[RFC] Collateral Basket Change Proposal: Adding Wrapped Super OETH (wsuperOETHb) to the Based ETH Collateral Basket

[RFC] Collateral Basket Change Proposal: Adding Wrapped Super OETH (wsuperOETHb) to the Based ETH Collateral Basket

Summary

This proposal recommends integrating Wrapped Super OETH (wsuperOETHb) into the bsdETH collateral basket to increase yield generation and enhance the diversification of the index LST.

Abstract

Super OETH (superOETHb) is the next iteration of OETH, a superior LST with an extremely tight peg and high yields thanks to a combination of the OETH AMO and DVT direct staking through SSV/P2p. superOETHb yields are able to reach double digit levels, making it an exceptionally perfect token for lending and borrowing against ETH, and for integrating into LST indexes. superOETHb was built reusing 90% of the code from OETH, for which the codebase has already been audited 12+ times, and for which there is also a Reserve RFC currently on the forum.

Super OETH is the first token in a new category of liquid staking: Supercharged LSTs. Supercharged LSTs will have materially higher yield while being designed for L2s, with a similar risk profile to mainnet LSTs. Ethereum liquid staking is amplified with chain-specific, auto-compounded incentives. Deep concentrated liquidity pools guarantee exits with minimal costs - users will never lose ability to convert back to ETH.

wsuperOETHb is a ERC-4626 tokenized vault designed to accrue yield in price rather than in quantity. When you wrap superOETHb, you get back a fixed number of wsuperOETHb tokens. This number will not go up - you will have the same number of wsuperOETHb tokens tomorrow as you have today. However, the number of superOETHb tokens that you can unwrap to will go up over time, as wsuperOETHb earns yield at the same rate as standard superOETHb. The wsuperOETHb to superOETHb exchange rate can be read from the contract (0x7FcD174E80f264448ebeE8c88a7C4476AAF58Ea6, function number 16), or via the OETH dapp.

Current exchange rate as of 9/20/24: 1 wsuperOETHb = 1.00945809 superOETHb

Problem Statement

The bsdETH collateral basket is currently made up of only two types of diversified staking collateral, limiting the risk spread and potential yield enhancement. There is a simple and straightforward opportunity to both further diversify bsdETH, 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 was not the case with OETH, and it will not be the case with Super OETH.

Using Super OETH on Reserve will produce higher yield than the other top LSTs and have a near perfect ETH peg. Utilizing a concentrated Aerodrome liquidity pool with the tightest tick possible helps make Super OETH the most pegged L2 LST currently available, while being able to reach double digit yields.

The current APY for wsuperOETHb stands at 18.10%, which is significantly higher than bsdETH’s existing components. It seems to be a logical next step to integrate a product such as this into the bdsETH collateral basket.

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

Yield Improvement: wsuperOETHb is designed to be high yielding, while remaining tightly pegged to ETH. Due to the higher yield than cbETH and stETH, any allocation of wsuperOETHb into bsdETH would improve the yield of the index substantially.

New bsdETH Collateral Basket

Token Allocation APY = 8.08%
cbETH 33% 2.92%
Wrapped stETH 33% 2.93%
wsuperOETHb 34% 18.10%

Source: Reserve./org and Originprotocol./com

Risks

Adding another asset as collateral adds additional counterparty risk and smart contract risk. However, superOETHb and wsuperOETHb were built reusing 90% of the OETH code, which was built reusing 95% of the OUSD code, of which many 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 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, Super OETH, or the proposal itself. Adding wsuperOETHb as a market for bsdETH collateral will be mutually beneficial for both Reserve and Origin Protocol, as it will increase the utility for superOETHb, while also increasing the Reserve TVL and rollout of bsdETH. The Origin team can be reached at any time via the Origin Discord server.

  • I am in favor of adding wsuperOETHb to bsdETH collateral
  • I am not in favor of adding wsuperOETHb to bsdETH collateral
0 voters

Makes sense, Super OETH is a pretty solid asset with very competitive yield.

1 Like

It is capable of earning a higher yield than any other LST currently available! Check out Proof of Yield for a deeper dive into where the yield is coming from

Thanks @pete for the proposal

Props where they are due, after diving into the WhitePaper I really like the mechanics behind Super OETH, with it’s superior yields and tight peg via AERO PoL I really think it’s a proposal the bsdETH community can get behind.

I’m also buoyed by the fact that the adapter required carries a significantly reduced technical burden than the OETH adapter proposed in your ETH+ proposal. I believe Reserve are already building a AERO adapter so it shouldn’t take too much of an uplift to plug in this pool for mints and redemptions (I’d reach out to our team in the #Technical-Discussion channel in our discord) and liquidity isn’t an issue given the smaller market cap of bsdETH compared to ETH+.

I’d like to point you to a previous DIVA Staking proposal they are a bsdETH launch partner and have been incentivising bsdETH minting and holding with the promise of a token allocation for bsdETH holders at their TGE. The TLDR is their LST will join the basket once live with a equal 33% allocation with cbETH and wstETH however I don’t see this as a blocker, once they are live we should uphold their 33% allocation maybe with a 16% allocation for cbETH and wstETH to also keep you at 33%.

We have some support here from governors already judging by the poll. I suggest you reflect on both the discussions here and on your ETH+ proposal and decide internally on a way forward. It’s my opinion that you should focus on one adapter at a time and given;

  • The impact on yield you could have with the inclusion of wsuperOETHb to the bsdETH collateral basket
  • The reduced technical burden of adapter development here compared to the OETH adapter
  • The ongoing slow introduction of ETHx to the ETH+ collateral basket

It’s my opinion that getting wsuperOETH included in the bsdETH collateral basket would be a good place for you to start.

Appreciate the kind words!

Great, I will make sure the team building the adapter knows about this.

Understood. 33% works great for us, and it is a large enough amount in the bsdETH basket to really bring up the combined yield.

This is straightforward, thank you. We’ll be having the internal discussions around this starting this Monday.

2 Likes

I have two main concerns with the addition of this asset to bsdETH: liquidity concentration and access control. It is worth noting that the engineering, transparency of the protocol and general commitment to decentralizaton are nonetheless high quality. Please correct me if I am wrong @pete !

The risks are that 1) bsdETH may never be able to sell superOETHb if it buys it and 2) contract upgradeability (behind a 48h timelock) for superOETHb may be too risky for holders, which could decrease TVL.

1. Liquidity Risk


Source: superOETHb analytics
Firstly, re:liquidity: 99% of the liquidity in the aerodrome pool is likely PoL. Some 113K superOETHb are owned by the protocol. If you look at the pool balance (see below image), there is only 1K more in the pool. This indicates that 99% of the pool is likely protocol owned liquidity*, which could be removed at any time by the protocol and leave bsdETH unable to trade out of the asset.


Source: Basescan


Source: Aerodrome
This risk is compounded by the low fee generation of this pool as LPs will be unlikely to rush in with liquidity to replace withdrawn Origin LP as there is low financial incentive to do so. Note how a pool (identified above, vAMM-USDC/AERO) that is less than half the size of the superOETHb pool produces more than 85 times the amount of fees.

2. Access control risk

There is also access control risk introduced by the addition of this asset.
Any part of this asset can be upgraded (unlike mainnet) by a multsig. While upgrades must pass a 48 hour timelock to come into effect, this could easily be missed if an upgrade is pushed on Friday at midnight. bsdETH stakers will not be able to rebalance out of the asset if they decide they are no longer satisfied with the yield strategies inherent to superOETHb. This presents a significant risk to holders and may result in TVL decreasing as this does not fit the perceived lower risk profile of bsdETH.

Access control risk is presented by the following:

All protocol contracts are controlled by the Timelock with a 48-hour delay. The role assignment is the following:

Contrary to OETH on Ethereum mainnet, the Timelock is not managed by a governance contract which allows token holders to vote on proposals, but directly by the 5/8 Admin multisig. Effectively, token holders do not have a say when it comes to contract upgrades and parameter changes on Base L2. Nevertheless, since superOETHb is ultimately built on top of the OETH architecture on the Ethereum mainnet, xOGN token holders retain some form of control over superOETHb.

Similarly to OETH on Ethereum mainnet, however, is a 2/8 Guardian multisig that is tasked with day-to-day administrative tasks necessary for the protocol to function properly. The OriginProtocol documentation on Base L2 mentions a 2/8 Reservoir multisig that is not being used.

Closing

With this in mind, stakers should carefully consider the addition of this asset. It does not mean that this asset should not be added, but instead that stakers should be comfortable with the possibility that TVL may decrease from increased access control risk AND that they may be unable to rebalance out of superOETHb. At 33% of the basket (or $2.13M), that would be a significant problem to deal with. It is not an exaggeration to say in the worst case scenario having such a large position in an asset that could not be traded out of could result in the RToken becoming a highly unattractive value offering to holders.

Addendum: Why I believe the majority of the superOETHb pool to be Origin sourced LP

As Aerodrome does not use LP tokens, I cannot verify it. However, if we look at Curve liquidity for OETH, we can see essentially all liquidity traces back to originteam.eth. I am quite certain the same growth strategy will be being used for this pool given its young age (at roughly 60 days old). For a pool to grow to that size in such a short space a time on an L2 organically is next to impossible. It is also worth noting that 80% of superOETHb is held in the aerodrome pool.

Hi @river0x, thank you for your questions:

Yes, a good amount of the liquidity in the Aerodrome pool is PoL, as is a good amount of the liquidity in the Curve pool. We are not trying to hide this fact, it is clearly viewable on the analytics page that you linked, and in the OETH analytics page. The superOETHb/WETH pool is the AMO, which is a core component of the protocol. We need sufficient DEX liquidity for the AMO to function properly for Super OETH, OETH, and OUSD. When users supply DEX liquidity to one of those 3 tokens they are giving up their ability to earn the rebasing yield - so most users are not LP’ing and are instead just holding the tokens within their wallets or are wrapping, lending, and looping them.

Yes, the PoL can be removed, but it would only be done so to handle protocol security issues. This was done once in July of 2023 during that situation with the Curve vyper bug, which you can see from the brief dip in PoL for OETH in the OETH analytics page, and in the screenshot here:

Screenshot 2024-10-08 at 2.48.59 PM

Origin’s contracts were unaffected by this bug, but Origin was being proactive nonetheless while making sure the protocol was safe and secure to continue operations.

Yes, there is a Timelock that all contract upgrades must go through. It was designed based on Compound Finance’s original timelock, audited by OpenZeppelin. There are Origin core contributors working across all timezones - if there are any contract upgrades going through the Timelock that may possibly have adverse affect on bsdETH and it’s holders, the Reserve team will be notified promptly. Origin has a direct line of communication to the Core Reserve team already set up.

These details appear to have been taken from the Llamarisk’s Collateral Risk Assessment posted on Aave earlier today - I would suggest reading that entire report to fully understand superOETHb

I believe stakers should carefully consider this for ALL new assets used as collateral for bsdETH and other similar Reserve tokens, not just for superOETHb. But compared to stETH and cbETH, superOETHb is extremely well pegged:

See also from the Origin Twitter: x.com