[ARC] Onboard rETH (rocket pool ETH) to Aave V3 ethereum market

At Llama, we believe it is beneficial to be the first lending market that lists rETH and other LSD assets. The first mover advantage is key and the recursive LSD/ETH loops are a material, scaleable, revenue source for Aave.

After meeting with Chainlink earlier today, we can share that a spot price for rETH is not to far away from being a reality. The trading volume is trending higher and approaching the magical $2.5-$3M average over 30 days needed to support an oracle and the liquidity is diverse enough to enable a safe oracle feed to be built for use on Aave.

Llama is supportive of listing rETH on v3 with Borrowing disabled as mentioned in @MarcZeller’s post. We do note that a LTV slightly higher, 65% and above, is a lot safe for building structure trading products that borrow stable coins and buy more of the asset to generate a x2 to x2.3 leverage strategy.

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Thanks, @MarcZeller and all. Gauntlet and @ChaosLabs are working jointly on rETH parameter recommendations and will return to the forums with analysis.

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Is this supply cap in terms of rETH? I ask because a 200k rETH cap would be greater than the current circulating supply per Coingecko.

We are supportive of the rETH V3 listing and think it’ll be a great addition to Aave. Waiting on Gauntlet and @ChaosLabs for parameter recommendations!

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good catch, it’s a typo, meant to be 20k so a bit above 10% of current supply. will edit.

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Not only should we be adding rETH, but other LSDs as well. But to keep the topic on Rocket Pool, I also think the RPL token would make a lot of sense as well, given the tokenomics of RPL. Those looking to spin up a Rocket Pool node need to have RPL, so people might be incentivized to borrow the RPL token via Aave. Overall, I’m all for more LSDs on Aave, but especially Rocket Pool and rETH.

This proposal reached the delay maturity to escalate to snapshot.

That being said we will wait for the Risk service providers to express their feedback on risk parameters before doing so, as the current ones are suggestions to start a conversation around them.

Once we reach a consensus on risk parameters, the ACI will escalate this proposal to the next stage of governance.

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Market Risk Managers Recommendation

Below is a joint proposal from Gauntlet and @ChaosLabs.

Rocketpool rETH first began trading in November 2021, with supply at 182000, FDV at $320mm, and 30-day average daily volume at $6mm. rETH is a growing asset - whether in terms of holders, or total supply, particularly as more users stake their ETH with Rocketpool.

rETH is the third largest ETH liquid staking derivative, behind stETH/wstETH and cbETH, holding 3.5% of the market share of liquid staking derivatives. The quality of rETH as collateral can be directly compared to that of stETH/wstETH. As such, it is important to evaluate what components of rETH make its risk profile different from that of stETH/wstETH.

  1. rETH currently has a weaker liquidity profile than wstETH - As of 1/23/22, rETH → WETH swap of $27mm incurs 1% slippage, whereas a wstETH → WETH swap of $180mm incurs 1% slippage.
  2. As a liquid staking derivative, rETH is more flexible than wstETH. rETH can be redeemed immediately to ETH at the exchange rate via smart contract, conditioned on the Rocketpool ETH reserves, which are roughly ~5120 ETH. On the other hand, wstETH cannot be redeemed to ETH until post Shanghai upgrade, the only way to convert wstETH to ETH is via the market.
  3. rETH and wstETH follow similar price trajectories. Both assets represent some form of staked ETH (rETH represents staked ETH by validators with Rocketpool, stETH represents staked ETH by validators with Lido) that has the potential to be withdrawn at the upcoming Shanghai upgrade. As such, both assets naturally accrue interest over time (rETH and wstETH) and their prices have positive drift. However, there are +/-5% fluctuations in price between the two. Moreover, rETH was less affected by LSD discounts during June 2022 than stETH. This may be due to rETH not being enabled for collateral across the market, so cascading liquidations of rETH did not have tangible impact.

rETH/wstETH time series

We can also imagine the type of debt that rETH, because it is a liquid staking derivative, will support to be similar to that of stETH on Aave v2. The biggest use case for stETH on Aave v2 is to borrow WETH, roughly 57% of the debt supported by stETH is WETH, compared to 37% for stablecoins.

On the other hand, this is the distribution of debt supported by WETH collateral - 75% are stablecoins, whereas only 18% is WETH.

As such, we recommend the following parameters:

Isolation Mode - No

While isolation mode provides newer, untested assets a safe backdrop to evolve, by only allowing stablecoin borrowing, in the context of rETH however, it excludes potentially the largest use case of rETH collateral, which is to borrow correlated assets in WETH or wstETH. Enabling in isolation mode will likely not capture how rETH collateral will likely be used, and as a result, only delays the path towards understanding rETH dynamics on the Aave markets. Unless the definition of Isolation Mode includes correlated assets to rETH, we recommend against initializing in isolation mode.

Borrowable - Yes

We are aware of the risk that comes with enabling small LSD borrowing. However, disabling borrowing for rETH (given the profile shown above) may be excessive and misses out on likely use cases for rETH. As demand for liquidity for liquid staking derivatives increases, disabling borrowing cuts off a potential revenue opportunity for Aave v3 - specifically WETH/wstETH supply + rETH borrowing. We believe a better way to balance this intrinsic risk and opportunity would be to allow borrowing rETH, thus giving the protocol an opportunity to explore this potential form of usage but mitigate tail risks via stringent borrow caps. This will allow rETH more time to evolve in the context of Aave’s markets.

LT - 74%; LTV 67%

We recommend lower parameters compared to wstETH of 79.5% to capture this difference in collateral quality that we’ve identified above.

LB - 7.5%

We recommend initializing with an LB of 7.5% to give liquidators slightly more incentive to liquidate rETH collateral, as compared to wstETH.

RF - 15%

LPF - 0.1

Debt Ceiling - NA

Supply Cap - 10K

Borrow Cap - 1200

Our analysis shows that initializing rETH with borrows enabled but with a stringent borrow cap - would be most beneficial to see how rETH evolves on the v3 markets.

Symbol Isolation Mode Borrowable Collateral Enabled LTV LT LB RF LPF Debt Ceiling Supply Cap Borrow Cap
rETH NO YES YES 67% 74% 7.5% 15% 0.10 N/A 10K 1200

Interest Rate Curve and Reserve Factor

rETH is similar to stETH, which has been listed on Ethereum v2 since last Spring, but since borrowing has always been disabled for stETH, we have no data about how users respond to changes in interest rates. As such, we recommend starting with conservative parameters that can be optimized later.

Parameter Recommendation
Base 0
Slope 1 0.07
Uoptimal 0.45
Slope 2 3.0
Reserve Factor 0.15

Under these parameters, the borrower interest rate increases linearly from 0% at 0% utilization to 7% at 45% utilization, and then linearly to 307% at 100% utilization. This interest rate curve matches that of the more volatile assets on Aave (1INCH, CRV, ENS, LINK, MKR, UNI). From a risk perspective, interest rate curves need to be designed to reduce the chances of utilization reaching 100%, which would prevent stakers from withdrawing rETH and prevent liquidators from seizing rETH collateral when performing liquidations. The proposed interest rate curve is thus desirable because it uses a low optimal utilization and has a high maximum interest rate.

Question to the Community on E-Mode

One question which we would appreciate community feedback on is whether we should initiate rETH, cbETH, and other LSD markets with e-mode, or wait to see how usage evolves before initiating e-mode? Gauntlet and Chaos are currently working on aligning methodologies. If the community has a preference for enabling e-mode upon market launch, Gauntlet can provide recommendations in the meantime as we continue working with Chaos on aligning methodologies. We would value community feedback.

Below are tradeoffs:

  • A benefit of not initiating with e-mode is to see how market usage evolves, and using that data to inform e-mode recommendations.
  • A downside of not initiating with e-mode is that a primary use case for these LSDs is recursive borrowing, so not enabling eMode at launch means Aave is less attractive to user needs.
  • It also may be important to have full functionality of the asset before making further parameter changes in order to understand how new Aave v3 features perform (regular mode relative to e-mode for that asset). Not enabling e-mode can delay the path towards understanding rETH dynamics on the Aave markets.
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thank you for this joint risk recommendation from Gauntlet & Chaos labs.

it’s great to witness risks team working together to produce quality risk analysis of assets.

according to emode, while the ACI initial position was to leave rETH & cbETH out of emode until shanghai, the risk teams approach to be conservative with caps indicates that we most likely can afford to enable emode in that limited environment to gain attractiveness while staying in actable risk territory.

The ACI is now supportive of integrating rETH to emode but will be conservative about raising the caps via AIPs until shanghai.

once parameters for emode are suggested, the ACI will escalate this proposal to a snapshot vote.

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Emode - LT 91%, LTV 88%, LB 2%

As we’ve discussed before, rETH shares many characteristics with wstETH, including the type of debt that it will support. Given that wstETH will be initialized with eMode params of LT 93%, LTV 90%, LB 1%, we recommend that rETH be listed with lower LT and LTV and higher LB to account for the collateral difference.

Personally, I do not have a strong opinion on this. However, I think we can get more representative data by non adding them to eMode at this point.
In case we add them to ETH eMode, we will hit such limited caps soon with a small set of borrowers (due to leveraged positions). It is questionable, but I think we will get more information about LSDs borrowing mechanics if we leave them out for now. The sonner we have data about it, the better and quicker we will be able to adjust LSDs risk params.

Given that we are seeing the discussion about the listing of ETH-correlated assets on this and other governance threads (e.g. cbETH), we would like to clarify something really important from the technical side, that seems to be wrongly interpreted.

Each asset listed on an Aave v3 pool can have only 1 eMode category configured, and each category can only have 1 set of configurations (mainly LTV, Liquidation Threshold, Liquidation Bonus)

Currently, the existing ETH-correlated eMode category on Aave v3 Ethereum already has 90% LTV, 93% Liquidation Threshold, and 1% Liquidation Bonus configured. Given that WETH is included in that category together with wstETH, it is simply not possible to create a new category with different parameters and have WETH on both, as implied in the current recommendations here; at least not directly.

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The ACI is escalating this proposal to the snapshot stage with four options to allow the community to decide whether they want to support emode from day one on rETH.

  1. YAE (with emode)
  2. YAE (without emode)
  3. NAY
  4. ABSTAIN

https://snapshot.org/#/aave.eth/proposal/0xb06bac2b74fb2fafcfb21492c938f03a52a389d545b9975f8dc926374e966b04

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@bgdlabs, thanks for this necessary clarification.
Adding additional eth correlated assets (e.g. cbETH, rETH) into the wstETH/ETH emode category will require further analysis and, most likely, updating the current configuration.

Chaos Labs recommends listing rETH and cbETH without emode at launch, and deciding on the emode listing at a later stage after further analysis and updated parameters are presented to the community.

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After conducting further analysis considering the empirical correlations across rETH, cbETH, and wstETH and analyzing their differing volume and liquidity profiles, below are 3 options for the community from a purely quantitative perspective. Because e-mode has one set of LT/LTV/LB parameters for all assets included in that e-mode, the addition of any assets to e-mode impacts the entire risk profile of the e-mode.

(1) Decrease the rETH supply cap to 8k and keep the current ETH-correlated eMode parameterizations.
(2) Update the eMode parameterizations to decrease LT/LTV and increase LB.
(3) Wait until the Shanghai upgrade in March and list rETH and cbETH with the current eMode parameters.

Each option has its pros and cons.

If the community decides to hold off on e-mode for now, we are happy to provide analysis and recommendations following the Shanghai upgrade (if that is the community’s preference).

If the community decides to move forward with e-mode, we will provide more color on options 1 and 2 and the tradeoffs for the community.

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Hi @Pauljlei,

Llama is in favour of proceeding with Option 1 and then pivoting to Option 3 once withdrawals are available for each respective Liquid Staked Token.

Thanks for sharing your thoughts.

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thanks @ChaosLabs, @Pauljlei & @Llamaxyz on your feedback.

Snapshot votes are immutable. That being said, if the result of the current vote outcome is “YAE (with emode)” the ACI will work on an AIP reflecting @Pauljlei option (1) by decreasing the rETH supply cap.

if the outcome is “YAE without emode” the ACI will work on AIP with initial proposed supply cap and emode disabled.

If the outcome is anything else, the governance will also be heard, and rETH will need to restart a governance process after reaching more maturity.

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Update: with AIP-153 execution, rETH is now onboarded on Aave V3.

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Hi @MarcZeller,

What would be the governance process required to also enable rETH as collateral on Aave v3 on Optimism?
The token has a fairly deep liquidity there (as of 06-May-23, ETH price at ~$1,900):

With the wstETH supply always maxed out, it would be nice to onboard alternative ETH LSTs :slight_smile:

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Fully agreed, and it would nicely complement the proposal to onboard rETH to Arbitrum. [ARFC] Add rETH to Aave V3 Arbitrum Liquidity Pool - #3 by gohawi8287

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