[RFC] Introducing ETH+

[Eridian]

Introduction

Introducing ETH+, a reward-generating Ethereum Liquid Staking Token basket with over-collateralized protection.

The Future of Ethereum is at Stake.

In this RFC, I will give an overview of the new RToken ETH+. I highly encourage the community to ask questions and share their suggestions. If you want to help make this RToken a success, please reach out to me.

Mandate

What is the mandate?

1. Maintain an Ethereum-aligned Liquid Staking Token basket.
2. Positively impact the Ethereum staking distribution.
3. Provide value to ETH+ holders through diversification.

Why is that the mandate?

A simple, Ethereum-aligned, directive that allows flexible governance in the pursuit of this mandate.

What rules does the mandate set for governance?

The mandate does not dictate the specific rules used for the governance of the RToken. The RSR stakers, given their tokens at stake, will act in the best interest of the RToken.

Deployer

Who is the deployer?

Hello I’m Eridian and I’ve been an active member of the Ethereum staking community for over 18 months. As a member of the EthStaker community and a solo Ethereum staker, I’m interested in all things staking. I write and maintain the EthStaker Knowledge Base, as well as DVStakers, an educational resource focused on the future of Distributed Validator Technology (DVT). I’m an active community member of a number of existing and upcoming LSD protocols, engaging their teams on how to support and onboard community stakers. Any governance tokens that I own of any of these protocols can all be seen on my public ENS eridian.eth. This will continue to be true moving forward, as I believe transparency will be important when suggesting and voting on new LSD tokens to add to the basket.

Primarily though, I’m focused on decentralization and accessibility. Ethereum’s value to the world is as a decentralized network that is credibly neutral, but that isn’t going to happen by accident, we all have to make it happen.

• Deployer Address: eridian.eth 0xE3e34FA93575AF41BEF3476236E1A3CDb3F60B85
• https://twitter.com/EridianAlpha

Why did I decide to deploy the RToken?

LSDs provide an opportunity to expand the Ethereum staking ecosystem beyond people with the 32 ETH minimum requirement for solo staking. It also allows users to gain compounding rewards, something not possible directly with solo staking. But the LSD ecosystem is already daunting for users not deeply involved with the space, and this problem is about to become exponentially worse as a Cambrian explosion of new LSD protocols comes online in the coming months! I always thought an LSD token basket would be a good idea, but it wasn’t until I attended the Reserve Hackathon event in ETHDenver 2023 that I saw how it could be achieved as an RToken. The deployment of the ETH+ RToken is a continuation of that hackathon.

What’s in it for me?

In my original proposal, I suggested that a small portion of the rewards could be directed to a DAO that would support the growth and ongoing maintenance of the RToken. Instead, after giving it some thought, I opted to direct revenue simply to the RToken holders and RSR stakers. In the future, I still think a DAO could be a good idea, and I believe it would be in the best interest of this RToken. However, right now, I don’t have a group of people to form a DAO with who are aligned and supportive of this RToken (but if you’re reading this, that could be you!). I hope that will change as people in the Reserve community and wider DeFi community get behind this project and a DAO could be formed through a governance proposal to the RSR stakers for a share of the rewards.

I believe DeFi is the future of finance. Creating a fairer, more open, and transparent financial system. I’m genuinely excited to see how this project grows and what part I can play in that journey.

Collateral Asset Backing

What does the initial collateral backing for this RToken look like?

• 50% rETH - RocketPool LSD
• 50% wstETH - Lido LSD

Why was this collateral backing chosen?

As two of the largest LSDs in the Ethereum staking ecosystem rETH and wstETH provide deep liquidity and a diverse set of validators. They also have Chainlink oracles available which are used to monitor the price of the assets. Oracle availability is currently the main limitation to adding more LSDs to the basket. As reliable oracles become available, new LSD plugins will be created, and proposals will be submitted to RSR stakers for inclusion into the basket.

A part of the RTokens mandate is to “positively impact the Ethereum staking distribution” which means encouraging more equitable distribution of LSDs. As Lido currently has a significantly larger share of the total Ethereum stake than RocketPool, setting an equal collateral backing encourages greater usage and adoption of rETH.

Should governance keep the collateral backing as it is or update it whenever it can?

The collateral backing should be updated whenever a new LSD can be integrated at a technical and social level, or an existing LSD in the basket is no longer viable. As governance proposals can be put forward and voted on by RSR stakers for the RToken, there won’t be set criteria for which LSDs should be included or rejected, as this will be decided by the RSR stakers.

What is the estimated APY with the initial collateral backing?

The estimated APY is based on the rewards accumulated by the underlying staked assets.

There is no guaranteed APY and there is always a risk that a slashing event or other unforeseen circumstance could cause the underlying collateral to lose value, even past the point of the RSR over-collateralized protection. Smart contract risk also means that nothing is certain, everything is at risk. Nothing presented here is financial advice and it should not be considered financial advice.

Revenue Distribution

What will the initial revenue distribution look like?

• 95% passed through to the RToken holders.
• 5% distributed to the RSR stakers for providing governance and over-collateralized de-peg protection.

Example:
100 ETH total is staked in the RToken basket, 50 ETH with RocketPool for rETH and 50 ETH with Lido for wstETH. Over time rewards are earned by those two protocols so now the total value of the ETH in the basket is 105 ETH. 95% would be passed through to the RToken holders (4.75 ETH) and 5% would go to the RSR stakers protecting and governing the RToken, equating to (0.25 ETH).

Why was this particular distribution chosen?

This ratio was chosen to be competitive in a growing LSD market. If the rewards for holding the ETH+ were significantly lower than the underlying assets then it would not be attractive for users to hold the RToken over those assets directly.

The reward distribution for RSR stakers must also be attractive so that they have the incentive to stake and risk their tokens, while also providing governance.

This fee is comparable with existing competitors in the Ethereum LSD index space.

This balance should be reviewed and adjusted in the future if the RSR staker governance decides the ratio should be updated.

Product Differentiation

How does this RToken differ from competitors?

A key differentiator of the ETH+ token in comparison to competitors is the over-collateralized protection provided by RSR stakers.

To have a dynamic basket of tokens, governance is required. Competitor indexes can either have completely centralized single-entity governance or a general DAO governance where anyone with the DAO governance token can vote.

ETH+ utilizes RSR stakers to provide both governance and over-collateralized protection. This ensures an aligned incentive for the governance voters to vote in the best interest of the RToken, and to actively protect it from any malicious proposals.

The RSR stakers are active participants and are rewarded proportionally for their input to the specific RToken ETH+. They have “skin in the game”.

Why will people use this RToken?

• Passive yield exposure: Users can enjoy attractive rewards on their ETH through a diversified basket of liquid staking tokens.
• Diversified counterparty risk: ETH+ offers over-collateralized protection and simplifies DeFi integrations.
• Reputation neutrality: ETH+ allows for simple DAO treasury diversification.
• RSR staking protection: RSR tokens will be sold off in the event of a de-peg to cover losses suffered by the basket.

Go To Market

Who do you see as the early adopters and advocates of this RToken?

• People who like stacking ETH
• People who want passive (compounding!) rewards without monitoring every new LSD token and manually rebalancing their portfolio.
• DeFi enthusiasts exploring ways to earn passive income
• DeFi yield farmers, especially on Curve
• DAOs who want to diversify their treasuries
• RSR stakers who believe in the project

Community members are invited to create novel strategies and tactics to raise awareness for ETH+ and improve its positive impact on the wider Ethereum ecosystem. If you have go-to-market ideas and would like to contribute please leave comments and suggestions.

What does success look like for this RToken?

A highly liquid reward-generating token that can be easily minted, traded, and used in DeFi protocols on both Ethereum L1 and L2s.

Branding

Why was this RToken name chosen?

This RToken embodies Ethereum values and culture, plus diversified rewards. ETH+ represents this, and also it stands out as a simple name from the growing list of complex LSD names (abcETH, xyzETH, stk2.0ETH2V2.0, etc.).

What does the logo look like?

Why was this logo chosen?

A simple logo that is easily recognizable at all size ranges and can be associated with the token name even without knowing anything about the token.

What does the brand represent?

The brand is the embodiment of the RToken mandate:

1. Maintain an Ethereum-aligned Liquid Staking Token basket.
2. Positively impact the Ethereum staking distribution.
3. Provide value to ETH+ holders through diversification.

Call To Action

What is expected from the RToken’s governors?

• Advocates of ETH+ adoption, usage, and the values of the mandate.
• Active participation in both forum discussions and governance proposal votes.
• An interest in the Ethereum Staking ecosystem, keeping up-to-date on developing technologies and new LSD providers.

What can the community do to make this RToken a success?

• Get involved! If you ever wanted to be “early” to a project, now’s the time
• Please share any thoughts you have about this RToken in the comments below.

[Sinatra]

Thanks a lot for sharing this overview of ETH+ with the community, @Eridian!

The product itself is very powerful. I can imagine a future where a user can easily buy ETH+ and is automatically exposed to all ETH staking protocols out there, while at the same time being protected against smart contract risk and “de-pegs”.

I do see a potential challenge in going from $0 to $1 million market cap, as I think that might be the hardest adoption phase, but that’s obviously the case for all new products. In this post you talk about who you think the early adopters of ETH+ will be - have you already thought about how those early adopters will be reached (e.g. Twitter Spaces in ETH staking communities, Reddit posts, media outreach, etc)? Incentivizing yield on an ETH/ETH+ pool on Curve via Reserve’s CVX holdings could be another great bootstrapping method, was this option already discussed between yourself and the core team?

Overall very excited to see the second RToken come to life. I’ll be here to support the project in any way possible!

[Eridian]

Thanks @Sinatra, I agree with the powerful potential of ETH+ as a product, and that the challenge is realizing that potential.

Initially, I’m speaking to the LSD protocols currently included in the basket as well as future protocols who would like to be added to the basket when they are ready. A Twitter space is being organized for some time next week, the exact date and time is being finalized.

Incentivizing yield on an ETH/ETH+ pool on Curve is something that I spoke to the Reserve team about in Denver and we have been discussing how best to get that started. It’s something I expect to have more information about in the coming weeks.

[RyanTreeFiddy]

Super cool. Thanks.

[mattimost]

Wow! Amazing, can’t wait to see where this goes. Staked RSR. Excited to participate in governance!

[teasea]

A great overview @Eridian - thanks for sharing. I can see this one getting more and more compelling over time as additional flavours of staked Eth are added to the basket, which is very exciting.

I’ve seen a few mentions from people around the 5% yield to stakers feeling a bit low and the risk/reward is asymmetrical. It’s obviously impossible to know how stakers will react to this until it’s properly launched, but I think you’re right to make the yield to RToken holders comparable with Index Coop. Any less than that and it’s not competitive, and there won’t be uptake.

I’m interested to know what the tolerance is for a depeg event, and the rationale for your decision?

Thanks!

[sukitrebek]

Hi, saw this comment on the discord hadn’t been posted here yet, so I thought I would just copy paste it since I would be curious to know people’s thoughts on it. The comment was from Art Gonzo.

Interesting read. I’m doubtful however that 5% being delegated to RSR stakers is going to be of an incentive to produce a significant back stop for the R-token. Any collateralisation over 5% and the RSR stakers will be receiving a lower APY than the ETH+ holders whilst assuming all of the risk - at this level, only a depeg of 5% would mean RSR stakers losing 100% of their holdings I believe? I can’t imagine it getting to 150% as stakers would only be receiving 1/10th of the APY of the ETH holders as well as copping the losses if things go wrong… unless I’m missing something it seems like it’s a great way to aggregate yield and distribute risk of holding a single LSD but I can’t see why anyone would risk their RSR for such small returns… especially when you can earn 60%apy on it in LP pools etc.

[Eridian]

Thanks @sukitrebek for reposting that comment, I had a reply written out and was waiting for the chance to respond @teasea this should also cover part of your question (let me check on the specific de-peg tolerances used in the two plugins).

The balance that needs to be found is a strong enough economic incentive for the RSR stakers to provide protection as well as governance over the RToken. Without the protection element, it’s essentially a problem of “What is the cost of good governance, and who pays for it?”. The “good” part is subjective, but when RSR stakers have their tokens on the line, they are likely to act in the best interest of the RToken. If the governance was centralized with a single person or entity, then I think an important part of the value proposition of the RToken would be lost, as at that point you could argue you don’t even need RSR stakers at all.

How this works in the long term is still very much subject to debate and discussion. Governance attacks on any decentralized protocol are a concern, and if the cost of an attack is much lower than the potential gain then it will eventually be attempted. There are mechanisms in place to backstop against malicious governance takeovers and other attacks, such as the guardian and pauser roles, but I’m not aware of a perfect solution that has been created to resolve these issues in other DOAs.

What do you suggest as a better ratio to provide this aligned incentive structure, at least at the start?

[teasea]

Hey @Eridian - thanks foe the info, just adding my thoughts here. I think it’s very hard to say what the perfect ratio is without launching and learning from the response from both sides.

10% to stakers could potentially be considered. The current 5% to stakers being comparable with Index Coop doesn’t factor in the fact Reserve also offers depeg protection. How much value do holders put on this? Enough to lose an additional sliver of yield?

Although with Shanghai now live I think the likelihood of a rEth or wstEth drifting off-peg through normal market forces, the more versions of LSDs added to the basket, the greater the number of protocols stakers will be exposed to, with the smart contract risks increasing incrementally. So maybe the number needs to be reviewed as the RToken grows. (Although by the time this happens, it’s likely marketcap will be a good bit higher, and there will be more yield going to stakers to offset the risk.)

I don’t think I have a definitive answer. 5% most likely. Maybe 10%. More than 10% and it probably wouldn’t be attractive to the masses Just my thoughts.

I think knowing the numbers around what constitutes a depeg event would help weigh up the perceived risk/reward for stakers, so it would be good to see that when you have it.

[tbrent]

Very good points raised here.

IndexCoop’s 0.25% is on TVL, which is exactly 5% of a 5% ETH staking yield. But IndexCoop does not offer downside protection. At least in principle, ETH+ holders should be willing to pay more than holder’s of IndexCoop’s ETH product.

The more immediate question is whether ETH+ holders should be asked to pay more today. Maybe. But it’s worth understanding the value of the alternative: ETH+ could ask the same fee as IndexCool in order to offer a financially strictly better product.

If the capital entering ETH basket tokens is greedily maximizing for yield, this may end up mattering; 5% vs 7% could be the difference between growth and no-growth.

[tbrent]

I also think it’s a great point that at a 5% revenue split this puts the size of the RSR overcollaralization buffer at ~5%, if you make the assumption that RSR-yields are equally attractive as ETH-yields. This assumption isn’t true, but it’s a good starting point to begin thinking about the problem.

What kinds of downside risks are there? To name a few:

• Downtime (small loss)
• Slashing (medium loss)
• Smart contract risk (big loss)

Realistically I don’t see smart contract risk being realistic to fully cover without making the ETH+ holder yield extremely uncompetitive; slashing could be absorbed by the staking pool if it only happened to a small subset of all validators; downtime seems fine and coverable in almost all scenarios.

[Mallo]

Nice writeup - hope it goes well. I agree it will need to show reasonable rates vs the competition. Perhaps a couple of finance examples in deposits / yields on $1000 for example over months / year against indexcoop and the result of a possible slashing even with and without RSR staked (for both parties - stakers and token holders) so people can visualise GaInZ.

[Eridian]

@teasea @tbrent thank you for your replies.

I think an important point about the protection (as @tbrent lists out) is what event is being protected against. As downtime and slashing events (if they are small) are likely to be absorbed by the underlying protocol buffers. That leaves big events.

When there are only two LSD tokens in the basket, it would be a significant cost to RSR stakers to recover the loss of 50% of the basket, e.g. if an LSD went to zero instantly due to some smart contract exploit on the withdrawal address. So right now, it’s a tough asymmetry as RSR stakers are only providing “profitable” protection over a narrow range of events.

In the future, when more LSDs are added to the basket, the impact of a single protocol going to zero has a reduced impact on the basket as a whole. That, combined with those smaller protocols having higher yields or other value propositions aligned with the ETH+ mandate, should allow the yield and/or social value of the whole basket to be higher, allowing RSR stakers to take a greater margin without making the basket uncompetitive.

I could also see in the future more exotic LSD that don’t have such a tight peg to ETH, offering higher yields as a trade-off. And therefore the protection provided by RSR stakers would have more importance and utility for ETH+.

To your point @tbrent

The more immediate question is whether ETH+ holders should be asked to pay more today.

For this early stage of the project, does it make sense to have a different fee model? If it’s a chicken and egg situation, where RSR stakers will only get a return if there is ETH+ already minted, and the ETH+ value proposition of protection requires RSR to be staked, then one will have to start before the other.

Do you think a 5% fee paid to the RSR stakers for protection and governance at the start is a blocker for TVL growth? Would 10% reduce the TVL growth?

[Larry]

Thank you for creating this @Eridian - it’ll be a big win for both the Reserve and ETH Staking communities

My 2 gwei on the revenue split for RSR stakers is that 5% is the strictly better option given the compeititive landscape. With 5%, we are on par with Index Coop on a fee basis. This ensures that users do not face a cost disadvantage by going with ETH+ and do not have to decide on this basis. So all things being equal, ETH+ has a clear competitive edge with overcollateralization that makes it tough for anyone to have a strong case for going elsewhere.

Given @tbrent’s great points on what RSR overcollateralization is meant to cover, we are comfortably covered for the anticipated scenarios at 5% revenue to RSR, and so there’s little compromise on this aspect of ETH+'s offering either.

It’s a win-win here

[Eridian]

Hey @teasea, the de-peg tolerances for the plugins can be found here: protocol/plugin-addresses.md at master · reserve-protocol/protocol · GitHub.

For both rETH and wstETH it is set at 15%. That’s in USD value against ETH returned by the oracles.

[Jack]

I’ve been trying to figure out how an RToken with a basket entirely composed of staked ETH with a mandate to maintain a peg to ETH itself could actually encounter a depegging event where RSR stakers get wiped out. Even if there was a run on the LP, it still wouldnt imo render a depeg trigger on the protocol. This ETH+ honestly feels like riskless free money for RSR stakers. Someone correct me if I’m wrong but what is a hypothetical depegging event look like on ETH+? Just a simulation would be nice if someone could elaborate.

[0xJMG]

Elaboration here https://twitter.com/reserveprotocol/status/1731312406717231399