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.
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
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 | 1.15 |
The chart above demonstrates that the generation of WETH Comet reserves will be positive when utilization exceeds 60%.