Hello, thank you for your proposal @0xSleepy.
The composition of ETH+ is crucial for ensuring the asset’s security and successful growth.
Considering the various discussions on this topic, it would be appropriate to reduce rETH's share in ETH+ in favor of wstETH.
Here is our initial proposal (with more compositions at the end):
- 50% wstETH
- 33% sfrxETH
- 17% rETH
Why is it relevant to reduce rETH's share to 17% in the current basket? Here is our reasoning:
Growth & Expansion issues
rETH frequently trades at a premium. This is due to the protocol's intrinsic workings, which operate with its mini-pool system. This can pose problems, especially when the premium is significant.
Currently, the rETH premium is around 0.15%.
The liquidity for buying rETH could be more optimal: a swap of 4,000 ETH would result in a slippage of 0.46%.
Added to the rETH premium (currently 0.15%).
Due to the slippage and premium of rETH, this asset significantly increases the price impact of minting ETH+. A user who mints 12,000 ETH+ would take over 20 days to recover his price impact loss.
Which is also a clear bottleneck to the growth of ETH+.
Actual ETH+ basket composition price impact
- Under the previous composition, it took 21 days to absorb the price impact for a mint of 12,000 ETH (based on the current ETH+ APR)
New ETH+ basket composition price impact
- Under the new one, it only takes 10 days (based on the current ETH+ APR)
Redemptions Liquidity
The impact of redemption price is also essential, as it could affect money market risk parameters for any arbitrageur or liquidation bot that would add the redemption as a route.
RocketPool has a liquidity pool of 31,000 ETH, allowing for pegged redemptions. This pool is called for large redemptions via a 1inch route. Interestingly, the redemption price impact for rETH increases and decreases again.
Since 1inch aggregator uses this route, redemptions on this asset have greater liquidity than for wstETH (on substantial swaps). With lower liquidity, the price impact is slightly worse.
Therefore, it is important not to increase the proportion of sfrxETH too much, as this would weaken global liquidity.
Here is how ETH+ would perform during redemptions:
Actual ETH+ basket composition price impact
New ETH+ basket composition price impact
As you can see, the redemption price impact hasn't changed. However, the mint liquidity has been significantly improved:
To recap, the new allocation will:
- Improve ETH+ expansion by enhancing liquidity at the time of minting
- Improve overall yield by reducing the allocation to rETH (lowest yield)
- Without affecting the redemption liquidity and without overexposing wstETH to more than 50%
Here are also some relevant composition ideas:
- wstETH: 45%
- sfrxETH: 33%
- rETH: 22%
- wstETH: 50%
- rETH: 28%
- sfrxETH: 22%
Please feel free to share your thoughts/responses to further the discussion.