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:
- Maintain an Ethereum-aligned Liquid Staking Token basket.
- Positively impact the Ethereum staking distribution.
- 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.