Research Interview | Kelp DAO
AlphaGrowth met with KelpDAO over the last couple months to get caught up on all things rsETH.
We’ve collated that information in an Article / Async Interview for the Compound Forum.
One goal of this document is to share the new opportunities Kelp is offering such as Gain Vaults, $KERNEL, and insight into the future of AVS. The other goal is to reflect critically on how Compound can better align with Kelp, and other high value partners.
[Please Note: “AG” refers to AlphaGrowth, and the indented comments are Kelp’s responses.]
The Second Largest LRT
Kelp DAO has reached 2B in TVL, and according to the LRT War Dune Dashboard, they now represent 16.9% of the Total LRT Supply.
This is an incredible accomplishment, and is another reason why the Compound Growth team supports Kelp DAO, in their conquest of the LRT space.
High Gain Vault | hgETH
Kelp is innovating by offering liquid shares of a structured Vault Product called High Gain. The vault runs an rsETH Looping strategy on behalf of its depositors, and is facilitated by UltraYield and Upshift.
You can learn more about the strategy here:
AG: Tell me more about these professional management services, UltraYield and Upshift.
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UltraYield is a team of experienced strategy curators focused on market-neutral strategies that are uncorrelated with BTC or ETH. They know how to get returns even in a bear market. They’ve got experience managing leveraged positions of over $1bn on AAVE, and are one of the biggest TVL providers on the market.
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UltraYield is also the largest purchaser for on-chain insurance. They are focused on hedged trades, and their job is to minimize risk for the vaults they curate.
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Upshift is another vault partner – Upshift runs a digital storefront for on-chain yield, powered by August Digital. They offer users simplified access to Partner vaults.
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As a service, Upshift offers a streamlined solution for accessing DeFi yield opportunities. Users are able to deposit assets into secure vaults that deploy capital across curated strategies. With a focus on simplicity, security, and transparency, Upshift eliminates the complexities of DeFi, enabling users and protocols to earn consistent yields without managing intricate strategies or liquidity fragmentation.
[Note: Upshift Vaults have just been listed on DeFi Llama.]
AG: What are the sources for liquidation risk for the High Gain Vault?
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AVS Slashing is an unlikely source of liquidation since contrary to the popular belief, it only happens in rare circumstances when a node signs two different blocks simultaneously on separate machines – for example in an event of a replica malfunction. Missing attestations don’t bear slashing risks so for the majority of restaked capital currently it’s not a tangible risk.
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LP Pool x Oracle de-correlation can be a potential risk but we are mostly dealing with correlated assets that lack risk of de-pegging. In the case of heterogeneous assets (like rsETH and USDC) - we maintain high enough health ratios to be able to adjust positions when the market suddenly moves.
AG: Does it work similarly to a Safe Module, with permissioned contracts for the multiple strategies listed, and then UltraYield executes these strategies, on behalf of hgETH holders?
- UltraYield team determines the most profitable trades on the market, and shares these signals with Upshift. As a vault provider, Upshift’s infrastructure executes the trades in a permissionless fashion without directly managing the capital. This setup helps minimize the operator risk since only interaction with a set of whitelisted contracts is approved, so the funds aren’t exiting the vault at any time.
AG: What preventative measures are there to protect against liquidations?
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Increased LTV | Health Ratios give us time to react when market conditions change.
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All the protocols the vault deposits to are well audited by external teams as well as UltraYield’s development team, to ensure the risk is minimized.
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We buy onchain insurance which covers exploits on protocols we interact with, so we have the ability to return at least part of the deposits back to hgETH holders. We interact with Blue Chip Protocols, that everyone trusts, but even those have non-zero risk of vulnerabilities.
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Only interactions with whitelisted contracts are possible, so the funds can’t suddenly leave the vault.
GAIN Vault | agETH
Another strategy for growth has been making sure rsETH holders are the recipients of key airdrops for L2s. GAIN is an “Airdrop Concierge” style service, where by depositing into GAIN, users receive automated exposure to upcoming airdrop opportunities.
Current Airdrop Targets Include:
- Scroll
- Linea
- Karak
- Eigenlayer Programmatic Rewards
- Kernel Dao
- Hemi
- Zircuit
- Swell
For Scroll and Linea – Kelp specifically negotiated to receive the highest allocation.
AG: Kelp users also were able to farm zkSync, Blast and Layer Zero, correct?
- Yes, they were able to farm those if they had bridged plus kept the assets on the respective chains.
AG: Do you have a Dune Dashboard of the total Value which has been directed toward rsETH and agETH holders through all of your airdrop participations?
- Kelp Gain vault - https://dune.com/yieldfarmers/kelp-gain-vault-simplifying-l2-airdrops
- Overall Kelp - https://dune.com/yieldfarmers/kelpdao-tvl-stats
AG: One of Kelp’s great achievements has been building a business by capturing the attention and capital from each of these airdrops, and directing that momentum into your own project. This strategy allows Kelp to build capital, and to build a brand around earning yield.
AG: This has been an incredible strategy – was this design intentional, and do you see this as an incubation period where yield is subsidized by airdrops, before AVS rewards are live?
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This design was strategic. We wanted to provide passive exposure to users to airdrops while ensuring security and efficiency of rewards. AVS rewards would complement these rewards further, creating a sustainable rewards cycle.
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More Information here: Kelp Gain | Kelp
$KERNEL
Kernel DAO is a restaking platform funded by Binance, which focuses on $BTC, $BNB, and now $ETH via KelpDAO.
The exchange rate for Kelp Miles holders is set to 1000 Miles : 1 Kernel.
AG: Did Kernel acquire Kelp, or was it early enough that you made a deal to merge token structures?
- Merged token structures for both ecosystems.
AG: Is there anything you can share here about $KERNEL Tokenomics? – Anything innovative that you are trying out?
- We have a multi-ecosystem token distribution and emission plan. Here’s a thread on Kernel Tokenomics for more information.
AG: Will $KERNEL holders vote for which AVS or staking services they want the DAO to delegate toward?
- Yes, that’s in the roadmap. AVS and staking service delegations will be led by DAO members and risk managers in the near future - bringing in more governance and transparency.
AG: Kernel will have a lot of capital to direct toward “yield opportunities”, but these are much more than yield opportunities. They are businesses that are using this capital for legitimacy in security, or to support whatever function the AVS provides for their project.
AG: Does AVS Delegation, or using BTC or BNB as staked security help legitimize companies, or allow them to claim higher TVL or partnerships, which in turn help them secure funding?
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Yes, delegating staked security, such as BTC or BNB, to an Actively Validated Service (AVS) provides several benefits:
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Enhanced Credibility: Delegation signals trust, boosting TVL and making projects more attractive to partners and investors.
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Improved Funding Opportunities: Staked security draws funding by showcasing safety and reliability.
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Operational Stability: Strengthens infrastructure, ensuring efficient operations and scalability.
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Broader Ecosystem Momentum: Kernel DAO’s support drives adoption and synergies, acting as a “KingMaker” for emerging projects.
Interesting, so Kernel DAO will function somewhere between an AVS project incubator, and a bribe market, as $KERNEL holders vote for which AVS they want to support, and in exchange receive tokens from that project.
EigenLayer Slashing
EigenLayer Slashing has been announced to be turning on sometime near the end of 2024. Levered Loops are a significant strategy within LRT Assets, and slashing means that underlying collateral for these assets will be burned.
AG: Can you provide some examples of when a Slashing event would occur for an AVS?
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Double Signing: This occurs when a validator signs conflicting blocks, often due to misconfigured or compromised infrastructure.
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Inactivity or Downtime: Validators failing to maintain uptime or meet performance standards risk slashing penalties.
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Malicious Behavior: Actions like deliberate network disruption or misuse of delegated capital can trigger slashing.
AG: What is Kelp doing to prepare for the release of Slashing?
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Diversified Strategies: By leveraging hedged positions and well-audited protocols, Kelp minimizes exposure to slashing events. Levered loops are carefully monitored with high health ratios.
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Insurance and Risk Mitigation: Kelp utilizes on-chain insurance where possible to safeguard restaked capital and ensure compensation in case of slashing.
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Due Diligence: Rigorous screening of AVS operators ensures that only trusted and well-audited projects receive delegations.
AG: If Levered Loops become a higher risk activity do you think that a new yield strategy becomes dominant for LRTs?
- Yes, if slashing becomes a higher risk, the dominance of levered loops may decrease. New strategies, such as hedged yield farming, structured products, or collaborations with insurance-backed staking services, could emerge to fill the gap.
AG: What would be some red flags that a project would be giving, which would indicate, “You might be an untrustworthy operator, and our restaked capital could be at risk by delegating to you.”
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Red Flags in AVS Operators:
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Lack of Transparency: Operators with opaque operations or unclear governance structures are high-risk.
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Unverified Protocols: Projects that fail to undergo external audits or provide credible security assurances.
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Inconsistent Performance: Operators with a history of downtime, inefficiencies, or suboptimal performance metrics.
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Excessive Leverage: Over-reliance on leverage without robust risk management signals instability.
Let’s Talk AVS Rewards:
AG: This entire structure is a flow to direct capital toward AVS services. Some of these services seem abstract, like tools. What AVS projects are currently functional, and what are the ones you are most excited about?
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Projects like Lagrange , EigenDA , and HyperLane offer high utility and ecosystem value.
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Emerging consumer apps, particularly AI agents leveraging verifiability through EigenLayer, represent an exciting new frontier.
AG: Does KELP have a type of AVS Service Incubator?
- Kelp doesn’t explicitly operate an incubator but plays a pivotal role in identifying and backing high-potential AVS projects. Kernel DAO’s governance framework may formalize this process in the future.
AG: How does Kelp choose which AVS to delegate toward, and will this be decided by $KERNEL holders?
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Currently, selections are based on factors like risk, reward potential, and community alignment. In the future, $KERNEL holders will likely vote on AVS delegations.
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DAO members may review presentations from AVS projects, ensuring transparency and participation.
AG: Some of these AVS are already issuing out rewards in tokens like CYBER or ALT. Are there Pre-TGE AVS, and would delegating to those result in an airdrop distribution to Kernel DAO?
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Supporting pre-TGE AVS projects could result in airdrop-style distributions, rewarding early supporters with significant upside potential. This aligns well with Kelp’s strategy of combining airdrop farming with sustainable yield generation. AVS selections are based on multiple factors, like risk, reward potential, and community alignment.
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You can check our current delegations here:
How can Compound better support Kelp?
Kelp is doing incredible things, but very little of their success has to do with Compound, and we asked them what we could do to improve.
Three areas would make Compound a better partner:
Collateral Factor increases, would allow for either more loops, or safety for current positions. Structured products like Kelp’s High Gain Vault, require safety on behalf of their users, and so Kelp has a responsibility to use Money Markets with more generous thresholds for liquidation.
The table below shows this disparity in Collateral Factors:
Protocol | Supply | Supply ($) | Collateral |
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Aave - Mainnet | 340K | $1,158.9 M | 72% and 92% rsETH LST LTV |
Morpho - Mainnet | 14K | $46.2 M | 94.50% |
Morpho - Base | 4K | $12.0 M | 94.50% |
Compound - Mainet | 8K | $25.8 M | 88% |
The Compound Rate Stabilization Vault provides cross-chain arbitrage which brings equilibrium to market utilization, and alleviates borrow APR spikes, where utilization is too close to the kink.
Kelp’s High Gain Vault, and other structured products, cannot predict sustained profitable operations on Compound, due to interest rate risk. In its current state, compound is only useful for small borrowers on high utilization markets, who can open and close their positions depending on the interest rate.
In the case of both Kelp High Gain Vault, as well as interested parties from Traditional Finance, interest rate variability is the main blocker. The only way around that is to design more efficient markets through cross-chain arbitrage vaults, or to increase supply.
- Increasing Supply through innovative savings programs like Linea and Ronin, or continued growth efforts to secure Treasury Deals.
Compound’s exclusion from the High Gain Vault provides tangible evidence of Compound failing to meet a need within the markets. This is a high value signal for Compound, which ought to be interpreted as a rejection from DeFi Institutions, and an instruction on how we can move forward.
In simple terms, If we can’t serve Kelp’s High Gain Vault, what makes us think that we can serve any other institutional size, onchain, borrowing product?
By way of providing constructive feedback, Kelp has suggested that Compound ought to issue out COMP incentives through integrators like Contango to support the supply side, and that adopting a structure similar to Aave’s E-Mode would provide better access for LRT Looping.
AlphaGrowth is ready to move the needle in favor of supporting Kelp, but in order to do so, we are going to need the DAO’s support.
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COMP Everywhere & Cross Chain Stabilization Vaults will need to be passed with provisional tests, so we can gather more data on their effectiveness.
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Negotiations on the 2025 Growth Program will need to be resolved, so AlphaGrowth can continue to seek Treasury focused, long terms supply-side Liquidity Deals.
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Gauntlet will need to coordinate, according to conversations we’ve held on Spaces around raising Collateral Factors.
These agreements predicate any incentive programs, because paying to rent supply side liquidity is a band-aid, when the underlying problems are restricting our capcities for growth. When these solutions are in place, all incentives directed toward growth programs will be more capital efficient, and Compound will be able to be a significant contributor toward the success of partners like Kelp.
We’d like to thank Kelp DAO for taking the time to engage, and respond to this interview. This type of content is important because it gives the Compound DAO a deeper understanding of the needs of our partners, as well as some insight into their roadmaps for the future of DeFi.
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Keep an eye out for more in-depth interviews with our partners, as well as an upcoming 𝕏 Space with Kelp and Renzo on the future of AVS.