I appreciate everyones patience here as we waited over the last month for LPs to exit their LP positions. We can now see that these exits culminated in an ETH supply drop of 45% from 22,000 to 12,000 ETH and when coupled with ongoing ETH price depreciation saw a contraction in market cap of 60%. While this does make for painful reading for the ecosystem as a whole it does somewhat relieve some of the pain points we’ve been discussing here.
I’m going to try and keep this post as short as possible so will first present the data in full before briefly summarising my preferred basket and the rationale behind it.
Individual Collateral Assets
Current Collateral Basket
Previously Proposed Basket
Proposal
I propose we continue with the rebalance into the proposed basket as planned for the following reasons;
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ETHx Reduction, 5% (-3%) - A stepwise reduction to the asset which is bottlenecking ETHplus redemption liquidity. A stepwise approach to the reduction has been chosen given the poor overall liquidity of the asset, even a 3% reduction to ETHx’s total allocation has to be completed in two steps as exiting 375 ETHx in a single transaction gives 44.5% slippage. ETHx should then be considered for complete exit at the next rebalance if liquidity metrics do not improve.
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weETH, 25% (+3%) - Increases ETHplus exposure to LRTs to 25%, a comfortable allocation given weETH can easily accomodate the increase given it’s strong liquidity profile and a yield profile that beats ETHplus yield benchmark, stETH. I’d be cautious to increase the allocation to weETH or the LRT class more generally given the additional slashing risks associated with LRTs.
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rETH, 0% (-10%) - A complete reduction in rETH given it’s the least performant asset in the basket, yielding 2.04% while stETH yields 2.45%. The additional risks associated with the asset’s primary liquidity venue being an aETH boosted pool on Balancer also carry some weight on it’s exclusion from the basket.
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frxETH, 20% (+10%) - Given ETHplus supply has reduce by 45% this month, a 20% allocation to frxETH now comfortably sits within the previously ratified dependency parameters (<10%) holding 6.38% of frxETH total supply. Coupled with a favourable liquidity profile and the strongest yield profile among eligible collateral assets, a 20% allocation to frxETH helps maintain ETHplus competitiveness relative to its benchmark, stETH.
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OETH - I’m grateful to @pete for the thoughtful and ongoing discussion around OETH and acknowledge that the recent reduction in ETHplus supply makes a meaningful allocation more viable than when this discussion began. However, while OETH remains an asset worth monitoring, ETHplus currently underperforms its yield benchmark and OETH does not currently improve that position. As a result, I do not believe inclusion is warranted as part of this rebalance, though it may be worth revisiting in future should its relative yield, liquidity profile or strategic role within the basket change.
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Liquidity Profile - While the proposed rebalance does not significantly alter the point at which basket redemption slippage exceeds the 0.5% threshold (~5,000 ETH), it reduces exposure to ETHx, the primary contributor to redemption slippage within the current basket. This improves flexibility for future rebalances and places ETHplus in a stronger position should a complete exit from ETHx be required.
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Diversification Profile - Despite increased concentration in frxETH, the diversification ratio declines only marginally from 0.68 to 0.65 and remains comfortably within mandated limits.
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Yield Profile - The proposal increases the holder yield profile by 8bps from 2.25% to 2.33%, aligning it closer with its yield benchmark, stETH which currently yields 2.45%.
Execution
Given ETHx liquidity remains extremely limited, with redemption liquidity largely exhausted beyond 200 ETHx, I propose executing the rebalance in two equal steps. This reduces execution risk while keeping the estimated cost of each rebalance leg to approximately 0.03% of ETHplus supply. Following completion of the first step, liquidity metrics can be reassessed before proceeding with the second rebalance.
For reference, the table below illustrates the estimated execution costs associated with completing the rebalance in a single transaction. Due to the limited liquidity available for ETHx redemptions beyond ~200 ETH, a single-step execution is estimated to incur approximately 173 ETH of slippage, equivalent to 1.38% of ETHplus supply. This compares to an estimated cost of just 7.2 ETH (0.06% of supply) when executed in two stages.
Poll
- YAY, proceed with the proposed basket rebalance using a two-step execution strategy
- YAY, proceed with the proposed basket rebalance using a single-step execution strategy
- NAY, do not proceed with the proposed basket rebalance