[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.
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%.