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

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

Summary

This proposal recommends integrating Wrapped OETH (wOETH) 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

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.

Until a proposal earlier this year, OETH was an LST aggregator that earned yield by tapping into blue-chip protocols while being collateralized by other LSTs. Over the weeks following the proposal, the ability to deploy OETH collateral to other projects was removed and LST collateral was divested back to ETH, as OETH transitioned into 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.

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 9/19/24: 1 wOETH = 1.10449597 OETH

Problem Statement

The ETH+ collateral basket is currently made up of only three types of diversified staking collateral, limiting the risk spread and potential yield enhancement. There is a simple and straightforward opportunity to both further diversify ETH+, while also increasing its blended yield output.

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 will not be the case with OETH.

Using OETH on Reserve will produce higher yield than other top LSTs and have a near perfect ETH peg. 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.

The current APY for wOETH stands at 4.48%, which is higher than ETH+'s existing components. It seems to be a logical next step to integrate a product such as this into the ETH+ collateral basket.

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

Yield Improvement: While remaining tightly pegged to ETH, wOETH is designed to be high yielding. DVT direct staking through SSV/P2p combined with the AMO enable OETH to be the highest yielding ETH LST currently available. Historical OETH yields can be found on Proof of Yield.

New ETH+ Collateral Basket

Token Allocation APY = 3.26%
rETH 25% 2.36%
Wrapped stETH 25% 2.92%
sfrxETH 25% 3.28%
wOETH 25% 4.48%

Source: Reserve./org and Originprotocol./com

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 6 hours.

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 ETH+ 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 rollout of ETH+. The Origin team can be reached at any time via the Origin Discord server.

  • I am in favor of adding wOETH to ETH+ collateral
  • I am not in favor of adding wOETH to ETH+ collateral
0 voters
2 Likes

Thank you for this well-formed and exciting proposal!

Given the overlap with the Stader ETHx proposal here, we wanted to know if you see this proposal as a replacement of or an addition to the ETHx one?

Initially this proposal was submitted in addition to the ETHx proposal, but if the community prefers to chance it to a replacement, we will support it.

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What is the cap on ARM redemption at the moment? ETH+ TVL is significant and to lose 0.1% through the legacy redeem function would be suboptimal. Your documentation doesn’t state a current liquidity floor. Indeed, what would stop ARM liquidity drying up in a time of crisis? RTokens, by design, do not move fast.

There is no cap, it is just bound by the amount of WETH in the contract. At the moment, Origin is the only LP for the ARM, but soon we will be opening it up for external LPs to provide their ETH. This should happen in October of this year.

If the total amount needed is not available in the ARM, async redemptions to ETH are 1:1, there should be no fee. The Instant vault redemption that you are referencing in the docs is the old exit method that is hardly used nowadays.

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We don’t have a preference there and were looking for clarification.

Your proposed basket does not have any ETHx included, though.
If your proposal is meant as an addition to Stader’s would you mind reflecting that in the basket you are proposing? It’s entirely up to you, though.

We’re here to check the formal requirements only.

Sure, I will do it here. The numbers below are today’s APYs if the 5 LSTs were equally weighted at 20%.

Token Allocation APY = 3.226%
rETH 20% 2.37%
Wrapped stETH 20% 3.00%
sfrxETH 20% 3.35%
wOETH 20% 4.26%
ETHx 20% 3.15%

Hey pete, not to be overly picky, but the current plan is to introduce 8% of ETHx to the basket. Do you propose to add more?

See this discussion here: [RFC] Addition of Stader’s ETHx into the ETH+ LST Basket - ETHPLUS (ETH+) - Reserve Protocol Forum

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No problem @rspa_StableLab, here are the same LSTs, with ETHx and OETH at 8%:

Token Allocation APY = 3.0396%
rETH 28% 2.38%
Wrapped stETH 28% 3.02%
sfrxETH 28% 3.37%
wOETH 8% 4.24%
ETHx 8% 3.06%

Since OETH is the highest yielding of the 5 LSTs, a higher allocation of OETH within the basket would bring up the total ETH+ yield, but we can leave that to the community, DAO, and risk stewards to determine/decide on.

That looks good. Let me know if you need help to create a new RFC or want to push it to an on-chain proposal.

1 Like

Rather than creating a new RFC, we can treat the above comments as truth. We could use some assistance with the on-chain proposal, but I believe we need to finish building the plugin before the on-chain vote is supposed to happen

sounds good. RFC should get more than 50% approval in the forum poll before going on-chain. If that hasn’t been the case it could be helpful to repropose this with the new parameters. Up to you of course.

Thank you for your proposal @pete and your responsiveness to the comments.

High-level OETH does look like an attractive collateral basket asset with superior yields and Origin’s lindyness and strong commitment to security, however there are other factors at play to get it included in the basket.

Firstly, the adapter - this will have to built and then likely audited by Reserve.

When redeeming or minting ETH+ currently opts for purchasing or selling the underlying basket through traditional DEX liquidity, this reduces frictions in protocol design as it’s simpler to interact with a few DEXs than the underlying mechanisms of each LST product. With this in mind I wonder if Origin ARM can be included in the OETH adapter on not. If like me you’re uncertain i’d be grateful if you could discuss this in our discords technical channel.

We need to see how this works and if we can route mints and redemptions through the ARM +/- the async redemptions you reference in the comments before we consider a collateral basket allocation. If we can’t and have to use more traditional sources of on-chain liquidity we will hit liquidity bottle necks much sooner and the introduction will be a lot slower.

Secondly, from your initial RFC and the comments you’re not up to date with ETH+ governance. I’d be more confident giving OETH a significant allocation when you are more familiar with the Reserve protocol and recent gov discussions especially the recent discussions addressing liquidity bottlenecks and the addition of ETHx to the collateral basket.

In this regard we are currently slowly introducing ETHx to the collateral basket in two steps, step one has just passed quorum and the collateral basket will be updated early next week and step two will be pushed for voting once we are satisfied with the safety criteria mentioned in the RFC. I’d rather wait until this two-step plan is complete and we have a stable basket before we introduce OETH. However if you are at the start of adapter development this may not be an issue as it will take time.

I notice you have also submitted a proposal on the bsdETH forum for the inclusion of wsuperOETHb to the bsdETH collateral basket. I will add to discussions on the bsdETH forum but given the superior yield I feel it will be very well received by the bsdETH community and given liquidity is on AERO there we be a significantly reduction in the technical burden of adapters development. To this end I propose you focus on developing that adapter if work has not started on this one and we introduce Origin to the Reserve ecosystem through that rToken while we finish the introduction of ETHx inclusion in the ETH+ basket and iron out any kinks with the OETH adapter routing through the Origin ARM.

2 Likes

We are scoping this out right now, and understand it will need to be audited.

Understood. We will scope building the adapter with this in mind. We’ll also join the technical discussion in the Discord

We are fully aware of the ETHx proposal - we have been in touch with the Reserve team since July, and the ETHx proposal was sent to us then as an example to use for the OETH proposal, not as one to include in the OETH proposal

Thank you, we understand proposal lifecycles are typically not fast - this was initially submitted to get the ball rolling, but was not meant to be rushed through the process. If OETH is to be added, we want to make sure it is done correctly from the start.

Understood. I will respond to your comments on that forum post as well.

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