Summary
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This RFC proposes the removal ETHx from the collateral basket, reallocating its 5% weighting to frxETH, resulting in a basket comprised of 50% stETH, 25% weETH and 25% frxETH.
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ETHx liquidity has deteriorated significantly over the past year. Removing the position now avoids the risk of a more difficult or costly exit if this trajectory continues.
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ETHx also has the lowest yield of the current collateral assets, while its 5% allocation provides only a limited diversification benefit.
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The rebalance has limited impact on ETHplus at a high level. Blended yield increases from 2.33% to 2.35% while the diversification ratio decreases only slightly from 0.65 to 0.63.
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Redemption capacity improves from approximately 65% to 100% of current ETHplus supply in a single transaction below the 0.5% slippage threshold.
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The proposal therefore represents a proactive simplification of the basket while ETHx remains small and manageable, rather than a reactive response to an immediate ETHplus-level liquidity constraint in the future.
Problem Statement
ETHx liquidity has deteriorated significantly over the past year and it now has the weakest redemption profile of any asset in the ETHplus basket. While its current 5% weighting does not create an immediate basket-level liquidity constraint, continued deterioration could make the position progressively more difficult and costly to exit. At the same time, the allocation provides limited diversification and yield benefit relative to the additional monitoring and governance requirements.
Rationale
The removed 5% ETHx allocation would be reallocated to frxETH, increasing its weighting from 20% to 25%. The proposed basket maintains a similar yield and diversification profile, with blended yield increasing from 2.33% to 2.35% and the diversification ratio decreasing from 0.65 to 0.63.
Redemption liquidity does improve. Under the current basket, approximately 65% of ETHplus supply can be redeemed in a single transaction while remaining below the 0.5% slippage threshold. Following the removal of ETHx, the modelled redemption capacity increases to 100% of the current ETHplus supply below the same threshold. While this is an improvement, the current basket already maintains strong redemption liquidity and this is not the primary motivation for the rebalance.
The rationale for removing ETHx is therefore primarily forward-looking. As shown in the liquidity analysis below, ETHx already has by far the weakest redemption profile in the basket and its liquidity has deteriorated significantly over the past year. While the current 5% position can still be removed with limited impact, continuing to hold ETHx risks leaving governance with a progressively more difficult and costly exit if liquidity continues along the same trajectory.
Removing ETHx now allows governance to simplify the basket under favourable conditions rather than waiting for deteriorating liquidity to force a future rebalance which may trigger an RSR slashing event if significant slippage in incurred. The proposed change gives up a small amount of diversification, marginally improves yield and increases redemption capacity well past requirement, while removing the lowest-yielding collateral asset and the asset with the weakest liquidity trajectory from the basket.
Liquidity Analysis of Individual Collateral Assets
Liquidity Analysis of Current Collateral Basket
Proposed Basket
Risks
The primary risk associated with the proposed rebalance is execution under relatively thin ETHx liquidity. While the position represents only 5% of the ETHplus basket, available ETHx liquidity is limited and poor execution could result in increased slippage during the rebalance.
Following removal, the basket will also become slightly more concentrated, with the diversification ratio decreasing from 0.65 to 0.63 and the frxETH allocation increasing from 20% to 25%. Based on the current composition of frxETH, this increases ETHplus’s indirect stETH exposure from approximately 1.14% to 1.43%, taking combined direct and indirect stETH exposure from approximately 51.14% to 51.43%.
Risk Management
These risks will be managed through continued governance oversight of the liquidity, yield and diversification profile of the ETHplus basket. The increased allocation to frxETH builds on an established allocation within ETHplus, while its liquidity, yield and broader risk profile will continue to be monitored alongside the remaining collateral assets.
Given the current liquidity conditions for ETHx, ABC Labs will also monitor execution of the proposed rebalance to help ensure the position is unwound efficiently and without unnecessary slippage.
Conclusion
The proposed rebalance does not significantly change the high-level characteristics of ETHplus. Yield and diversification remain broadly similar, while redemption capacity improves. Approximately 65% of current ETHplus supply can be redeemed in a single transaction below the 0.5% slippage threshold, increasing to 100% under the proposed basket.
The rationale for removing ETHx is not an immediate constraint at the basket level, but the continued deterioration of ETHx liquidity and the limited benefit it provides at a 5% weighting. ETHx has the weakest redemption profile and lowest yield of the current collateral assets, while providing only a modest contribution to diversification.
Delaying removal risks leaving governance with a progressively more difficult and costly exit if ETHx liquidity continues along its current trajectory. Removing the allocation while it remains small and manageable allows governance to simplify the basket proactively under favourable conditions, while maintaining a strong overall yield, diversification and liquidity profile.