[RFC] Collateral Basket Change 6: Re-introduction of apxETH

Degen ETH (dgnETH)
1

Summary

This proposal reintroduces apxETH to the dgnETH collateral basket, replacing lower-yielding assets and reducing the ETH+/ETH LP. The change boosts blended yield from 2.87% to 3.65%, raises sdgnETH yield to 7.2%, and improves diversification from 41% to 50%, strengthening dgnETH’s mandate of yield optimisation and diversification.

Problem Statement

The dgnETH collateral basket has recently fallen out of compliance with it’s mandate for two reasons; the inclusion of Origin’s OETH limiting the baskets ability to beat LST yields and the fact that current dgnETH collateral basket isn’t optimised for yield given there are higher yielding collaterals available to it, Dinero’s apxETH yielding 4.3%, which aren’t currently deployed in the basket.

Dinero’s apxETH

apxETH is no stranger to the Reserve Protocol with it previously being included in the dgnETH collateral basket, proposal found here and a previous RFC to include it in the ETHplus collateral basket which didn’t graduate to the on-chain voting stage. The latter includes an excellent write up on apxETH if you want to get up to date on the assets mechanics.

Rationale

The addition of apxETH to dgnETH’s collateral basket aims to satiate dgnETH’s hunger for yield increasing the collateral baskets blended yield from 2.87% to 3.65% and sdgnETH’s yield from 5.68% to 7.2%.

While apxETH is still an Ethereum LST it’s two-token model has enabled it to consistently outperform the markets average LST yield and remains the highest yielding collateral available to dgnETH.

1600×750 175 KB

1600×532 195 KB

Basket Changes

788×448 32.5 KB

794×444 31.1 KB

436×242 18.7 KB

The collateral basket change proposed removes the two lower yielding collaterals; OETH and the RE7 Morpho Vault and reduced the ETH+/ETH LP to 50% in favour of the higher yielding apxETH. These changes also increase the diversification ratio from 41% to 50%.

Risks

The proposed changes concentrates counter-party risk in the two remaining collateral assets however the diversification ratio is increased and both protocols have undergone rigorous audits and are sufficiently lindy to warrant the allocation in the dgnETH collateral basket.

Dinero Audits and Security Partnerships

  • Audits: (1) (2) (3)

  • Security partnerships: (1) (2)

Conclusion

Reintroducing apxETH into the dgnETH collateral basket directly addresses mandate compliance by replacing lower-yielding assets with the market’s highest-performing LST. While this increases the percentage of the basket that is allocated to LST yield the change raises yields and improves diversification ensuring dgnETH continues to deliver on its north star, yield optimisation.

Poll

  • Yay, proceed with the basket rebalance
  • Nay, no change to the collateral basket
0 voters
1 Like
2

gm, after reflecting on the basket proposal and discussing with key stakeholders I feel this proposal doesn’t hit the mark and fails to balance yield and risk.

Firstly the yield data presented is from multiple sources, Register app + DeFiLlama and appears to be mixed between 30d ma and current APYs. While unintentional, this has the potential to mislead governors. A standardised data set will be used going forward, likely DeFiLlama 30d ma’s.

Secondly, dgnETH has grown to such a size that liquidity considerations are now at play especially with longer tail LSTs and LP positions. After some preliminary work it looks like pxETH redemptions bottleneck around 750 pxETH and with a 50% or 1500 ETH allocation are certainly above the level of risk i’d be comfortable with even for dgnETH which is generally comfortable with a higher risk profile than a yDTF like ETHplus.

Finally, we have had 2 collateral basket rebalances in the recent past which have both eaten into the backing buffer which still hasn’t re-filled despite these rebalances being roughly one month ago. While the backing buffer is deficient there is no yield streaming to RSR stakers. If we were to go ahead with this rebalance and another we have planned in the future to update the ETHplus / ETH LP to the new Convex LP that would be 4 rebalances in this quarter. These frequent rebalances risk governor fatigue and also deplete the backing buffer meaning loss of yield for RSR stakers, both things which I’d like to avoid.

Instead I propose we do NOT proceed to on-chian voting for this proposal for the reasons mentioned above and instead re-visit the collateral basket rebalance with a closer eye on liquidity constraints once the ETHplus / ETH Convex LP plug-in is ready.