ARC: Add support for wstETH on Polygon V3

Governance New Asset
1

Proposal: Add support for wstETH on Polygon v3

Back once again for the renegade master…:cd: :musical_note:

References:

Project: https://lido.fi/

Whitepaper: lido-dao/README.md at master · lidofinance/lido-dao · GitHub

Github: GitHub - lidofinance/polygon-contracts

Documentation: https://docs.lido.fi/

Audit: polygon-contracts/audits/v2 at main · lidofinance/polygon-contracts · GitHub

wstETH: Wrapped liquid staked Ether 2.0 (PoS) (wstETH) Token Tracker | PolygonScan

Chainlink: EACAggregatorProxy | Address 0x10f964234cae09cB6a9854B56FF7D4F38Cda5E6a | PolygonScan

Governance: https://research.lido.fi/

Twitter: https://twitter.com/LidoFinance

Discord: Lido

Summary:

This ARFC presents the community with the opportunity to add wstETH to the Polygon v3 Liquidity Pool.

Motivation

The stETH Reserve on Aave v2 is the largest Reserve across all Aave deployments with $1.52B in deposits, exceeding USDC ($0.99B) and ETH ($1.16B). On Aave v3, the most recent Aave deployment, wstETH provides $130M or 29% of markets TVL.

Several communities building on Aave utilize the wstETH/wETH rewards-maximizing strategy to generate rewards on various assets. By adding wstETH to the Polygon v3 market, users gain access to a third Liquid Staking Token (LST) source of rewards.

The demand for wETH on Aave has increased as a result of listing stETH on Aave v2. This led to a material increase in Aave’s wETH nominated revenue stream. Listing wstETH across various Aave deployments, has enabled Aave to offer the higher APR on wETH deposits, across major lending markets, continually outperforming Compound.

By listing wstETH on Polygon, the Aave community is helping create an environment capable of replicating a similar outcome to that of the Ethereum Aave v2 and v3 Liquidity Pool.

The utilization of wETH on Polygon is 10.07%, compared to 48.37% on the Ethereum v2 wETH Reserve. Listing wstETH on Polygon v3 will increase TVL for Aave and generate new demand for wETH borrowing, creating demand for wETH deposits and driving growth for Aave.

Specification

  1. What is the link between the author of the AIP and the Asset?

Jbeezy is a full-time contributor to the Lido DAO.

  1. Provide a brief high-level overview of the project and the token?

Lido is the name given to a suite of liquid staking smart contract systems deployed across multiple blockchain network platforms. The smart contract systems are software middleware that extend the functionality of the networks by enabling more participants to stake the network native token.

The Lido on Ethereum software is deployed on the Ethereum network. When participants use it to route their stake, they enhance the security of the Ethereum network by increasing the number of participants who stake ETH.

Lido on Ethereum does not record the wallet address of participants that use it. Instead participants use the middleware to mint a rebasing stETH utility token to themselves when they route their stake. The utility tokens are fungible and liquid. The total balance of stETH in existence is based on the total amount of ETH staked via the Lido on Ethereum middleware plus total staking rewards minus any slashing applied on validators. stETH rebases daily.

Due to the rebasing nature of stETH, a user’s stETH balance changes daily as staking rewards are reported from the consensus layer. As some DeFi protocols require a constant balance mechanism for tokens, stETH can be wrapped into wstETH which keeps a user’s token balance fixed and uses deterministic code to account for users’ staking reward balances.

Example of an unwrapping scenario:

  1. User wraps 1 stETH and gets 0.9803 wstETH (1 stETH = 0.9803 wstETH)

  2. A rebase happens, the wstETH price goes up by 5%

  3. User unwraps 0.9803 wstETH and gets 1.0499 stETH (1 stETH = 0.9337 wstETH)

When withdrawals are enabled on the Ethereum network, by the Ethereum Foundation, wstETH user’s can unwrap the tokens to stETH and then burn the tokens to use the withdrawal functionality of middleware and get their stake and accumulated rewards.

wstETH on Polygon: [0x03b54A6e9a984069379fae1a4fC4dBAE93B3bCCD](https://polygonscan.com/token/0x03b54a6e9a984069379fae1a4fc4dbae93b3bccd)

  1. Explain positioning of the token in the AAVE ecosystem. Why would it be a good borrow or collateral asset?

The below shows the effect that listing of stETH has had on the Aave v2 Ethereum Mainnet deployment. stETH drives most of the wETH borrowing demand and the resulting fee-revenue.

The wETH reserve generated approximately $279k in revenue during January, $244k during February and has already generated $234k by mid March 2023.

  1. Provide a brief history of the project and the different components: DAO (is it live?), products (are they live?). How did it overcome some of the challenges it faced?

The below provides a brief overview and some key dates of interest providing insight into the history to stETH and wstETH:

  • stETH deployed on 17th December 2020
  • stETH listed on Aave v2 on the 27th February 2022
  • wstETH deployed 5th August 2022
  • wstETH listed on Ethereum v3 27th January 2023
  • wstETH listed on Optimism v3 24th February 2023
  • wstETH listed on Arbitrum v3 1st March 2023

Lido Protocol stETH is considered the most dominant staked ETH utility token across the industry. stETH tokens make up 31.4% of all staked ETH deposits.

  1. How is wstETH currently used?

Aave v2 on Ethereum is the largest holder of stETH.

Deploying wstETH on Polygon, along with on other networks like Optimism and Arbitrum, will make the token available to Aave users on Layer 2 networks in the same way stETH is available on Ethereum Mainnet. It will also enable DeFi protocols to build interesting and exciting new use cases by utilizing integration with Aave to access the wstETH market.

InstaDapp, Index Coop, Galleon DAO, CIAN and others have all built products on top of Aave utilizing the recursive stETH/ETH strategy. By adding wstETH to the Polygon Liquidity Pool, Aave moves closer towards enabling developers to deploy similar products on Polygon.

On Polygon, wstETH is mostly used for providing liquidity on Balancer. In time, this pool will be migrated to wstETH / bb-a-wETH and a gauge will be created to distribute rewards to Liquidity Providers who stake their BPTs.

  1. Emission schedule

There is no emission schedule.

  1. Token (& Protocol) permissions (minting) and upgradability. Is there a multisig? What can it do? Who are the signers?

For details on stETH, which is already listed on Aave v2 Ethereum, Arbitrum and Optimism please refer to the following forum posts:

Transferring wstETH from Ethereum to Polygon occurs via the Polygon canonical bridge provided by the Polygon Foundation.

  1. Market data (Market Cap, 24h Volume, Volatility, Exchanges, Maturity)
  • Market capitalisation: $8,582,392,956
  • 24H Volume ~$50M (stETH + wstETH)

Decentralized exchange liquidity pools

Balancer

Kyber Network

  1. Social channels data (Size of communities, activity on Github)
  1. Contracts date of deployments, number of transactions, number of holders for tokens

The below applies to just wstETH on Arbitrum:

  • Date of Deployment: Aug-25-2022
  • Number of Transactions: 259
  • Number of holders for token: 14 (liquidity pools are recorded as 1 address)
1 Like
2

Thank you for publishing this proposal @jbeezy.

Upon listing wstETH on Polygon v3, this deployment will become the first to offer users multiple rewards-maximizing strategies. Strategists will be able to optimise across wstETH/ETH and stMATIC/wMATIC strategies when offering users yield.

Having worked with Lido DAO on a number of proposals, @Llamaxyz is glad to support this ARFC through the governance process by publishing a Snapshot & AIP.

1 Like
3

Hi @ChaosLabs, @Gauntlet,

Would it be possible to learn what is needed to progress this proposal ?
Ideally, if liquidity is a concern, it would be great to learn how much liquidity is required in order to facilitate the wstETH on Polygon v3.

May we suggest progressing the asset listing with conservative initial parameters and then adjusting them over time as market conditions improve.

4

Risk Parameter Recommendations

Summary

Should the community choose to list wstETH on Aave V3 Polygon, below are consolidated risk parameter recommendations. Please see further below for a breakdown of recommendations and considerations for transparency.

To summarize, the below consolidations were made:

  • Using Gauntlet’s LB (higher value)
  • Using Gauntlet’s supply cap (lower value)
  • Using Gauntlet’s LB for e-mode (lower value). Depending on how usage evolves, the community may adjust after listing.
Symbol Isolation Mode Borrowable Collateral Enabled LTV LT LB RF LPF Debt Ceiling Supply Cap Borrow Cap
wstETH NO YES YES 70% 79% 7.2% 15% 0.10 N/A 1800 285

eMode - Yes, ETH Correlated Category (LT 93%, LTV 90%, LB 1%)

IR Curves

Parameter Recommendation
Base Variable Borrow Rate 0.0025
Variable Rate Slope 1 0.045
Optimal Usage Ratio 0.45
Variable Rate Slope 2 0.8
Reserve Factor 0.15

Additional Detail

Gauntlet Analysis

Parameter Recommendations

Symbol Isolation Mode Borrowable Collateral Enabled LTV LT LB RF LPF Debt Ceiling Supply Cap Borrow Cap
wstETH NO YES YES 70% 79% 7.2% 15% 0.10 N/A 1800 285

Gauntlet has previously provided wstETH parameter recommendations for Aave v3 Ethereum, Aave v3 Optimism, and Aave v3 Arbitrum, which serve as the foundations for the following wstETH initial parameter recommendations on Aave v3 Polygon. We note that wstETH does not yet have a Chainlink price feed on Polygon and that our recommendations are conditional on a price feed existing.

As noted in our wstETH param recommendations for other chains, parameterizing new markets provides a specific challenge due to the lack of user data to train simulation models. That said, we anticipate wstETH to act similarly on Aave v3 Polygon as on as it does on other layer 2 chains, so we use those as a jumping-off point for these recommendations.

We recommend the following parameters for wstETH on Aave V3 Polygon:

Isolation Mode - No
Borrowable - Yes
Collateral Enabled - Yes
eMode - Yes, ETH Correlated Category (LT 93%, LTV 90%, LB 1%)

wstETH’s market risk in eMode on Aave v3 Polygon is relatively minimal given the conservative proposed borrow and supply caps and its correlation with other ETH-derived liquid staking derivatives, thus we recommend it be included in the ETH-correlated eMode category at the current eMode parameters. wstETH has sufficient liquidity on Polygon to facilitate any foreseeable liquidations at the recommended parameters. As of now, if the full supply cap of 1800 wstETH were swapped for ETH via 1inch, it would incur less than 1% slippage.

Supply and Borrow Caps

Supply Cap (in tokens) - 1800 / Borrow Cap (in tokens) - 285

Gauntlet recommends Supply Caps and Borrow Caps falling between our initial wstETH recommendations for Optimism and Arbitrum. We recommend a Supply Cap of 1800 and a Borrow Cap of 285. The liquidity of wstETH on Polygon is higher than that of Arbitrum and lower than that of Optimism, as the following table shows:

Chain wstETH swapped to ETH for 1% slippage
Ethereum Mainnet 345,000
Optimism 3200
Polygon 1500
Arbitrum 1000

These relatively conservative caps will mitigate unknown tail risks while giving the market ample time to naturally evolve and grow. In the case that the wstETH market grows quickly due to its greater use cases as compared to stETH, we can meet rapidly increasing demand with proactive updates as needed.

LTV - 70.0% / LT - 79.0%

Gauntlet recommends the same LTV and LT on Polygon as on Optimism and Arbitrum, given the similar profiles of these markets.

Liquidation Bonus - 7.2%

Gauntlet recommends initializing the LB at 7.2%, the same value we recommended for v3 Optimism and Arbitrum.

Liquidation Protocol Fee - 10%

Gauntlet has recommended a 10% LPF for the LPF of wstETH on v3 Ethereum, Optimism, and Arbitrum. For v3 Polygon, we recommend the same. This, again, will allow for protocol revenue from LPF while minimizing effects on liquidator behavior and user experience. The LPF is a percentage of the LB that ultimately contributes to Aave reserves. LPFs, like LBs, are intimately linked to liquidation behavior, as they serve as the primary incentive for liquidators. As such, more data is needed going forward to conduct analyses on what optimal LPFs should be. A high LPF and unadjusted LB may deter liquidators from conducting liquidations due to fears of unprofitability. A high LPF with an upwards adjusted LB to ensure bonuses for liquidators similar to v2 may cause too much of the collateral to be eaten up by liquidations, which also impacts liquidator behavior.

Reserve Factor - 15%

Gauntlet recommends wstETH reserve factor to be that of the reserve factor for recommended wstETH on Ethereum, Optimism, and Arbitrum, which is 15%.

IR Curves

We recommend the same IR curves used for wstETH on Optimism and Arbitrum:

Parameter Recommendation
Base Variable Borrow Rate 0.0025
Variable Rate Slope 1 0.045
Optimal Usage Ratio 0.45
Variable Rate Slope 2 0.8
Reserve Factor 0.15

Chaos Analysis

Liquidity Data:

the current price of wstETH through 1inch is 1.116 [ETH]:

1% slippage 2100 wstETH:

2800 - 5% slippage:

2900 - 8.25% slippage:

Chain wstETH swapped to ETH for 1% slippage
Ethereum Mainnet 150,000
Optimism 2700
Polygon 2100
Arbitrum 800

We recommend the following initial parameters for wstETH on Aave v3 on Polygon:

Supply and Borrow Caps

Supply Cap - 5,600 wstETH:

According to the current on-chain liquidity and our interim methodology, we see that with the recommended LP, we have 2800 wstETH at a 5% slippage - and we multiply this by 2 = 5,600 wstETH

Borrow Cap - 285 wstETH:

according to our interim methodology, we recommend the borrow caps as supply_cap*U_Optimal = 5,600 * 0.45 = 2,520.

But due to exposure risk consideration and lack of user data, we recommend adopting the more conservative cap recommended by Gauntlet at 285.

Isolation Mode - No

Borrowable - Yes

Collateral Enabled - Yes

LTV - 70% / LT - 79%

Set similarily as on Arbitrum and Optimism

Liquidation Penalty - 5%

From the liquidity data we see that most of the liquidity on-chain is concentrated around the 5% range from the current price. by increasing the LP higher, we don’t get a major amount of liquidity.

eMode - Yes, ETH Correlated Category (LT 93%, LTV 90%, LB 2%)

For the parameters above, we recommend the same parameters we recommended and were set for wstETH on Arbitrum V3, as they are set conservatively, and we anticipate similar volatility of the asset.

Liquidation Protocol Fee - 10%

We recommend the LPF to be in line with our recommendation for wstETH, cbETH, and rETH on Ethereum V3. This is a default parameter configuration that should be revisited with more liquidator behavior data.

Reserve Factor - 15%

We recommend the RF to be in line with our recommendation for wstETH, cbETH, and rETH on Ethereum V3.

IR Curves

We recommend the same IR curves used for wstETH on Optimism and Arbitrum:

2 Likes
5

Thank you @Pauljlei, @Gauntlet and @ChaosLabs.

I will create Snapshot vote for adding wstETH to Polygon v3 and arrange for this to be tentatively scheduled into @Llamaxyz engineering workflow. At first glance, I think we can bundle stMATIC Supply Cap increase (Polygon v3), wstETH listing (Polygon v3) and LDO listing (Ethereum v3) into a single proposal, assuming all have positive Snapshot votes.

6

The ACI concurs that utilizing a bundle of risk parameters is a reasonable approach; however, we firmly oppose bundling asset onboarding processes, even if the goal is to enhance governance efficiency and reduce the overall number of AIPs.

A recent example of this bundling is the UNI, MKR, SNX, and BAL bundle proposed by Llama. Llama is now attempting to introduce yet another bundle.

We must honor the governance process by providing a voice for Token holders and embracing granularity in decision-making. Furthermore, establishing a precedent with such bundled asset onboarding can be detrimental in the long run. While current bundles may have faced minimal debate, this practice is not sustainable for future operations.

Although the ACI supports the UNI, MKR, SNX, and BAL bundle (AIP-197), we would like to notify @Llamaxyz that we will vote against any subsequent bundled asset onboarding.

We strongly recommend presenting individual assets in separate AIPs, and exploring alternative means of streamlining the governance process without compromising the integrity of decision-making.

1 Like
7

Thank you for the feedback @MarcZeller. @Llamaxyz had received feedback from Service Providers to reduce the number of AIPs and consolidate submissions to governance which is what led to bundling various proposals.

Given the community is not yet aligned on how best to streamline governance. We will revert to present one idea per governance forum post and support each idea individually through the governance process.

1 Like
8

In my opinion batching small similar risk updates together makes a lot of sense (e.g. multiple cap updates, rate updates, lt updates) as in a mental model these are adjustments to things already approved by the DAO.

New listings on the other hand are sensitive new additions to the protocol, so agreeing with @MarcZeller that it’s important to have a choice of: “yet to x”, “no to y” so bundling here doesn’t seem like a good choice.

2 Likes
9

Is there an update on increasing the supply of wsteth on Polygon? It has been capped pretty much since the beginning.