[RFC] Collateral Basket Change Proposal: Adding Wrapped OETH (wOETH) to the dgnETH Collateral Basket

Degen ETH (dgnETH)
1

[RFC] Collateral Basket Change Proposal: Adding Wrapped OETH (wOETH) to the dgnETH Collateral Basket

Summary

This proposal recommends integrating Wrapped OETH (wOETH) into the dgnETH collateral basket to enhance the diversification of the index LST.

Abstract

Origin Ether (OETH) was launched in May 2023 and is an ERC20 that generates yield while sitting in your wallet. Similar to stETH, OETH yield is paid out daily and automatically (sometimes multiple times per day) through a positive rebase in the form of additional OETH, proportional to the amount of OETH held. OETH is a full-fledged LST with an extremely tight peg (1:1 redemptions to ETH thru Origin’s ARM) and high yields thanks to DVT direct staking through SSV/P2p and a Curve AMO.

wOETH is a ERC-4626 tokenized vault designed to accrue yield in price rather than in quantity. When you wrap OETH, you get back a fixed number of wOETH tokens. This number will not go up - you will have the same number of wOETH tokens tomorrow as you have today. However, the number of OETH tokens that you can unwrap to will go up over time, as wOETH earns yield at the same rate as standard OETH. The wOETH to OETH exchange rate can be read from the contract (0xDcEe70654261AF21C44c093C300eD3Bb97b78192 , function number 16), or via the OETH dapp.

Current exchange rate as of 6/23/25: 1 wOETH = 1.13150121 OETH

Problem Statement

The dgnETH collateral basket is currently made up of only two types of collateral - there is a simple and straightforward opportunity to further diversify dgnETH, by introducing an LST to the collateral basket.

Rationale

We’ve noticed many LSTs trade below their peg due to DEX fees and slippage, and to reflect the time value of money. LSTs that consistently trade below peg effectively impose a hidden exit fee - certain LSTs often trade ~0.25% below peg, meaning it takes three weeks of staking to break even. This may be ok for long-term holders, but is terrible for users who plan to loop LTSs for additional yield, or for those looking for short term yield. This is not the case with OETH.

OETH ARM mechanics and gas optimizations will ensure the best possible prices for traders looking for instant exit liquidity, while DVT staking will achieve greater risk-adjusted yield. Our vision for OETH is for it to become the most trusted LST for those seeking to integrate OETH into other tokens.

Adding wOETH diversifies the sources of yield within the dgnETH basket and mitigates risks associated with the concentration in fewer yield strategies. The OETH Curve AMO has enabled OETH to earn higher yields over other LSTs historically, while redemptions through Origin’s ARM ensure OETH can be exited back to ETH 1:1 at all times, without needing to sit through an exit queue. Historical OETH yields can be found on Proof of Yield at all times.

New dgnETH Collateral Basket

The current dgnETH basket is capable of generating decent yields, but has a diversification ratio that is quite low:

Current basket:

Token Allocation APY = 5.06%
Morpho 25.03% 3.13%
Convex 74.97% 5.71%
wOETH 0% 2.789%
sdgnETH - 8.5%

Diversification ratio: 0.3754

I am proposing a 25% allocation of the basket to wOETH, which significantly increases the diversification ratio, while only marginally decreasing the combined APY:

Proposed basket:

Token Allocation APY = 4.333976%
Morpho 25.03% 3.13%
Convex 49.97% 5.71%
wOETH 25% 2.789%
sdgnETH - 7.10%

Diversification ratio: 0.625

I am also proposing a slightly different alternate basket, which still significantly increases the diversification ratio, but decreases the combined APY less:

Alternate basket:

Token Allocation APY = 4.46375%
Morpho 20% 3.13%
Convex 55% 5.71%
wOETH 25% 2.789%
sdgnETH - 7.32%

Diversification ratio: 0.595

Source: Reserve and OriginProtocol

Risks

Adding another asset as collateral adds additional counterparty risk and smart contract risk. However, OETH and wOETH was built reusing 95% of the OUSD code, of which 10+ audits have been done since 2020. Not that long ago, OUSD reached a market cap of $300m without breaking, and without diminishing the APY it was capable of generating. All OETH audits can be found in the audits section of the OETH docs. We have recently retained yAudit to look at our PRs as we code, and OpenZeppelin is also held on retainer to review 100% of the OETH and OUSD smart contract changes. Origin also maintains an active bug bounty with rewards ranging in size from $100 OUSD for minor issues to $1,000,000 OUSD for major critical vulnerabilities. The bug bounty program is currently administered by Immunefi, where Origin maintains a median resolution time of 7 hours.

OETH is also a core component of superOETHb, which was onboarded to Reserve several months ago as a collateral for bsdETH. OETH is a simpler version of superOETHb. The relationship between OETH and superOETHb can be found within the superOETH docs here.

The core Reserve team has also publicly stated their support for adding OETH to dgnETH via a comment on the thread to introduce OETH to the ETH+ basket:

Conclusion

We would be happy to adjust the above parameters based on feedback from the community and core Reserve team and would be happy to answer any questions on Origin Protocol, OETH, or the proposal itself. Adding OETH as a collateral for dgnETH will be mutually beneficial for both Reserve and Origin Protocol, as it will increase the utility for OETH, while also increasing the Reserve TVL and diversification of dgnETH. The Origin team can be reached at any time via the Origin Discord server.

  • I am in favor of adding wOETH to dgnETH collateral
  • I am not in favor of adding wOETH to dgnETH collateral
  • Abstain
0 voters
1 Like
2

Thank you for taking the time to post this well rationalised RFC @pete. While I do agree that the basket needs updating I can’t support the inclusion of OETH into the Degen ETH, dgnETH basket at this time. With the main reason being the yield profile of OETH which goes against the dgnETH mandate.

dgnETH Mandate

1: Take appropriate risks to capture high DeFi yields and sustainably outperform the LST market.
2: Distribute revenue to maximize staking contract yield.

Your rational behind including OETH in the basket is centred around centralised risk mitigation through diversification we can see from the mandate that dgnETH’s main goal is to capture high yields that outperform the LST market.

I’m also keen to point out that while your proposed basket only drops the yield by ~0.7% the two-token model and the multiplier effect on sdgnETH needs to be taken into account. A drop in basket yield of 0.7% translates to a drop in sdgnETH for 1.3%. This is important given sdgnETH is currently the best in class single-sided ETH LP at 8.5% with a drop of 1.3% I worry that dgnETH will then be less competitive.

I could maybe entertain adding a version of OETH that gives higher yields by incorporating multiple DeFi legos (e.g LPs or a looped position) but would not support including a ‘raw’ LST in the basket especially one that hovers around the mean LST yield. For reference i’m currently in discussions with Tokemak and Yield Nest to include autoETH and ynETHx respectively, both of these products hover around 5% which if both go live would diversify the basket while keeping yields around 5%, beating the LST market.

3

thanks for a thorough proposal @pete! as Ham pointed out the change in basket yield will be amplified by dgnETH’s two token model which creates leveraged yield.

Can you please add a column to the various potential baskets highlighting projected new staking rate for sdgnETH in order to fully weigh the options?

4

Hi @ham, I don’t believe the yield profile of OETH goes against the original dgnETH mandate:

  • Maintain a high-yield diversified ETH LST index leveraging collateral to earn from Liquidity Provision, staking, lending, and other yield-managed strategies
  • Manage yield with risk management by deploying into audited protocols

I believe that at 7.2% dgnETH would still be a very competitive single-sided ETH LP. In my calculations above the OETH yield was also on the lower-end of it’s spectrum - Origin is still in the process of migrating the OETH AMO to the new Curve pool, and once that is complete higher emissions should start landing, leading to higher OETH yield. In the last month, OETH yields have gone as high as 7.64% APY, and in the last 6 months they have been as high as 18.96% APY. These rates are confirmed by Origin’s Proof of Yield .

I would not support adding autoETH to dgnETH. Rather than onboarding wOETH itself, Tokemak integrated the OETH Curve pool to generate yield, and in doing so they are taking some of the emissions that would otherwise go to the OETH AMO. This means that both the OETH and superOETH yields will decrease as the autoETH TVL increases, which would lower the yields of both dgnETH (if OETH is added) and bsdETH, where superOETH currently makes up 33.35% of the basket.

5

No problem, I have added the sdgnETH APY to each of the options, assuming total dgnETH of $7.29M and a staking rate of 61.03%. The projected staking rate for sdgnETH will also increase with the new OETH Curve AMO.

1 Like
6

Thanks for your replies @pete.

Unfortunately I stand by my previous comments that OETH doesn’t have the yield profile required to be included in the dgnETH collateral basket mainly due to the multiplier effect the two token model has on reductions in yield.

While I do agree OETH yields have been high these have been extreme outliers and have quickly reverted to the mean. The 30d average yield currently sits at 2.4% on DefiLlama. I feel maintaining staking yields at ~8% is optimal for dgnETH and we should curate a basket around that. While still competitive at 7.2% I feel we’ll struggle to overcome the inertia of your average DeFi participant if it’s only a couple of percentage points gained.

TokeMak Integration

I’ve looked into this since you raised your concerns but I think they may be overstated. With a 33% allocation to TokeMak’s autoETH will see an additional $2.6m deposited, or an additional 5% when compared to total deposits. autoETH had a 10% weighting towards the OETH LP which means an additional $264,000 deposited into a pool which has $72m deposited, granted a large percentage of that is deposited by Origin. If we saw significant TVL growth this would be a concern but at that point we would likely diversify into more collateral assets mitigating the problem anyway.

  • Upon review it looks like OETH no longer has an allocation in the autoETH basket.
7

While the OETH yield isn’t as high as Morpho and Convex, I still believe it is in line with the original dgnETH mandate from May of 2024. Yes, the 30 day yields are lower, but as I mentioned earlier this has not taken into account the new Curve pool, where the new AMO emissions have yet to land.

On the flip side, I don’t believe users have been rushing to deposit ETH into dgnETH even at 8%+ APY — currently, 99.9437% of the supply is held by just three wallets, two of which are smart contracts. The next largest holder has only 1.0078 dgnETH, followed by 0.2554, with every wallet after that holding even less. Given this distribution, I don’t think a drop from 8% to 7.2% APY would significantly impact TVL, as it represents only a small reduction in yield and there doesn’t appear to be strong organic demand at the current rate anyway.

You are correct that OETH at the moment does not have an allocation in the autoETH basket, but this changes daily with Tokemak’s auto-rebalancing. In the last 3 days 1076.62 ETH has been allocated out of OETH into other Tokemak strategies. The average autoETH yield is also only 4.29% over the last 30 days.

8

Thanks for your comments Pete. However, I just don’t see a way forward with including OETH in the dgnETH basket with it’s current yield profile. While i’m not sure why we have two different mandates, the one you linked from the ‘Introducing Degen ETH’ RFC on the forums and the one displayed in the app, I don’t think including OETH in the collateral basket actively work towards either. As I stated previously I’d be much more open if you incorporated another DeFi lego. Governors can find OETH DeFi integrations here. At the very minimum we should hold off making a final decision on this for a month or two until after the new Curve pool emissions have started streaming.

With regard to the holder breakdown, the two-token model makes it a little more complicated than looking only at dgnETH holders. The two smart contracts contain the two type of holders dgnETH accommodates for. The first type of holder we have is actively seeking DeFi yields, given dgnETH isn’t that composable across DeFi the only place you can do this currently is in the dgnETH/ETHplus LP on Curve which is the smaller of the two smart contracts you’ve mentioned. Currently we only have one holder and they can be found holding the LP token here.

Alternately holders can passively accrue yield as a sdgnETH holder, we have 30 right now (which makes sense since the yield is 15% atm) and they can be found here. While these number are small they control over 50% of the $7.7m of capital that is held in dgnETH. If one of these large LP decides to exit due to the drop in yield this will likely lead to a significant portion of TVL being lost. Last week we saw yield drop to 0% after some auctions weren’t ran, this led to many exiting their positions showing that this cohort are actively managing their holdings.

I understand your position on autoETH but still find it untenable. Maybe it will drop the bsdETH APY slightly but still only marginally compared to the drop that adding OETH to the collateral basket will give us. I still think products such as ynETHx and autoETH are viable alternatives, you’ve commented on the average 30d APY of autoETH being only 4.29% but this is still competitive against the LST market and is still 80% higher than OETHs 30d APY.

If you are keen on getting OETH included in the dgnETH collateral basket I suggest we do two things;

  1. Wait a few months until the new Curve pool is live and has stabilised to see where the new equilibrium of OETH has landed and evaluate the possibility of it being included in the collateral basket again then. However, I feel this won’t change my stance significantly.
  2. Consider developing a plug-in that incorporates another DeFi lego, such as an DEX LP or Money Market position. While this will increase the risk profile and requires more work from your team I feel by taking more risks to capture high DeFi yields we are able to maintain a high-yield diversified ETH LST index that is more in line with the mandate.
1 Like
9

Hi, I’m one of the few holding some dgnETH and initially did so for the higher rate of return. I think we should wait for the Curve pool to kick in as well to see better what rate we would be voting for.

2 Likes