[RFC] Adjusting the ETH+ Collateral Basket To Adjust Liquidity Constraints To Protect ETH+ Holders From Slippages

Understanding the 15k ETH threshold

15k ETH is the current redemption threshold before ETH+ becomes at risk of depegging. When redeeming or minting, ETH+ opts for purchasing the underlying basket via through online liquidity. When minting through online liquidity, minting and redemptions don’t have directly interact with the underlying mechanisms of each LST product, but through Uniswap and Curve, reducing overall design friction.

When purchasing and selling, there comes a point where users can receive a loss through purchasing via slippage. ETH+ has a backing buffer Reserve Protocol Docs | RTokens that protects ETH+ holders from taking a loss from this slippage. If the total slippage is greater then the backing buffer, then ETH+ holders will incur a loss that is covered through RSR stakers.

Reserve protocol recently did research on one of the larger holders.

This multisig currently hold 5,000 ETH+ as can be seen in their DeBank Profile

At 30K ETH threshold, this would maximize the runway as ETH+ grows without encountering liquidity constraints anytime soon. As the the LST index scales, the size held by large holders will increase and they will need to assurances that ETH+ is designed to handle the amount of ETH+ they hold in case they need to redeem.

This means that measures must be put in place, in advance for large holders to feel comfortable to mint more. If large holders already holds 33% of the total redemption value that will affect the backing buffer, they may be hesitant to mint more.

The model above takes into a consideration a full backing buffer, if the backing buffer is not full due to mass redemption already occurring or changes underlying liquidity of the LSTs backing ETH+, this could directly affect large holders and whales and keep them from redeeming at the full underlying value. If in an event like this occurs and they still choose to redeem, all ETH+ holders could see significant loss.The idea of this decision to address liquidity constraints is at the current basket, there have already been liquidity concerns with products like rETH as ETH+ continues to grow. This concern will only continue to remain a problem until addressed.

If the community looked to adjust the basket dynamically (every quarter) here are a few things to consider
Double trading: the community must not uniformly lower all collaterals at once, at least one of the collaterals need to stay constant. This means as new collaterals are added (in the future) and the collateral basket is adjusted ideally one collateral should not be adjusted. wstETH, would likely be the candidate to take the large share as it is the most liquid.

More Governance: More governance will be required to monitor and deliberate on this. If the market conditions change rapidlly and ETH+ enters a liquidity crunch due to redemptions. The governance process may not be able to adequately address these concerns in time. Which could lead to loss greater then the backing_buffer if not adequately prepared.

Concerns with designing ETH+ fully around liquidity
As noted by @tbrent and @StableScarab

There are questions on whether this does not follow the ETH+ mandates and concentrates too much risk on wstETH. If the community opted for 50% wstETH 25% sfrxETH and 25% rETH this could double the potential ETH+ that could be redeemed before surpassing the backing_buffer.

One way to affectively address this concern is look to begin adding new LSTs to further diversify the product. This will introduce greater counter parity risk to that LSTs liquidity and their protocols infrastructure. However, it would further diversify ETH+.

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