Gauntlet Analysis
Below, we have conducted research to shed light on the trust assumptions of various ETH LSDs, in order to provide the community with additional information. Although Gauntlet’s platform focuses on market risk, we hope that the below research provides transparency and helps the community in making an informed decision.
TLDR: Based on the below, listing sfrxETH requires greater trust assumptions compared to stETH and rETH.
| Frax sfrxETH | Coinbase cbETH | Lido stETH | Rocket Pool rETH | |
|---|---|---|---|---|
| Validator | Ran by the FRAX core devs | Ran by Coinbase | 30 entities approved by Lido DAO | 2000 deposit addresses |
| ETH rewards | Managed by the FRAX Multisig Treasury Contract | Managed by Coinbase | Controlled by smart contract + DAO-assigned oracles, the withdrawal credentials are derived from the withdrawal address supplied by the DAO | Controlled by smart contract + Oracle DAO, the reward snapshot is compiled into a Merkle Tree and the Rocket Pool contracts enables node operator to claim the reward |
| Permissions for Minting LSD | frxETHMinter contract has frxETH minting permission. The contract owner is a multisig with various permissions. | cbETH contract’s master minter set the MintForwarder contract as a minter. | The outstanding stETH amount is based on the total amount of ETH controlled by the protocol. | Only the RocketDepositPool contract is allowed to mint rETH. |
While the counterparty risk is difficult to quantify, based on these qualitative evaluation criteria, listing sfrxETH requires greater trust assumptions compared to stETH and rETH. Given that different LSDs exhibit different levels of trust assumptions, the decision of listing sfrxETH should be based on the community’s risk preference that is separate from market risk.
| Frax sfrxETH | Frax frxETH | Coinbase cbETH | Lido stETH | Rocket Pool rETH | |
|---|---|---|---|---|---|
| Market Cap | $81M | $160M | $1.8B | $8.4B | $350M |
| Top Liquidity Sources | $1.9M on Balancer | $62M on Curve | $7.3M on Uniswap v3, $3M on Curve, $6.5M 2% depth on Coinbase | $820M on Curve | $26M on Balancer, $3M on Uniswap v3 |
| DEX 25% Depth | $2.7M | $88M | $9M | $1.1B | $84M |
| Supply Cap | 10,000 | 200,000 | 10,000 |
Given that sfrxETH may be unstaked into frxETH via smart contract, users looking to liquidate an sfrxETH backed loan can make use of frxETH liquidity. Setting aside the counterparty risk, the liquidity of frxETH on the DEX is greater than that of rETH, although its market capitalization is lower. Therefore, we recommend using the same parameters as those used for rETH (if the community decides on listing sfrxETH). Please refer to our rETH post for considerations regarding ETH staking derivatives.
With the proposed supply cap of 5,000 suggested by Chaos, the highest possible opportunity cost of deferring sfrxETH for two months would be approximately $31.1k in borrowing interest (calculated as 5000 * $1680 * 0.74 LT * 3% stablecoin borrow interest * 2 months / 12, as of 2023/02/16), assuming the majority of the debt against sfrxETH will be stablecoin. Therefore, two potential paths are recommended for moving forward:
- Conservative approach: wait for the release of frxETH v2, which is expected to launch following Shanghai upgrade, and will enable a more decentralized validator set. By delaying the listing of sfrxETH, the maximum potential opportunity cost in borrowing interest is estimated to be $31.1k.
- Aggressive approach: if the community favors the listing of sfrxETH, they may choose to reduce the supply cap from 5,000, based on their level of confidence in the Frax team. Gauntlet is unable to provide a specific recommendation for the supply cap since counterparty risk cannot be quantified.
We hope that this analysis helps the community assess the risk-reward tradeoffs.