[RFC] Collateral Basket Change Proposal: Adding Staked pxETH (apxETH) to the ETH+ Collateral Basket v2

[funky]

Summary

This proposal recommends integrating staked pxETH (apxETH) into the ETH+ collateral basket to increase yield generation and enhance the diversification of the index LST following the mandate to add value to ETH+ holders through diversification.

Abstract

pxETH is a LST created by Dinero Protocol, representing ETH staked on the Beacon Chain. While pxETH doesn’t generate staking yield on its own, it can be further staked for apxETH, which earns staking rewards from the total ETH staked within the Dinero Protocol.

pxETH and apxETH employ the same two token system employed by frxETH and sfrxETH, the latter of which is already present in the ETH+ collateral basket.

apxETH is also 50% of the collateral basket for dgnETH, which itself also employs a two token model.

Thanks to the DeFi yield opportunities available for pxETH, only about 30% of pxETH is staked for apxETH, allowing apxETH to offer a higher ETH staking yield compared to other LSTs since launching in December 2023 and growing to more than 27,500 ETH TVL.

Adding apxETH to the collateral basket is attractive given its high yield and deep liquidity. This proposal suggests allocating 8% of the ETH+ collateral to apxETH and reducing existing stETH allocation by 8% to accommodate this new collateral asset.

Problem Statement

The current ETH+ collateral baskets concentrated asset composition does not optimally diversify risk and is missing yield enhancement opportunities. There is still a clear opportunity for further diversification in order to spread risk and significantly enhance yield while still sticking to trusted, high-performance tokens from protocols with a strong commitment to security such as apxETH.

Rationale

Enhanced Diversification: Adding apxETH further diversifies the sources of yield within the basket and mitigates risks associated with the concentration in fewer staking platforms.

Yield Improvement: apxETH is designed to be loosely pegged to ETH, capitalizing on on the same model as Frax a proven strategy in the synthetic asset market to potentially offer higher yields.

Liquidity: by improving basked diversification, ETH+ can tap into the deep pxETH market liquidity, boosting overall liquidity

The Dinero Protocol offers full-stack infrastructure for L1 and L2 protocols through a dual-token liquid staking solution called pxETH.

When ETH is deposited into the protocol, it is staked with Dinero’s validators and converted into pxETH, which maintains a 1:1 peg with ETH. pxETH, while not directly generating yield, can be staked for apxETH, a yield-bearing ERC-4624 vault token. apxETH benefits from the staking yield of Dinero’s validators.

pxETH is widely integrated throughout DeFi, meaning not all pxETH gets staked for apxETH. This allows apxETH to earn above market ETH staking yield.

pxETH can be staked for apxETH and vice versa at any time with zero fees. Liquidity for pxETH is available across Ethereum mainnet and L1/L2 networks, enhancing its accessibility. Additionally, pxETH can also be redeemed for ETH with minimal fees, ensuring easy and cost-effective conversions.

Security is of utmost importance at Dinero Protocol. Dinero prioritizes security with institutional-grade reliability and a robust network of partners as a part of its security framework for pxETH. Each deployed system is subject to a minimum of two audits conducted exclusively by premier auditing organizations: a private audit by Spearbit and a public one by Code4rena.

In addition, pxETH has a $500k - $2m responsible disclosure and bug bounty program incentivizing the community to report vulnerabilities, one of the highest in the industry.

As a founding member of the Secure Staking Alliance, Dinero collaborates with Cubist Foundation (Trusted by Lido and EigenLayer) for off-chain keeper and validator management which adds an additional layer of protection. Dinero has also set up a security retainer with Code4rena’s top security researchers, ensuring all smart contracts are under continuous oversight.

Ownership risks are mitigated through 24/7 operations, globally distributed and rotating multisig with doxxed team members, and the utilization of hardware security modules for generating private keys within air-gapped environments, ensuring the utmost security for pxETH and its stakeholders.

Audits: (1) (2) (3)

Security partnerships: (1) (2)

Suggested New ETH+ Collateral Basket

Impacts of mints and redemptions

Risks

Adding another asset as collateral adds additional counterparty risk. However, apxETH has gone through rigorous smart contract audits and has existed for 10 months with a total value locked of $70 million with no exploit occurring.

The two token model such as the ones employed by frxETH and pxETH have complex staking and yield dynamics and I encourage the community to explore them further (here) to be well informed when deliberating on this RFC.

Conclusion

Integrating apxETH into the ETH+ collateral basket represents a strategic move to enhance yield, improve diversification, and leverage the Dinero Protocol’s robust security framework. With its high yield potential, deep liquidity, and reliable staking infrastructure, apxETH aligns with our mandate to add value to ETH+ holders while balancing yield with diversification and risk management. By reallocating 8% from stETH to apxETH, the ETH+ basket can better capitalize on yield-generating opportunities while maintaining exposure to trusted liquid staking tokens.

While introducing apxETH adds a new layer of counterparty risk, the Dinero Protocol has demonstrated strong security practices, including multiple audits, a substantial bug bounty, and collaborations with reputable partners. This proposal seeks to responsibly elevate the ETH+ basket’s performance and resilience.

Please provide any questions or feedback in the comments to enhance the discussion and help the DAO in making this decision.

• Maybe, I require more information to make an informed decision
• Yes, in favour
• No, against

[pete]

How would this fit with the OETH proposal that is currently going through the governance process?

[funky]

The proposal can be updated if OETH proposal is successful.

[ham]

Thank-you for the proposal @funky

Overall I’m keen to see the addition of apxETH to the ETH+ collateral basket as it is clear it will efficiently diversify the collateral basket and optimise yield further.

I think following in ETHx footsteps and slowly introducing apxETH at 8% is sensible. Despite this being a relatively small allocation, apxETH will contribute to 20% of the baskets overall yield. The contribution being significant when comparing to ETHx which only contributes 7.5% to the overall basket yield.

Also taking the weighting solely from wrapped stETH also remedies some of @StableScarab previous concerns about the collateral asset concentration we saw when we increased the weighting of stETH to 50% to address liquidity bottlenecks in rETH and sfrxETH. I believe a diversification ratio between 70-75% is optimal for a ETH+ especially if we include OETH once their adapter is complete, again taking the allocation from stETH. However it is worth mentioning here what @mattimost discussed in the GovOps call - Given the TVL of ETH+, gas fees associated with minting and redemptions aren’t a huge concern as smaller holders will trade into ETH+ through a DEX and larger holders will suffer minimal fees relative to the size of the ETH+ they are transacting. However we will soon be approach the gas limit for a transaction with >5 collateral assets, this shouldn’t be an issue for the addition of apxETH (N#5) but worth noting for future additions. Further analysis into gas limits is required.

It is also worth noting that ETH+ mainly caters to institutional clients and DAO treasuries given it’s safe, reliable and over-collateralised yield offering. I wonder if holding ETH+ would be a harder sell with a novel LST, such as apxETH, in the collateral basket. This was discussed on the call linked above with @funky who reassured us that Dinero is committed to it’s security frameworks, also outlined in the RFC. This commitment and the fact that Dinero is partnered with Galaxy Digital, Laser Group and Nomura to offer institutional grade ETH staking yield, through iapxETH, reassures me that apxETH fulfils the safety requirement to be included in the ETH+ collateral basket. It is also worth noting that another two-token LST, sfrxETH, is already in the collateral basket.

A final point on apxETH is while pxETH liquidity is deep on Eth mainnet, will we be able to swap 8% of the collateral basket into apxETH without incurring loss of RSR stakers? Is it worth slowly introducing apxETH with the same two step process we did for ETHx (0% → 4% ->8%). I’d appreciate some further analysis on liquidity to see if this is required. Who is best positioned to do this?

Regarding @pete proposal to add OETH to the collateral basket, while you have recently updated on the status of the OETH plugin timelines still aren’t certain, while the apxETH adapter is already developed. I see no issue pushing ahead with this proposal first and then looping back to the OETH integration once the adapter has been developed provided the addition passes governance.

In summary, i’m for the addition of apxETH to the collateral basket to diversify risk further and significantly optimise for yield. I’m reassured by Dinero’s commitment to safety with multiple audits per integration, bug bounty, it’s status as a founding member of the Secure Staking Alliance and it’s on-going work with institutional partners such as Galaxy, Laser Digital and Nomura and I think think our larger holders will be reassured by this also.

[mattimost]

Another question on my end: since pxETH is not that large an asset, and has quite a large % unstaked, how much does the yield go down when a huge new chunk of ETH enters the system and immediately stakes? What is new unstaked yield?

[funky]

Would be about a 1% drop in APR for a 8% basket weight.