wstETH - Aave Risk Assessment
General
Lido allows users to earn staking rewards on the Ethereum without locking ETH or maintaining staking infrastructure. This is achieved through the stETH token which represents a tokenized staking deposit.
As stETH is a rebasing token, it creates challenges as not all DeFi integrations support rebasing tokens. To overcome these challenges, wstETH was developed. wstETH utilises a constant balance mechanism that uses an underlying share system to reflect the earned staking rewards. As with Aave v3 on Ethereum, Aave v3 on Optimism is to use wstETH.
At the time of writing, there are 933,821.62 units of wstETH in circulating supply on mainnet, worth about $1,553,384,266 on the 14th Jan 2023. wstETH on Optimism represents a claim on the wstETH on mainnet, where the asset is held within the bridge contract. After 162 days of trading (launch date 5th August 2022), there are 14,703.80 units of tokens in circulating supply and 301,566 transfers have taken place on the Optimism network.
| General Information | |||
|---|---|---|---|
| Genesis Date | 05/08/2022 | ||
| Ticker | wstETH | Price | 1,673.57 |
| Circulating Supply (Optimism) | 14,704.35 | Number of Holders (Optimism) | 2,401 |
| Circulating Supply (Ethereum) | $1.55B | Number of Holders (Ethereum) | 933,821.62 |
| Market Cap (Optimism) | $24.6M | Number of Transfer (Optimism) | 301,566 |
Note: The number of holders metric above is skewed as it only reflects those that hold wstETH and counts all deposits into a single contract as one holder. To fully grasp the wstETH distribution, the distribution of liquidity provider receipt tokens deposited into various smart contracts such as gauges needs to be assessed. This will lead to significant increase in the number of holders of wstETH on Optimism.
There are several wstETH liquidity pools on Optimism, Velodrom $14.8M, Beethoven $6.09M, Curve $10.5M and Kyber Swap $3.3M as of the 14th Jan 2022 for a total of $34.8M in TVL across the liquidity pools.
Data Source.
The below summaries relevant addresses specific to liquidity, bridges and tokens:
wstETH Ethereum Contract Address: 0x7f39C581F595B53c5cb19bD0b3f8dA6c935E2Ca0
Ethereum Bridge Address: 0x76943C0D61395d8F2edF9060e1533529cAe05dE6
wstETH Optimism Address: 0x1F32b1c2345538c0c6f582fCB022739c4A194Ebb
wstETH Optimism Bridge Governance Executor Address: 0xefa0db536d2c8089685630fafe88cf7805966fc3
Velodrom Liquidity: 0xbf205335de602ac38244f112d712ab04cb59a498
Beethoven Liquidity: 0xba12222222228d8ba445958a75a0704d566bf2c8
Curve Liquidity: 0xb90b9b1f91a01ea22a182cd84c1e22222e39b415
Kyber Swap Liquidity: 0xda74DB17023750D02b83BE2559a4EaA013B65C54
wstETH Smart Contract Risk:
stETH had been audited several times, with audits from Sigma Prime, Quantstamp and MixBytes. Lido also has an active Immunefi bug bounty program as well. Lido wrote its own bridging contract for the Optimism native bridge, which was audited by Oxorio in July 2022. The conclusion section from Oxorio’s report indicates all findings were addressed or are considered not an issue.
wstETH Counterparty Risk:
With stETH already listed on Aave v2 and wstETH to be listed on Aave v3 on Ethereum at launch, here we will focus on the Counterparty Risk specific to Optimism.
As the Optimism bridge is owned by Lido DAO on Ethereum, no action can be taken on the bridge without explicit Lido DAO approval with exception to pausing the bridge. L1 and L2 upgrades are implemented via governance approval on Ethereum and utilise the Aave Governance Cross-Chain bridges contracts.
There is a 3 of 5 multisig on Optimism that performs the Emergency Brake role, which can pause deposits and withdrawals in the bridge contract. Do note resuming operations can only be performed by the Aragon Agent. Details about the signers on the multisig are mentioned in the original proposal.
With Chainlink set to monetise their oracle feeds, by onboarding wstETH, Aave will likely incur a fee for using two oracles. As Aave utilises a token/USD oracle feed, for wstETH, the oracle will need to calculate wstETH to stETH to USD in order to generate a wstETH/USD oracle feed for use on Optimism. This means Aave will utilise two Chainlink feeds in supporting the wstETH asset listing.
wstETH/stETH: 0xe59EBa0D492cA53C6f46015EEa00517F2707dc77
stETH/USD: 0x41878779a388585509657CE5Fb95a80050502186
Data source can be found here.
As a result, Llama believes the community should opt for a Reserver Factor of 15%, similar to the ETH Reserve on v2 and the pending v3 deployment. This will improve the overall economics of listing wstETH on v3.
Risk Parameters
Provided above by Gauntlet, with exception to a revised BorrowCap and Reserve Factor.
In addition, Llama would like to suggest the creation of an eMode Category for ETH correlated assets on Optimism. This will enable users to recursively deposit wstETH and borrow ETH to generate yield on ETH and other chosen types of collateral. Details relating to eMode can be found here.
ETH eMode Category:
| Category | Assets Included | Loan to Value | Liquidation Threshold | Liquidation Bonus |
|---|---|---|---|---|
| Ethereum Correlated | wstETH wETH | 93% | 90% | 1% |
The above reflects the same parameters suggested for the Ethereum v3 deployment and is expected to attract users to the v3 deployment. Given the BorrowCap suggested by Gauntlet is very limited (940 wstETH units) the risk proposed by the introduction of the eMode is minimal.
It is likely that Aave will experience demand for wstETH borrowing as users seek to compound their rewards by depositing into the various liquidity pools to earn additional yield. Ie: Deposit collateral, borrow wETH + wstETH and deposit into a liquidity pool to earn yield. Borrowing both wETH and wstETH enables users to avoid any loss of yield from the price impact by converting one asset to another prior to depositing into any liquidity pool.
wstETH Market Risk:
With Shanghai approaching, expected late Q1 2023, it is possible to see volatility in spot pricing between the LSD as each provider enables withdrawals from their respective staked ETH products. This is being discussed on a separate Governance Forum Thread.
Interest Rate Curve
The following Interest Rate Curve is proposed for wstETH on Optimism. This is the same Interest Rate Curve as wstETH being proposed for wstETH on v3 Ethereum.
| Category | Value |
|---|---|
| Base | 0.25% |
| Slope1 | 4.50% |
| Slope2 | 80.00% |
| Uoptimal | 45.00 |
| Reserve Factor | 15.00 |
BorrowCap based upon Gauntlet’s SupplyCap, utilising Chaos Lab’s public BorrowCap methodology:
Borrow Cap = Supply Cap * (Uoptimal + 0.1)
New proposed BorrowCap = 6,000 * (0.45+0.1) = 3,300
The figure below shows daily trading volume, 3,675.27 units of wstETH for the later half of January 2023, exceeding the borrow cap of 3,300 units. The chart below also shows the trading volume to be distributed across several decentralised exchange liquidity pools. There are 9,031 wstETH spread across the main liquidity pools, see chart below, which exceeds the BorrowCap by about 50%.
Date Source
Date Source
The main wstETH liquidity pools are incentivized by a range of token emissions:
Data Source
