   These liquidity improvements are achieved with only a modest reduction in basket-level yield and improvements in the diversification and concentration profiles, resulting in a more balanced risk profile overall.

   Although I am very much in favor of diversification and managing liquidity, I think it is fair to ask how much reduction of yield is expected?

Thank you for writing this forum post and the time it took!

[ham]

Hey Zeb, thanks for taking the time to read through. Some really good questions here.

1. Visibility of DTF methodology

Completely with you on the visibility of the methodology, you’re correct that the methodology I refer to is the one in the forum post you’ve tagged. The reason isn’t isn’t visible in all the place you’d expect yet is because this proposal is an RFC and hasn’t passed it’s onchain vote yet. The delay in ratifying the methodology is linked to the release of protocol version 4.2.0., the roll out of which is expected to begin in the coming days, this will allow us not only vote on ratifying the updated mandate and DTF methodology but also change ETHplus on-chain mandate which isn’t currently mutable with this protocol version. Given the urgent need to rebalance the basket, I’ve decided not to wait for the Protocol upgrade and have rolled ratification of the updated mandate and DTF methodology with the first step of the rebalance. It’s not ideal but otherwise we’ll be waiting early March before voting on this rebalance. Once ratified by governors it’s my intention to create a formal methodology document and share this everywhere and anywhere people are likely to look for it, including on the ETHplus page.

2. Comments on concentration risk

Really good question! I really think it ultimately boils down to the intentions of the protocol and what you’re trying to absorb.

CRV is a governance token that Convex explicitly set out to absorb; aggregating voting power, influencing Curve emissions and maximising yield via coordination. CRV doesn’t back redemptions and holders are not promised redemption at par.

On the other hand, frxETH is productive collateral and sits directly on the redemption path of ETHplus. If ETHplus were to become a dominant holder, even what might appear to be small rebalances at the ETHplus level could translate into a significant disposal of frxETH that the market cannot absorb. During periods of market stress this becomes much more apparent, as unwinding into a thinning market likely introduces non linear slippage that is not captured by the liquidity models above. In addition, ETHplus would be shouldering a meaningful degree of dependency risk on a single protocol’s smart contracts, governance processes, validator mechanics, and oracle dependencies.

This is why this risk belongs in the methodology. It’s a risk that only emerges through success but by making it a methodology constraint, governance pre commits to avoiding systemic importance in any single underlying protocol, rather than addressing the issue reactively once the product is already large. At one point last year ETHplus TVL was over $350m and we held over 15% of frxETH TVL. This risk was less visible at the time, as the methodology had not yet been formalised.

3. Yep, definitely missing a link. You can find that discussion here.

4. Correct, the rebalance will happen in 2 swaps. The reason for this is discussed in the body of the proposal. I’ve reproduced it as a quote below for convenience.

@ham

Beyond these baseline considerations, the proposed rebalance introduces execution risk related to the act of reallocating collateral, particularly when reducing exposure to assets with comparatively constrained exit liquidity such as rETH. Executing large reallocations in a single step could introduce avoidable slippage, complete depletion of the backing buffer and temporary value loss at the basket level which would lead to RSR seizure to recollateralise the basket.

5. Definitely fair to ask about the expected reduction in yield. The expectated reduction is modest, with the yield of the current basket and final basket in this proposal only differing by 4bps.

Check out the table which compares the diversification, liquidity and yield profiles of the current, interim and final basket just below the proposals summary. I’ll reproduce it below for you.

@ham

[zeb]

1. Thanks for the clarification. Since it is called an update, I assumed there would be an earlier version? Other than that I agree action is important, can’t be waiting until March.

2. Yes I fully agree that CRV / Convex are not comparable to ETHplus and frxETH as tokens and use cases in and of itself. But let’s say ETHplus grows heavily, and therefore more of all its underlying LSTs get minted, wouldn’t that likely grow liquidity of those LSTs as well? Its an assumption, I haven’t checked tbh, but it would make sense to me. Also, ETHplus holding the lion share of all frxETH does not also mean that frxETH is the lion share of the basket of ETHplus, so ‘ETHplus would be shouldering a meaningful degree of dependency risk on a single protocol’s smart contracts’ is not applicable in what I am suggesting I believe. It seems the main reason I am reading here is liquidity, but that is imo due to the status of frxETH, not due to how much of the total TVL of frxETH is owned by ETHplus. Perhaps I’m missing something.

3. Cheers.

4. Yes I was asking since I actually think you are totally right, and for huge rebalances, I would even be more in favor of more than 2 swaps. But that is from an newbie perspective who has worked in the fund world where we could over time move in and out of positions. Here I can imagine that more easy said then done due to governance votes, etc?

5. Ah ofc! I even remember looking at those numbers. Thanks for highlighting it again, it is a great table.

[ham]

1. ETHplus Methodology

The title could probably do with an amendment… ‘ETHplus mandate update and formalisation of DTF methodology’ would be a more accurate title. I have discussed methodology informally before but this is the first attempt to formalise it with an onchain vote.

I was motivated to try formalise the methodology to bring ETHplus in line with index DTFs which have an easily discoverable factsheet and methodology documents, but these aren’t yet standard across yield DTFs yet.

2. Concentration Risk

It’s very interesting, at first glance ETHplus could look well diversified with 5 - 10 different LSTs in its basket but still with sufficient size hold a dominant share of each of its underlying collaterals.

I don’t think its necessarily true that as ETHplus supply grows and more of its underlying is minted its liquidity will grow alongside. Just look at rETH, it is the 3rd largest LST with 577k ETH (~$2b) staked but has the worst executional depth of any of the collaterals I modelled. Each protocol will have its own idea on how to manage incentives which aren’t always tied to the amount of ETH staked.

On your second point, you’re right that smart contract risk does not scale linearly with supply. A bug exists whether ETHplus holds 7 percent or 70 percent of an assets supply. The issue does go deeper than liquidity though, we don’t want ETHplus to become systemically important to frxETH since then its actions will affect frxETH’s liquidity, market behaviour, and even governance dynamics. The circular dependency invites a level of governance oversight that ETHplus governors haven’t signed up and which sits outside the mandate of a neutral, index-like product.

4. Number of rebalances

Yeah you’re correct. With the current version of the protocol one governance vote triggers a single auction which rebalances the basket. Sadly, we don’t yet live in your fund world where we can TWAP in and out of a position with a single governance vote, although I wish we did… it would certainly make my life easier.

[ham]

This proposal, combined with the ratification of the updated mandate and methodology has been moved onchain. The Request for Comments period has ended and the poll is closed.

Link to onchain proposal: Reserve app | DTFs