Summary
On the 22nd of August a collateral basket change was proposed in the Ethereum Plus, ETH+ forum. The proposal advocated for the addition of Stader’s ETHx to the basket in order to improve risk diversification, allow the basket to reflect the evolving Ethereum staking ecosystem, and potentially increase ETH+ yields. The initial proposal allocated 10% to ETHx however, after consideration by the community and MEV Capitals analysis, it has been found that the current liquidity constraints on ETHx limit allocation to 8%. During this analysis, it was also highlighted that liquidity during both ETH+ minting and redemptions could be improved by allocating 50% to wrapped staked ETH, wstETH, and 21% to both staked Frax ETH, sfrxETH and Rocket Pool ETH, rETH.
This proposal outlines a two-step plan for collateral basket change in order to improve basket diversification, spread risk, and potentially improve ETH+ yields as the initial RFC set out to do with the addition of ETHx and titrate wstETH, rETH, and sfrxETH allocations to improve minting and redemption liquidity. Given this is a two-step plan, if passed this RFC will result in the changes according to the step 1 collateral basket change, a second RFC will then be live on the forum for community discussion once the stated safety requirements below have been met before a second IP is pushed on-chain to achieve the final collateral basket change.
Abstract
This proposal outlines a strategic change to the ETH+ collateral basket, specifically advocating for the inclusion of Stader’s ETHx to enhance risk diversification and align with the evolving Ethereum staking ecosystem. Initially proposed with a 10% allocation to ETHx, liquidity constraints have led to a revised 8% allocation. The two-step plan aims to optimize the basket’s composition by also adjusting allocations of wstETH, rETH, and sfrxETH, addressing liquidity bottlenecks during minting and redemptions. The first vote will initiate the changes, while the second vote will occur once predefined safety and liquidity criteria are met. This change seeks to balance risk management, improve yield, and enhance liquidity efficiency for ETH+ holders.
Problem Statement
The current ETH+ collateral baskets concentrated asset composition does not optimally diversify risk and is missing yield enhancement opportunities. An RFC was proposed on the 22nd August to address this with the addition of ETHx to the collateral basket. With the aim of expanding the asset spectrum, improving risk distribution, and potentially increasing the ETH+ yields.
The proposal was well received by the community agreeing that the addition of ETHx to the collateral baskets was in line with ETH+ mandate to maintain an Ethereum-aligned liquid staking token basket and provide value to ETH+ holders through LST diversification. However, given the current liquidity constrictions placed on ETHx the proposed 10% allocation was too high. After detailed analysis, it was found that with current liquidity constraints, a max allocation of 8% was appropriate to limit the impact on mint and redemption prices to acceptable levels.
During the analysis liquidity bottlenecks were also found, the current rETH allocation pushing the mint price of ETH+ and the current sfrxETH allocation pushing the redemption price above acceptable limits. The proposal plans to alter these allocations weighting wstETH heavier to limit the impact of rETH and sfrxETH on minting and redemptions, respectively.
Rationale
With these changes to the collateral basket, we aim to;
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Addresses current liquidity bottlenecks (rETH for minting, sfrxETH for redemption)
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Introduce ETHx at a conservative level with an increase at a later date once safety criteria have been met. A measured approach allows for close observation and monitoring of market reactions and liquidity before any further increases occur.
The proposal aims to align the ETH+ collateral basket with its mandate within the confines of the current liquidity constraints of the newly proposed collateral basket asset, ETHx and the collateral basket incumbents, wstETH, rETH and sfrxETH. The proposal will be completed using a two-step approach and as such this one RFC will warrant two on-chain votes.
The first basket change will be enacted once this proposal has passed through the usual governance cadence. Slippage for this basket change has been calculated to deplete no more than 30% of the current backing buffer.
Pending on the success of the first basket change, we will push a second RFC live to reach the final composition. Prior to part 2 of the rebalance, we need to ensure adequate safety. This proposal proposes the following criteria:
- The swap required for the second iteration should incur no more than 40% of the backing buffer in slippage costs.
- ETHx DEX liquidity should show improvement with Stader’s continuation of liquidity incentives.
- Market impact of the first iteration should be carefully evaluated and deemed acceptable.
- If any of these criteria is not met (or deemed unsafe), we will reduce ETHx by 1-2% (to a resting point of 6-7%) and provide that exposure to sfrxETH and rETH
| Current Basket | Vote 1 | Vote 2 (Final) |
|---|---|---|
| 33% wstETH | 41.67% wstETH | 50% wstETH |
| 33% rETH | 27.17% rETH | 21% rETH |
| 33% sfrxETH | 27.17% sfrxETH | 21% sfrxETH |
| 0% ETHx | 4.00% ETHx | 8% ETHx |
Risks
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. The two step approach outlined has been implemented with slippage and liquidity considerations in mind to prevent the loss of capital from stakers.
The addition of ETHx to the collateral basket does not come without additional counterparty risk. However, Stader’s ETHx has been operational for over a year, ETHx has a total value locked of 125K+ ETH and 20K+ active stakers, with zero exploits or security incidents to date and has demonstrated a strong commitment to smart contract and oracle security as shown by their past audits, bug bounty and oracle security mechanisms. To date ETHx has been audited by three renowned auditors: SigmaPrime, Halborn, and Code4rena and currently has an active $1M ImmuneFi bug bounty.
Conclusion
The proposed changes to the ETH+ collateral basket introduce a balanced approach to diversification and liquidity management, with the careful inclusion of ETHx. By addressing liquidity bottlenecks and allocating ETHx conservatively, the proposal aims to enhance ETH+ yields while mitigating risks associated with collateral rebalancing. The two-step implementation ensures that the process is measured and adaptable, with adjustments based on market performance and liquidity improvements. Should the outlined safety criteria not be met, further adjustments will be made to maintain the stability and performance of ETH+. This approach reflects a commitment to maintaining a robust and diversified collateral basket that aligns with the evolving Ethereum staking ecosystem.
- In favor of this proposal
- No, don’t add ETHx to the basket