[RFC] Reduce ETH+ backingBuffer from 0.25% to 0.05%

Summary

The current ETH+ backingBuffer is set at 0.25%, significantly higher than the suggested default value of 0.1%. This proposal suggests reducing the backingBuffer to 0.05% to align more closely with market conditions and optimize yield efficiency. The change is intended to further optimize ETH+’s performance by minimizing the impact of the backingBuffer on yield generation.

Abstract

The proposed change reduces the ETH+ backingBuffer from 0.25% to a 0.05%, to decrease the time required for the protocol to recover normal yields after significant market cap changes, thereby enhancing yield efficiency for ETH+ holders. The high liquidity of the collateral assets (wstETH, rETH, sfrxETH) on mainnet supports this reduction without significantly increasing risk to RSR stakers.

Problem Statement

The current 0.25% backing buffer for ETH+ is considerably higher than the recommended default of 0.1%. Given the low-yield nature of ETH+ collateral, this high backingBuffer results in prolonged recovery periods for yields when the market cap increases rapidly. Specifically, if the ETH+ market cap were to double, it would take approximately 15 days to return yields to normal levels. This delay is due to the need to replenish the backingBuffer from 0.25%, which represents around 30 days of revenue at current yields.

Rationale

Reducing the backingBuffer will optimize yield efficiency for ETH+ holders, aligning the protocol’s performance with the liquidity and stability of its collateral. The primary reason for maintaining a high backingBuffer is to prevent losses to RSR stakers during rebalances. However, given the high liquidity of ETH+ collateral assets, such as wstETH, rETH, and sfrxETH, on mainnet, the risk of significant losses during rebalances is minimal. Lowering the backingBuffer to 0.05% will mitigate the downside of prolonged yield recovery periods without materially increasing risk to RSR stakers.

Risks

The primary risk associated with reducing the backingBuffer is the potential for increased volatility in the protocol backing collateral which could expose RSR stakers to higher risks during rebalances. However, the high liquidity of ETH+ collateral assets mitigates this risk, making it unlikely that significant losses will occur. Additionally, careful monitoring and incremental adjustments can help manage this transition effectively. The probability of adverse outcomes is low given the market conditions and liquidity levels of the collateral assets.

  • I am in favor of changing the backingBuffer from 0.25% to 0.05%
  • I am not in favor of changing the backingBuffer from 0.25% to 0.05%
0 voters

I am in support of this proposal, but would appreciate more information in this area. What exactly do you mean by “careful monitoring and incremental adjustments”?

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A change from 0.25% to 0.05% is a significant adjustment.

If there is a concern that a significant change could put $RSR stakers at risk of receiving a loss during the backingBuffer rebalancing period, we could move it in more incremental steps, such as reducing by 0.05% until 0.05% is reached. We would continue to reduce the backingBuffer after each successful rebalancing period until 0.05% is reached.

That is only if there are any concerns with the liquidity of the underlying collateral.

This is the kind of governance ideas I enjoy seeing with RTokens.
Added protection to RSR stakers is greatly appreciated!

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I agree that ETH+ has particularly high liquidity collateral assets and therefore should encounter small slippage during rebalancing relative to other RTokens.

But I think 0.25% to 0.05% is too-significant an adjustment. I am in favor of moving to 0.1%.

One concern is that ETH+ is a mainnet RToken, so it has high gas costs. Here is a tx for a dutch trade settle tx from 2 months ago at 8 gwei: Ethereum Transaction Hash (Txhash) Details | Etherscan

$70 at 8 gwei is substantial. Depending on timing it could be higher. So I think it makes sense to be less drastic and pass through the 0.1% point first.

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This is a good opinion,

I cannot change the poll to add this as an option, but will push this to the community for further feedback.

During rebalancing periods, how relevant has the backing buffer been? Do we have any historical data that could better inform our decision? ie ETH+ typically endures x% loss during rebalancing? I would imagine other RTokens and their individual assets have varying losses.

I think the backing buffer needs more details in the docs. For how much chatter and modifications are made to various RTokens, there should be more information and examples to better inform decisions.

Taylor, why exactly is the gwei level relevant to rebalancing? Does the fee for this transaction come from the backing buffer?

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