Add weETH Market on Ethereum

Summary

ether.fi is seeking community support for adding weETH market to Compound V3 on Ethereum Mainnet.

Motivation

eETH is an LRT that allows users to stake their ETH, accrue staking rewards, and receive additional rewards through native restaking on EigenLayer. As of April 16, approximately 1,139,577 ETH ($3,54B) in TVL has been deposited into the ether.fi protocol and has been natively restaked in EigenLayer.

ether.fi stands as the pioneering decentralized and non-custodial delegated staking protocol featuring an LRT (eETH). A notable feature of ether.fi is the control it provides stakers over their keys. The team behind the protocol is guided by the following principles:

  1. Decentralization is the foremost objective. ether.fi is unwavering in its commitment to maintaining the protocol’s non-custodial and decentralized nature, ensuring that stakers always have control over their ETH.
  2. ether.fi operates as a legitimate business with a sustainable revenue model, with the team dedicated to its long-term success. There is no place for deceptive or unsustainable financial practices.
  3. ether.fi is committed to always acting in the best interest of the Ethereum community. In the event of any missteps, the team at ether.fi will take responsibility and swiftly rectify the situation.

The weETH market on Compound can become a growth engine, tapping into the LRT sector (the quickest growing one in 2024).

Risks:

ether.fi’s LRT eETH is 100% redeemable. Users who deposit ETH into the protocol can withdraw their stake at any time. The holdings are publicly auditable on-chain and the protocol retains healthy reserves to offset any losses.

Proposed Collateral

ether.fi proposes adding the following assets as collaterals for the market

  • weETH
  • ETH

The community is invited to suggest and give inputs for any other collateral assets.

Relevant Statistics and Links

Website
Twitter
CoinGecko
Contract address: 0xCd5fE23C85820F7B72D0926FC9b05b43E359b7ee
Audits
Whitepaper
Dune Dashboard for ether.fi

Points support

Users who deposit weETH into Compound will accumulate ether.fi and EigenLayer points to be used for future incentives.

Next Steps

The protocol invites the community to consider this application for listing the weETH market and welcome suggestions in this direction.

Additionally, the protocol looks forward to the community to suggest

Collateral Factor

Reserve Factor

Borrowing Limit

I would urge people to vote against this proposal. Ether.fi used Omniscia to audit their codebase, which is known to be a terrible auditing service. They missed some key lines of code that led to the Wise lending hack in January of this year

Gauntlet - Initial Parameter Recommendations for weETH on Ethereum Comet on Compound v3

Simple Summary

Gauntlet supports the decision to list weETH on Compound v3 ETH Comet. Gauntlet recommends adding this LRT along with other approved LRTs in the existing ETH comet moving forward.

Parameter Value
Collateral Factor 82%
Liquidation Factor 87%
Liquidation Penalty 8%
Supply Cap 22,500

Analysis

weETH Liquidity sources

weETH TVL in pools has been trending upwards barring decline in Balancer pool’s TVL. The below table outlines major weETH/WETH pools and their TVLs.

Dex Category TVL(mil) URL
uniswap_v3 84.72 Link
curve 0.73 Link

Total TVL: 85.45mil

The Uniswap weETH-WETH pool stands out as the primary liquidity source. However, it’s worth noting that there are additional liquidity pools involving LST/LRT pairs that contribute to the overall liquidity profile of weETH. These peripheral sources of liquidity are not accounted for in the list above. Currently, the withdrawal queue can tak up to 14 days for redemption of weETH to native ETH.

Supply Cap and Liquidation Penalty

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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 22,500 weETH (~$70,000,000), 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 4.5%
Max Drawdown from Exchange Rate 1.06%

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%

Oracle Risk

Chainlink’s price feed has only been live for a few weeks and is market rate based which could expose the protocol to exaggerated market movements. Gauntlet would like to highlight this potential risk to the community. As mention 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 weETH within this correlated Comet if the community decides to move forward with this strategy.

Yield Risk

Currently LRTs such as weETH 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 weETH:

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

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