Add rsETH Market on Ethereum Mainnet

Summary

Proposal to add rsETH market to Compound V3 on Ethereum Mainnet

References/Useful links:

Price feeds

Background

Kelp DAO was founded by Amitej G and Dheeraj B, who previously founded Stader Labs, a multichain liquid staking platform with $750M+ in TVL.

About rsETH

rsETH is a Liquid Restaked Token (LRT) issued by Kelp DAO designed to offer liquidity to illiquid assets deposited into restaking platforms, such as EigenLayer. It aims to address the risks and challenges posed by the current offering of restaking

  • Kelp has more than 213k ETH worth of assets restaked by over 20k users.
  • DeFi integrations across Balancer, Curve, Pendle, Maverick
  • rsETH is present on 5+ L2s including Arbitrum, Optimism, Blast, Scroll, and Mode

By providing liquidity for the restaked positions, rsETH allows for a seamless experience to engage with DeFi protocols and maximize rewards.

Motivation

From Compound’s perspective, any new asset is a source of additional revenue and expands the ecosystem as a whole. LRTs are a great use case for Compound as it is one of the fastest growing ecosystems.

With rsETH being one of the top LRTs, integrating it as a collateral asset will create new demand on Compound. This will be beneficial for both Compound and Kelp.

Specifications:

  1. Governance: Kelp token isn’t live yet as TGE hasn’t happened yet. The protocol is planning to transition to decentralized governance after TGE.

  2. Oracles: Kelp works with Chainlink, Redstone, and API3 to create price feeds of rsETH.

  3. Audits: Kelp’s smart contracts are audited by Sigma Prime, MixBytes and Code4rena.

Sigma Prime Report: https://kelpdao.xyz/audits/smartcontracts/SigmaPrime.pdf

MixBytes: https://kelpdao.xyz/audits/smartcontracts/mixbytes.pdf

Code4rena: (Code4rena | Keeping high severity bugs out of production)

  1. Centralization vectors: Centralization vectors currently are around upgradeability via proxy 3 on 5 multi-sig and front-end hosting. We will move to on-chain upgrades post-TGE.

  2. Market History: Kelp has seen meteoric growth in TVL in the last few months with TVL over 200k ETH and >20k holders of rsETH.

rsETH also has deep liquidity available across pools on Balancer, Curve, and Uniswap v3

Balancer - rsETH/ETH:

Balancer - rsETH/ETHx: Balancer

Uni - rsETH/ETH: Uniswap Info

Uni - rsETH/ETHx: Uniswap Info

Curve - rsETH/sfrxETH: Curve.fi

Parameters

Looking forward to hearing feedback from Compound Community and risk managers regarding parameters.

Collateral Factor

Liquidation Factor

Liquidation penalty

4 Likes

I think LRTs represent a wonderful growth opportunity for Compound, and Kelp has a great footing, large base of restakers, and strong TVL.

Hope to see it soon as collateral!

EigenLayer + Compound = Infinite Sum Games.

Kelp LRTs has had an incredible performance in the Defi sphere and restaking narrative becoming one of the largest players in the market with 730M TVL.
As users and Defi practitoners, we would need rsETH diversification in terms of Defi possibilities in the market and I cannot think of a better option than Compound MM.
Much appreciate it
techfuture

1 Like

I’ve looked over the LRTs and farming them myself, and must say the defi opportunities and the liqudity flowing is impressive. 10-20B market opportunity

Kelp has a solid performance and founders have a good track record with Stader. It seems a beneficial move for Compound.

1 Like

As a Compound user, I would say this is an exciting proposal and I think rsETH would be a phenomenal asset to add. The liquid restaking ecosystem is currently booming and the Kelp is one of the biggest and the fastest growing protocols built on Eigenlayer with a solid team and a track record. I support this proposal

2 Likes

Gauntlet’s Recommendations - rsETH Listing on WETH v3 Comet

Simple Summary

Gauntlet recommends not listing rsETH for the time being due to limited availability of liquidity sources.

Analysis

rsETH Liquidity sources

Dex Category Pool Assets TVL (mil) 24H Volume (mil) rsETH TVL ($ mil) URL
Balancer rsETH/WETH 25.26 22.7 8.3 link
Uniswap V3 rsETH/WETH 2.06 0.5 0.05 link
Total - 27.32 23.2 8.35 -

The balancer rsETH-WETH pool is the largest source of liquidity for rsETH with just close to $17M in WETH in pool balances. Although rsETH has pools with ETHx, the total liquidity available in these pools is not significant with a total rsETH/ETHx pool value of ~$6.5M.

Liquidity Risk

Liquidity Restaking Tokens (LRTs) present inherent uncertainties concerning liquidity profiles and associated slashing risks. While LRTs serve to reserve liquidity for instant in-protocol redemptions, withdrawals are constrained by rate limitations imposed by the underlying protocols once the reserve pool is exhausted. This limitation poses a potential challenge to maintaining liquidity availability. Presently, Kelp does not offer withdrawals, and liquidity levels remain below optimal thresholds.

Oracle Risk

Based on the oracles outlined in the KelpDAO documentation, particularly referencing the getAssetPrice() function in the LRTOracle contract, it appears that rsETH utilizes multiple oracles to price the assets (sfrxETH, stETH, ETHx) it accepts as deposits. This reliance on multiple oracles heightens the level of oracle risk associated with the protocol. By relying on aggregating oracle price feed rather than a single one, the protocol becomes more susceptible to potential discrepancies or inaccuracies in the price data provided by these sources. This expanded dependency amplifies the potential impact of oracle-related issues on the stability and reliability of rsETH’s operations. We would like the DAO to clarify if the oracles work as infered above or if there’s a simpler reference based oracle that rsETH utilizes.

Yield Risk

Presently, Liquidity Reward Tokens (LRTs) are experiencing heightened yields attributed to the points program. However, the upcoming maturity of EigenLayer and the launch of AVS are anticipated to introduce yield shocks. These developments are expected to significantly increase slippage magnitude and impact liquidity on decentralized exchanges (DEXs) as users swap out of their leveraged yield positions. Gauntlet seeks to bring attention to this potential risk within the community.

Recommendation

Given the above - Gauntlet recommends postponing the listing of rsETH until these challenges are addressed and liquidity conditions improve to at least $30M in WETH liquidity or less than 10% slippage for a $10M WETH swap is met. If the community desires to proceed with listing this market, we can implement a temperature check to poll the community. If the preferences of long-time community members and partners of the Compound community is to list rsETH even with the above-mentioned risks in the poll, Gauntlet will then provide conservative recommendations for integrating the asset into WETH Comet as proposed in this forum post.

Thanks a lot, Gauntlet team and community for your feedback. In line with the comments above from the Gauntlet team, please find the responses below -

  1. rsETH liquidity profile has significantly increased. Users can swap 10 Mn worth of rsETH within <10% slippage.
  2. Kelp has also enabled withdrawals for rsETH.
  3. We had a brief discussion regarding the Oracle risk with the Gauntlet team and clarified. rsETH doesn’t use any Oracles. Chainlink price feed shared for rsETH is a market-based price feed that aggregates prices across DEXs.

We request the community to provide feedback.

[Gauntlet] - rsETH Asset Listing Recommendation on WETH v3 Comet

Simple Summary

Following improving liquidity conditions and KelpDAO’s clarifications, Gauntlet recommends listing this asset within the existing WETH Comet with the following parameters:

Parameter Value
Collateral Factor 80%
Liquidation Factor 85%
Liquidation Penalty 10%
Supply Cap 5,000

rsETH TVL in pools has been trending upwards. The below table outlines major rsETH/WETH pools and their TVLs.

Dex Category TVL(mil) URL
balancer_ethereum 39.69 Link
uniswap_v3 13.06 Link

Total TVL: 52.75mil

The Balancer rsETH-WETH pool stands out as the primary liquidity source followed by Uniswap v3 pools. The Uniswap pool has $11.62M worth of WETH while the Balancer pool has about $6.2M worth, the total WETH liquidity against rsETH stands at ~$17.8M as of writing this. It’s worth noting that there are additional liquidity pools involving LST/LRT pairs that contribute to the overall liquidity profile of rsETH. These peripheral sources of liquidity are not accounted for in the list above. Currently, the withdrawal queue can tak up to 10 days for redemption of rsETH to either sfrxETH, stETH or ETHx. Withdrawals to native ETH or not enabled yet.

Supply Cap and Liquidation Penalty

A 10% slippage would amount to $18.3M worth of rsETH being sold. Given the above liquidity sources, we recommend setting the supply cap that would cause 5% slippage i.e half of the liquidation penalty although our methodology allows for higher supply caps. This means that the total slippage should the entire supply get liquidated needs to be < LP. Gauntlet recommends a supply cap of 5,000 rsETH, this swap would cause a slippage of ~5% vs a liquidation penalty of 10%

Liquidation Factor (LF) and Collateral Factor (CF)

Metric Value
Annualized Volatility 4.9%
Max Drawdown from Exchange Rate 3.06%

Given the above metrics along with the proposed Liquidation Penalty, Gauntlet recommends

Liquidation Factor = 1 - (LP+Volatility)

This would give an LF of 85%, and a CF of 80%

Use of Exchange Rate Oracles

If exchange rate oracles are implemented, Gauntlet can recommend more capital efficient parameters as the asset remains insulated from market movements, although exposes it to tail-end risks. The exchange rate based risk parameters could facilitate higher caps and Liquidation Factors along with more conservative Liquidation Penalties. As mentioned in the [Franklin DAO] Request for comment on: Market pricing vs. exchange rate pricing for LSTs and potential oracle implementations post, Gauntlet supports exchange rate oracles for rsETH within this correlated Comet if the community decides to move forward with this strategy.

Yield Risk

Currently LRTs such as rsETH have elevated yields due to points program. EigenLayer maturity and AVS launch will cause yield shocks and consequentially elevate slippage magnitude and liquidity on DEXs. Gauntlet would like flag this potential risk to the community.

IR Curve Parameters

Gauntlet recommends the following IR parameters for the ETH Comet to account for higher utilization due to the prospective addition of rsETH:

Parameter Current Value Recommended Value
Annual Supply Interest Rate Base 0 0
Annual Supply Interest Rate Slope Low 0.0185 0.0185
Supply Kink 0.85 0.85
Annual Supply Interest Rate Slope High 0.53 1
Annual Borrow Interest Rate Base 0.01 0.01
Annual Borrow Interest Rate Slope Low 0.014 0.014
Borrow Kink 0.85 0.85
Annual Borrow Interest Rate Slope High 0.53 1.15

We provided the same IR curve update for weETH asset listing. Gauntlet will work to have the IR curve updated when one of the LRTs are listed within the WETH Comet

The chart above demonstrates that the generation of WETH Comet reserves will be positive when utilization exceeds 60%.

1 Like

Mainnet rsETH collateral

PR - On-chain add rsETH collateral into WETH Mainnet market by dmitriy-woof-software · Pull Request #870 · compound-finance/comet · GitHub

Actions

  1. Run Slither. Fails. :x:. On-chain add rsETH collateral into WETH Mainnet market · woof-software/comet@bfcc1e2 · GitHub
  2. Forge test. Success.:white_check_mark: On-chain add rsETH collateral into WETH Mainnet market · woof-software/comet@bfcc1e2 · GitHub
  3. Gas Profiler. Success.:white_check_mark: On-chain add rsETH collateral into WETH Mainnet market · woof-software/comet@bfcc1e2 · GitHub
  4. Scan. Success.:white_check_mark: On-chain add rsETH collateral into WETH Mainnet market · woof-software/comet@bfcc1e2 · GitHub
  5. mainnet-weth Scenario. Success.:white_check_mark: On-chain add rsETH collateral into WETH Mainnet market · woof-software/comet@bfcc1e2 · GitHub
  6. Unit tests. Success.:white_check_mark: On-chain add rsETH collateral into WETH Mainnet market · woof-software/comet@bfcc1e2 · GitHub
  7. Eslint. Success.:white_check_mark: On-chain add rsETH collateral into WETH Mainnet market · woof-software/comet@bfcc1e2 · GitHub
  8. Contract linter. Success.:white_check_mark: On-chain add rsETH collateral into WETH Mainnet market · woof-software/comet@bfcc1e2 · GitHub
  9. Prepare. Success.:white_check_mark: Prepare Migration · woof-software/comet@bfcc1e2 · GitHub
  10. Enact Migration with impersonate - Success :white_check_mark:. Enact Migration · woof-software/comet@bfcc1e2 · GitHub

Description we use:

Add rsETH as collateral into cWETHv3 on Mainnet\n\n

Proposal summary\n\n

Compound Growth Program [AlphaGrowth] proposes to add rsETH into cWETHv3 on Ethereum network. This proposal takes the governance steps recommended and necessary to update a Compound III WETH market on Ethereum. Simulations have confirmed the market’s readiness, as much as possible, using the Comet scenario suite. The new parameters include setting the risk parameters based on the recommendations from Gauntlet rsETH.\n\n

Further detailed information can be found on the corresponding proposal pull request and forum discussion rsETH.\n\n\n

Proposal Actions\n\n

The first proposal action adds rsETH asset as collateral with corresponding configurations.\n\n

The second action sets new Annual Supply Interest Rate Slope High to 100%.\n\n

The third action sets new Annual Borrow Interest Rate Slope High to 115%.\n\n

The fourth action deploys and upgrades Comet to a new version.

1 Like