Hey Zeb, thanks for taking the time to read through. Some really good questions here.
- 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.
- 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.
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Yep, definitely missing a link. You can find that discussion here.
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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.
- 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.