Title: Add rETH/wETH as Collateral to ETH Market
Author: @jasperthesturdyghost (Rocket Pool) and Matthew Graham (@TokenLogic)
Date: 2023.04.23
Summary
This publication presents the Sturdy Finance community the opportunity to onboard the Balancer rETH/wETH Pool as collateral to the ETH Market.
Abstract
Balancer’s rETH/wETH pool is the second largest LST/wETH pool with over $85M in deposits. Aura Finance has $72M in user deposits earning a project 5.8% in yield.
Sturdy would benefit from the first mover advantage whilst enabling users to deploy yield maximising strategies. Due to Sturdy’s yield-sharing mechanics, this is expected to lead to a boost in wETH deposit rates.
The Balancer pool is the core of Rocket Pool’s Incentive Management Committee’s liquidity program and because of this, the yield will be sustainable.
Motivation
Rocket Pool strives to embody the core ethos of Ethereum and DeFi, specifically the non-custodial, trustless nature that allows self-sovereignty to truly thrive. This leads to reduced Counter Party risk relative to other LST providers.
Rocket Pool stakers deposit ETH into the deposit pool, enabling a node operator to create a new Ethereum Network validator. You can stake as little as 0.01 ETH.
In doing so, users are given a token called rETH. rETH represents both how much ETH is deposited, and when the user deposited it. The ratio includes rewards that Rocket Pool node operators earn from:
- The Ethereum network itself
- Priority fees from block proposals
- MEV rewards from block proposals
rETH is a staked, interest earning wrapper of ETH that can be exchanged at any time.
Since the Beacon Chain rewards, priority fees, and MEV rewards will constantly accumulate, this means that rETH’s value effectively always increases relative to ETH.
The rETH/ETH exchange rate is updated approximately every 24 hours based on the Ethereum network rewards earned by Rocket Pool node operators.
Use Case
rETH/wETH serves as a great collateral due to its intrinsic and extrinsic productive yield features.
Intrinsic Yield Sources
- rETH yield
- Swap Fees
Users can deposit the BPT into Sturdy Finance deposit contract, borrow wETH interest free and overtime the appreciation of the BPT will enable the repayment of the loan.
Extrinsic Yield Sources
- BAL Rewards
- AURA Rewards
Furthermore, the BAL and AURA rewards can be used to accelerate the repayment and reduce the payback duration.
Risk Considerations
Like other tokenised liquidity positions on Sturdy, the risks associated with the BPT are multifacet in nature.
The following details risk specific to rETH and includes a comprehensive technical and risk analysis performed by Maker DAO.
Currently, a 1% price impact swap via 1inch enables users to swap 18,000 ETH for 16,686.65 rETH.
This is more than sufficient to enable Sturdy users to borrow wETH and leverage the rETH/wETH BPT without incurring any large loss. Further more the swap can be routed via Cowswap which will enable the atrategy to go directly from wETH to the BPT without being front run and whilst querying the BPT price. See here for more details.
Market Volatility
As a soft-pegged asset, rETH is beholded to market forces. The nature of this relationship to the peg has varied through the protocol’s history. When it was launched in 2021, the rETH token traded at a slightly premium as node operator supply was outstripped by demand. This changed in May of 2022 when the stETH liquidation cascade sent all LST pegs underwater, however, by the time of the Merge later that year, rETH had fully recovered.
Between the Merge and the most recent Atlas upgrade accommodating the Shanghai hardfork, rETH had traded at a premium. Thanks to the Atlas upgrade, there has been a 300% increase in the rETH capacity provided by node operators and therefore the protocol is no longer limited by node operator supply. It is currently trading at less than a 0.1% premium.
You can see the history of the peg here.
Specification
This section defines the intial parameter configuration to support listing rETH/wETH colateral on the stable coin market.
Contract Address
BPT: 0x1e19cf2d73a72ef1332c882f20534b6519be0276
Gauge: 0x79eF6103A513951a3b25743DB509E267685726B7
Aura Finance: 0xA57b8d98dAE62B26Ec3bcC4a365338157060B234
Oracle
Via the pool.getRate() function on the rETH/wETH BPT contract.
The pool.getRate() function returns the exchange rate of a BPT to the underlying base asset of the pool accounting for rate providers. For example:
Please note the assets within the BPT each have a Chainlink Oracle:
- rETH Oracle:
536218f9E9Eb48863970252233c8F271f554C2d0 - wETH Oracle:
0x5f4eC3Df9cbd43714FE2740f5E3616155c5b8419
Please note the Balancer liquidity pool was deployed prior to the rETH oracle being in production.
The rETH oracle used within the Balancer pool is as shown below:
- rETH Price Feed:
0x1a8F81c256aee9C640e14bB0453ce247ea0DFE6F
Risk Parameter Configuration
Sturdy can unique configure the leverage strategies to match the initial composition of the BPT. This publication presents Sturdy with the opportunity to integrate the BPT via Aura Finance with the following parameters.
LTV: 90%
LT: 93%
LF: 2%
Supply Cap: 10,000,000 units which is approximately 25% of th BPT supply
Copyright
Copyright and related rights waived via CC0.