[RFC] Proposal to onboard ETHplus to the Lower Risk ETH Fleet (Ethereum Mainnet)

[Ham]

[RFC] Proposal to onboard ETHplus to the Lower Risk ETH Fleet (Ethereum Mainnet)

Summary

A proposal to onboard ETHplus, an asset indexed to the ETH staking ecosystem, to the Ethereum Mainnet Lower Risk Fleet. The proposal aims to improve both the diversity and yield profiles of the fleet by increasing ETH staking exposure and reducing reliance on lending market yields with a minimal increase in the risk layer.

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Context

ETH+ is a safety-first diversified ETH staking index launched in April 2023 on Reserve Protocol, the largest index protocol. ETH+ is backed 1:1 by its collateral assets and is permissionlessly mintable and redeemable onchain. ETH+ is fully decentralized and governed by Reserve Rights (RSR) stakers who also provide overcollateralization in the form of staked RSR that acts as first loss capital to automatically recollateralize the basket in the event of loss.

The ETH+ basket is currently composed of wstETH (50%), rETH (21%), sfrxETH (21%), and ETHx (8%). However, this may change in the near future as governors consider the inclusion of weETH into the basket in order to improve the diversification, liquidity and yield profiles of the index. As mentioned previously, ETH+ can be permissionlessly redeemed for these underlying assets permissionlessly in a single transaction. The dual exit, protocol vs DEX liquidity, is important as it creates first order liquidity for the index which significantly reduces the risk of holding ETH+ since the asset is exitable in size far beyond its DEX liquidity with minimal slippage.

Over the past year we have seen tremendous adoption of ETHplus across DeFi, currently boasting ~$24m in DEX liquidity across Curve and Uniswap, the 6th largest market on Morpho’s Mainnet instance with a total market size of $144m and the second most utilised asset in the new KPK curated ETH v3 vaults on Gearbox, links below.

Quarterly Reporting

For the past year ETHplus has submitted quarterly reports to the Reserve forum containing metrics on growth, governance, social media metrics and on-chain metrics such as DeFi supply and token holders. It is an excellent resource to quickly update the community and communities of its partners on the activities of ETHplus and the latest can be found here.

ETHplus has also more recently started publishing Quarterly Liquidity Reports and aims to be a comprehensive analysis of both ETHplus minting and redemption curves but also its on-chain liquidity and the liquidity of its constituent collateral assets. The latest Liquidity Report can be found here and will help guide discussion and BlockAnalyticas reccomendations.

All ETHplus reports can be found here.

Oracles

ETH+ has a market rate oracle from Redstone deployed in April 2024 and an exchange rate oracle built in-house and deployed in July 2024 which is used in several lending markets.

Security and Risk

Since its inception, Reserve has placed the utmost priority on security. Nine audits and a bug bounty of $10M with Immunefi (top 3 in the industry) contribute to ensuring the safety of the Reserve Yield Protocol, which has been live since October 2022 without any security incidents.

Additionally, ETH+ has been subject to several professional risk analyses in the past year. Most notably, LlamaRisk published an in-depth report on ETH+ in July 2024 as part of a series of comprehensive risk assessments on RTokens. A detailed overview and historical tracking of ETH+’s risk metrics can also be accessed through IntoTheBlock’s professionally-curated Risk Radar dashboard for ETH+.

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Motivation

Enhanced yield

The TVL growth of the Lazy Protocol’s Lower Risk ETH Vault on Mainnet has been nothing less than monumental since its inception. However, at present the vault has a heavy allocation to lending market yields which are underperforming the liquid staking token, LST market rate. For example, 30d ETH yields for Compound, Aave and Fluid sit at 2.28%, 1.95% and 1.82% respectively whereas ETHplus has a blended 30d yield of 2.77%.*

ETHplus is a valuable addition to the Lower Risk Ethereum Mainnet Fleet given its superior yield profile which alongside OETH will help set a yield baseline for the vault which is competitive with the LST market rate, a necessity for the Lower Risk ETH Vault as it continues on its growth trajectory and scales towards and past the 9 figures mark.

It’s also worth mentioning the events of the last few weeks in which we have seen some vault allocations incur bad debt and the likely socialisation of losses as in the case in Lazy Summer Protocol’s own USDC Vault on Arbitrum. A scenario which is best avoided given not only the loss to capital but also the reputational risk and governance burden occurred alongside. A point which is especially prudent when these allocations in the Lower Risk Fleet are currently under-performing the LST market rate.

*Yield data taken from DeFiLlama.

Increased Diversification

Currently the Lower Risk Vault on Ethereum Mainnet has an impressive diversification ratio of 75% when each strategy is weighted in isolation. However, when these strategies are grouped based on their DeFiLlama category the diversification drops to 50% with 64% of the vault being allocated to lending markets and only 29% allocated to staking.

By including ETHplus in the Lower Risk Ethereum Mainnet Fleet governors are able to not only expand the number of whitelisted curators but with a single integration expand into the ETH staking ecosystem. While the risk analysis by BlockAnalitica may take some time to complete the integration of ETHplus reduces the burden on the SummerFi engineering team as only a single integration is required to rapidly expand the vaults exposure into the current under allocated LST ecosystem rather than on-boarding each of ETHplus’ constituent collaterals individually.

Diversification Ratio calculations can be found here.

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Proposal

We invite the SummerFi DAO to:

• Deliberate on the performance and risk profiles of the current strategies in the Lower Risk ETH Vault on Mainnet and consider aiming for a baseline rate matching the LST market rate.

• Consider the inclusion of ETHplus as a way to gain rapid and diversified exposure to the Ethereum staking ecosystem, improving both the vault’s yield and diversification profiles while reducing reliance on lending market yield.

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Next Steps

The next steps will be to gather feedback and suggestions from the SummerFi DAO and iterate on this proposal. If consensus is achieved we will proceed with a SummerFi Improvement Proposal (SIP).

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Informal Support Indicator

Would you support onboarding ETHplus to the Lower Risk ETH Mainnet Fleet as outlined above?

• YES, I support onboarding ETHplus on Ethereum Mainnet
• NO, do not onboard at this time (continue discussion)

Tagging @Recognized_Delegates for a review and feedback.

[Raphael_Anode]

Welcome to Lazy Summer DAO, @Ham!

We’ve been working alongside Reserve Protocol for 18 months now and the level of attention and care that Ham has brought to ETH+ is a sight to behold.

Highly recommend anyone check out the liquidity analysis that go into making this token accessible at size.

The overcollateralization via staked $RSR is also an additional insurance here, and the collateral basket is pretty much blue chip.

Supported

[jensei]

Thanks @Ham its great to see you here and appreciate the thorough RFC. ETHplus looks like a well-designed, risk-aware index that could fit nicely within the Lower Risk ETH Fleet, especially as we continue to diversify away from pure lending exposure.

From a quick review, I see several positives:

• Diversified LST exposure (wstETH, rETH, sfrxETH, ETHx, soon weETH) packaged efficiently.
• Strong security and transparency track record with 9 audits, Immunefi bounty, and independent risk coverage from LlamaRisk and IntoTheBlock.
• Improved yield baseline that helps the Fleet stay competitive with the broader LST market, a clear need right now.

That said, before moving to a SIP, I’d like to see @BlockAnalitica risk scoring for ETHplus and its collateral dynamics (esp. redemption liquidity and dependency on Reserve Protocol governance) to confirm it meets the “lower risk” profile in practice; as well as the poll’s outcome!

Overall, I’m supportive in principle, as this looks imo directionally aligned with the Lazy Summer Protocol DAO’s goals.

[Ham]

Just hopping in here to say thank-you to @jensei for adding the Informal Support Indicator and for both yours and @Raphael_Anode early comments and kind words <3

With regards to redemption liquidity, as mentioned in the original post two methods of entering and exiting ETHplus positions exist: either by swapping into or out of positions using ETHplus own DEX liquidity or directly minting or redeeming through the protocol.

I suspect if onboarded to the Lower Risk Fleet the Lazy Summer Protocol will chose the latter as the benefit of aggregating the liquidity of ETHplus’ constituent collaterals for a more efficient operation at scale outweighs the moderate increase in gas costs.

If we use the latest reported data on the ETHplus liquidity curves and use OETH’s ~5,000 ETH allocation as an example of size it’s estimated we’d see 0.4% slippage entering the position (minting ETHplus) and 0.85% exiting (redeeming ETHplus). Although, I’d be inclined to view the redemption slippage as the maximal impact as I think it unlikely we’d see the vault exit the entire ETHplus position in a single rebalance so in practice we’d likely see much less slippage when exiting the position as it is gradually scaled down.

Happy to answer any further questions around this and if anyone would like to discuss this less formally you can reach out to me on TG @hamdefi.

[BlockAnalitica]

Hey SummerFi community,

Summary

BA Labs proposes moving ETH+ ARK to a SIP stage noting the collateral composition of ETHx staking index includes assets already onboarded to Lower-Risk ETH Fleets on SummerFi (rETH, wstETH, ETHx), while sfrxETH (representing ~21% of ETH+ backing at the time of writing this) is being the only new exposure with potential ETH+ ARK onboarding. While Reserve protocol’s ETH+ asset offers diversification in terms of LSTs, it’s worth noting it brings additional layers of risks such as SC and liquidity risks, while having a FLC mechanism implemented in a form of RSR token stakers.

Note: ETH+ passes all the baseline criteria, hence BA’s continuation of screening with providing a full risk assessment, available below.

Reserve Protocol Overview

Reserve enables anyone to launch and govern diversified onchain indexes called Decentralized Token Folios (DTFs). All DTFs (including ETH+) are backed 1:1 by baskets of digital assets, governed onchain by RSR holders (RSR stakers and vote-lockers, to be precise).

ETH+ has a mandate to:

1. Maintain an Ethereum-aligned Liquid Staking Token basket.
2. Positively impact the Ethereum staking distribution.
3. Provide value to ETH+ holders through diversification.

Collateral Distribution

ETH+ acts as an LST aggregator token, offering diversification to ETH stakers by having a composition of various LSTs available as collateral. Currently, there are four assets onboarded to ETH+ as part of its backing: wstETH, rETH, sfrxETH, and ETHx, with the allocations as following:

ETH+ is currently at 103% collateralization including the stake pool of ~$2m.

Collateral pricing

ETH+ relies on external price-feed oracles to trigger key protocol events, most notably to detect when a basket collateral has defaulted and must be liquidated into the designated emergency collateral. External oracles are also used during normal auction flows as a reference for setting initial auction exchange rates.

Note: Price feeds for each collateral is upgradable by governance.

• wstETH oracle: stETH/USD Chainlink feed * internal wstETH contract rate
• rETH oracle: rETH/ETH Chainlink feed & ETH/USD Chainlink feed
• sfrxETH oracle: Curve frxETH/WETH pool EMA Chainlink ETH/USD internal sfrxETH contract rate
• ETHx oracle: ETHx/ETH contract rate * Chainlink ETH/USD price feed

Staked Frax ETH

As the only new collateral being added by the proposed ETH+ ARK, we give a brief overview of sfrxETH LST risk profile, comparing it to the already onboarded LSTs to SummerFi protocol.

sfrxETH is the yield-bearing version of ETH deposited in frxETH which acts as an LST from Frax protocol. Frax divides its LST into frxETH and sfrxETH. frxETH is used for peg keeping with ETH and in AMOs (Automated Market Operations). The frxETH peg is defined as 1% of the exchange rate on each side 1.01 to 0.99.
sfrxETH is seen as a value accruing collateral token, and has historically enjoyed higher yields compared to typical Ethereum staking due to the non-negligible protocol-owned frxETH liquidity that forgoes its share of the yield to sfrxETH token holders.

Frax passes 90% of its staking rewards to sfrxETH and retains 10% as a protocol fee (20% of which goes to insurance fund).

Technical overview
frxETH shares much of its code with both the Frax and FPI stablecoins, and implements the ERC-2612 standard, allowing spender approvals to be made via ERC-712 signatures passed to the permit() function.

sfrxETH is a non-upgradable xERC4626 inheriting from a Solmate ERC4626 Vault contract.

Here we would highlight that assigning both timelock and multisig permissions to onlyByOwnGov() is undesirable, as it effectively enables circumvention of the timelock for sensitive operations, including the addition of new minters.

ETH+ share of collateral TVL
Here we’d like to state that frxETH outplays all underlying ETH+ collateral assets by the % of total TVL held in ETH+, currently at ~8%.

While we find it acceptable for one, we’ll be adjusting the summerfi parameters to ETH+ ARK if this value increases significantly, presenting ETH+ as a majority shareholder of frxETH.

Frax validators/node operators

frxETH started as a in-house-only validators (core team operating majority of the nodes) which has been the case until v2 was introduced with the goal of allowing aanonymous/external validators to enter the frxETH system.

Each validator’s public address and real time stats can be monitored here and here.

The above dashboards show encouraging results historically, including an all-time participation rate (uptime) of 100%, 99.5% correctness and 1.016 inclusion delay.

frxETH Liquidity Risk
The Frax Ether protocol allows for native redemptions of frxETH through a redemption contract. Users who opt to redeem frxETH receive a redemption NFT, reserving them a place in the redemption queue.

Important: Current waiting period for redeeming (s)frxETH is 41 days.

Secondary market’s slippage data shows similar numbers to ETH+, with ~2600 frxETH being available for selling under the 5% price impact.

RSR staking as FLC

Stakers of RSR token opt it for higher-risk-higher-reward role, effectively acting as a first-loss capital in case of a collateral token default. The portion of the staking RSR protocol revenue is currently set to 5%. It’s important to note that the revenue share is done in the for of RSR token itself, by market-buying RSR with ERC20s in which the yield is accrued, and distributing RSR back to the staking contract.

To prevent immediate runs, unstaking RSR implies a delay of 14 days (during which no rewards are earned by stakers).

In case either collateral type experiences a default, as determined by an oracle price feed, the protocol will replace the defaulted collateral type with the designated emergency collateral. This is currently set to WETH.

While having any form of FLC is appealing from risk management perspective, we do note that backstopping losses with the governance token should not be taken as a meaningful mechanism for reducing the risk from one of the collateral assets losing its value due to the price of the gov token being correlated to the protocol solvency.

RSR Governance / Counterparty Risk

Reserve protocol uses a governance system for RSR holders to enable parameter adjustments. The collateral tokens and basket distribution are also configurable by RSR stakers through on-chain governance voting.

Reserve protocol implies five main gov roles:

• OWNER (address) - has the power to: grant and revoke roles to any Ethereum account, set governance parameters, upgrade system contracts (The Reserve Protocol’s smart contracts use the ERC-1967 proxy pattern, allowing the RToken implementation contracts to be upgraded by the contract owner).
• PAUSER (address 1, 2, 3) - can pause the DTF system in case of oracle feed failure (redemption remain enabled).
• SHORT_FREEZER (address 1, 2) - can freeze DTF system for a short period of time, usually in case of a bug detected.
• LONG_FREEZER (address 1, 2) - exists so that in the case of a zero-day exploit, governance can act before the system unfreezes and resumes functioning.
• GUARDIAN (address) - has the ability to reject proposals even if they pass.

The default governance setup involves the following risk mitigation parameters:

• Proposal creation to voting snapshot delay: 2 days
• Voting period: 3 days
• Execution delay after a successful proposal: 3 days

ETH+ Redemptions

Reserve protocol offers a revenue distribution buffer available for instant redemptions, standing at minimum of 0.25% of the mcap of ETH+, which currently translates into ~$345k considering the ~$106m ETH+ TVL.

Looking at the current slippage data, most of the routing goes through Curve ETH+/WETH pools (~92%) with the rest via Uniswap v3 ETH+/WETH pair. The threshold of 5% slippage is identified at ~2500 of ETH+, which currently represents approximately 7% of the ETH+ TVL.

ETH+ introduces a parameter called “redeem max charge” representing the amount redeemable at specific time, which is set to either 12.5% of ETH+ total supply or the 2000 ETH+, whichever is the higher amount. Currently, the amount of ETH+ available for instant redemption is 4256 of ETH+.

RSR Holder Distribution

RSR token counts more than 35k of unique holders, with most of the shares sitting in wallets holding the undistributed portion like wallet 1.

ETH+ Secondary Markets

Similarly to Origin ETH, Reserve’s ETH+ comes significant liquidity risk as the redemption process vastly depends on the underlying LST secondary market liquidity and withdrawal queues, considering the ETH+ onchain slippage data on Mainnet.

In case of ETH+ acceptance as an ARK, we’d be proposing a gradual caps rollout, based on the available liquidity on Reserve and the underlying.

We also note ETH+ did not have exchange rate downturns since deployment to date.

Audits

Reserve protocol contracts (including the RSR token contract) are live for ~4 years, implying relevant lindiness, while multiple audits have been done by auditing firms including Trail of Bits, Solidified, Halborn, since August 2022 while the last one being reported was from July 2024.

ETH+ contract was deployed on April 20, 2023. There were no previous incidents identified related to ETH+.

Alongside this, Reserve protocol offers a $10m Immunefi bug bounty program being live since April 2023 according to Immunefi.

Conclusion

BA Labs risk assessment on ETH+ asset indicates its lindiness, collateral composition, and liquidity risks are suitable for LR summerfi fleets, with a conservative approach to caps setting for this ARK (if to be added), mainly due to potential long delays / withdrawal periods.

Full initial parameters proposal for ETH+ ARK for Lower-Risk ETH Fleet on Mainnet will be posted by BA Labs at the SIP stage.

[Ham]

Huge thanks to @BlockAnalitica for completing the risk review on ETHplus and providing a thoughtful assessment with clear parameters that support progression toward the SIP stage and beyond. Much appreciated.

This RFC has now graduate to SIP. The SIP and further comments on the onboarding of ETHplus to the lower risk fleet can be found here.