[ARFC] Add rETH to Aave V3 Arbitrum Liquidity Pool

Governance
1

title: [ARFC] Add rETH to Aave V3 Arbitrum Liquidity Pool
author: @Llama - @TokenLogic & @Dydymoon
dated: 2023-04-18

References

Website: https://rocketpool.net/ 14
Whitepaper: Rocket Pool — Staking Protocol Part 1 | by David Rugendyke | Rocket Pool | Medium 4
Documents: Developer Documentation | Rocket Pool 2
Dune: https://dune.com/rp_community/rocketpool 8
Github: Rocket Pool · GitHub
Source code for the system(s) that interact with the proposed asset, GitHub - rocket-pool/rocketpool: A next generation decentralised Ethereum proof of stake network and pool, currently in beta and built to be compatible with Ethereum 2.0 and the Beacon Chain.

Arbitrum Contract Address: Rocket Pool: rETH Token | Address 0xec70dcb4a1efa46b8f2d97c310c9c4790ba5ffa8 | Arbiscan

Audits

Communities

Summary

This publication presents the community an opportunity to add rETH to the Arbitrum v3 Liquidity Pool.

Motivation

rETH is listed on Aave v3 Ethereum and has over $20M of deposits. Rocket Pools is expanding its support for rETH across the L2 ecosystem, first Optimism, now Arbitrum and soon Polygon. There are currently only Chainlink Oracles for Arbitrum and Ethereum. Thus, this publication presents listing rETH on Arbitrum ahead of Optimism.

A new rETH liquidity pool and gauge has been created on Balancer v2 Arbitrum for rETH/bb-a-wETH. This pool will deposit wETH into Aave v3 on Arbitrum. Incentives are expected to follow soon. This publication is early and provides risk service providers adequate time to review the asset listing parameters whilst liquidity continues to grow.

LST collateral types drive material borrowing revenue to Aave as users deposit the LST and borrow the corresponding network token. This is most evident on Ethereum where the LST- and wETH-yield-maximising loop is the source of the vast majority of wETH borrowing demand.

By providing LST diversification, Aave presents itself as a neutral platform offering users the choice between various LSTs. An added benefit of offering a variety of LSTs is the respective communities may elect to compete for user acquisition via Aave through offering incentives. This is currently happening on Aave v3 Polygon and Aave’s TVL has meaningfully increased from a relatively small base.

Rocket Pool offers Aave v3 users on Arbitrum an alternative to wstETH.

Specification

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

Llama does not receive any payments from Rocket Pool.

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

Rocket Pool strives to embody the core ethos of Ethereum and DeFi, specifically the non-custodial, trustless nature that allows self-sovereignty to truly thrive. This leads to reduced Counter Party risk relative to other LST providers.

Rocket Pool stakers deposit ETH into the deposit pool, enabling a node operator to create a new Ethereum Network validator. You can stake as little as 0.01 ETH.

In doing so, users are given a token called rETH. rETH represents both how much ETH is deposited, and when the user deposited it. The ratio includes rewards that Rocket Pool node operators earn from:

  • The Ethereum network itself
  • Priority fees from block proposals
  • MEV rewards from block proposals

rETH is a staked, interest earning wrapper of ETH that can be exchanged at any time. rETH is not a rebasing token and therefore represents a straight forward integration prospect for Aave.

Since the Beacon Chain rewards, priority fees, and MEV rewards will constantly accumulate, this means that rETH’s value effectively always increases relative to ETH. The rETH/ETH exchange rate is updated approximately every 24 hours based on the Ethereum network rewards earned by Rocket Pool node operators.

For details on how to stake ETH with Rocket Pool, please refer to this link here. For those readers keen to learn more about rETH taxation implications, please refer to this link here.

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

By listing rETH as collateral, users benefit from staking rewards whilst taking out a loan.

Similar to other LSTs, there are a range of yield maximising strategies and lower carry cost leveraged trading strategies that users could deploy. Given the typically low borrowing cost for LSTs, users are able to borrow the LST and participate in yield strategies beyond the Aave protocol.

4. 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?

Rocket Pool is a first of its kind ETH Proof of Stake Protocol, designed to be community owned, decentralised, trustless and compatible with staking in Ethereum. It was first conceived in late 2016 and has since had over 5 successful public betas over the life span of ETH development.

Rocket Pool is designed to cater to two main user groups; those that wish to participate in tokenised staking using rETH using as little as 0.01 ETH and those that wish to stake ETH and run a node in the network to help generate a higher return on investment than staking outside of the protocol due to commissions earned.

For more information on these two groups that make up the protocol, we’d highly recommend reading article one in our explainer series that goes into great detail on how users can participate, be it via tokenised staking or running a node in the protocol.

The core premise behind a protocol is to ensure the network is not beholden to any one party. This is a principle directly linked to Ethereum and ETH itself, and a mindset used at every stage of the process as Rocket Pool has evolved.

5. How is the rETH token currently used ?

The distribution of rETH is spread thinning across many addresses. According to Arbiscan, the largest holding is only 3.13% of supply on Arbitrum.

rETH is new to Arbitrum and because of this, there are only a few extrinsic use cases. Providing liquidity on DEXs is one of the main use cases to date on mainnet and we expect this to be mirrored on Arbitrum. The new rETH/bb-a-wETH pool will soon receive incentives and will bootstrap a second liquidity pool complementing the existing Uniswap v3 pool.

With supporting liquidity and an oracle derived from DEX and CEX liquidity across several networks, Aave is positioned to be the dominant rETH lending/borrowing liquidity pool on Arbitrum. For reference, there is currently $20.03M of rETH deposits on Aave v3 Ethereum.

For further insights into how rETH is integrated across the ecosystem, please refer to this Rocket Pool community-maintained Defi Opportunities publication.

6. Emission schedule

There is no emission schedule. rETH is only minted when stakers deposit ETH into Rocket Pool for staking.

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

rETH is minted when stakers deposit ETH into the Rocket Pool deposit pool, and rETH is burnt when stakers withdraw their ETH.

  • The Rocket Pool contracts do not have permissions that grant administrators mint/burn capabilities

8. Market data (Market Cap, 24h Volume, Volatility, Exchanges, Maturity)

Arbitrum:

Further information here: Rocket Pool Explorer and Dune

9. Social channels data (Size of communities, activity on Github)

10. Contracts date of deployments, number of transactions, number of holders for tokens

The below applies to just rETH on Arbitrum:

  • Date of deployment: Nov 19th 2021
  • Number of transactions: 69,830
  • Number of holders for token: 11,761 (liquidity pools are recorded as 1 address)

Technical Specifications

A comprehensive technical analysis has been conducted by the Maker DAO technical team here is their report:

Security Considerations

RocketPool smart contracts have been independently audited by three audit firms:

There is currently an active bug bounty program on Immunefi:

Risk Analysis

A comprehensive risk analysis has been conducted by the Maker DAO risk team here is their report:

Risk Parameters

While we await input from the risk providers, Llama has prepared the following risk parameters to start the conversation.

Parameter Value
Isolation Mode No
Borrowable Yes
Collateral Enabled Yes
Supply Cap 325 units
Borrow Cap 85 units
LTV 67.00%
LT 74.00%
Liquidation Bonus 7.50%
Liquidation Protocol Fee 10.00%
Reserve Factor 15.00%
Variable Base 0.00%
Variable Slope 1 7.00%
Variable Slope 2 300.00%
Uoptimal 45.00%
Stable Borrowing Disabled
Stable Slope 1 13.00%
Stable Slope 2 300.00%
Base Stable Rate Offset 3.00%
Stable Rate Excess Offset 5.00%
Optimal Stable to Total Debt Ratio 20.00%
Flahloanable No
Siloed Borrowing No
Borrowed in Isolation No

The interest rate parameters mirror those of rETH on Ethereum, promoting consistency across the various Aave v3 deployments. An ETH nominated eMode is deployed on Arbitrum, but as rETH is not yet included in the v3 Ethereum eMode it has been excluded from this proposal.

12 Likes
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Overview

Chaos Labs supports listing rETH on Aave V3 Arbitrum as part of an overarching strategy to increase the offering of AAVE protocol with more LSD assets. We have relied on the recent analysis to onboard rETH on Aave V3 on Ethereum and considered the Arbitrum on-chain liquidity to make the below recommendations.

Liquidity and Market Cap

When analyzing market cap and trading volumes of assets for listing, we look at data from the past 180 days. The average market cap of rETH over the past 180 days was $307M, and the average daily trading volume was $3.9M (CeFi & DeFi). We find the market cap adequate and the trading volumes reasonable as long as they are considered when setting appropriate supply and borrow caps.

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Liquidation Threshold

Considering the volatility and the correlation of rETH to ETH, we recommend a LT of 74% to match the rETH parameters on Ethereum V3.

We support listing rETH as borrowable under reasonable caps, as we do not observe a significant risk to the protocol by allowing to borrow rETH, as long as it is bound by a well-defined cap.

rETH / ETH Volatility

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On-Chain Liquidity

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Supply Cap, Borrow Cap, and Liquidation Bonus

Following Chaos Labs’ approach to initial supply caps, as introduced with the Metis deployment recommendations, we propose setting the Supply Cap at 2x the liquidity available under the Liquidation Penalty price impact.

Given the concentrated liquidity of rETH, we recommend a 7.5% Liquidation Bonus and a derived supply cap of 1000 rETH.

Based on our observations, the utilization rate for LSDs has been very low. Therefore, we have taken a conservative approach toward LSDs borrow caps of 150 rETH. However, if there is a significant increase in demand and utilization, we will reassess the caps according to the utilization pattern.

Oracle

Given that the rETH Oracle price on Ethereum quotes the asset price from the smart contract, we believe the Arbitrum Oracle should be similar as it mainly reflects the perceived counterparty risk, as explained in Chaos Labs’ approach to analyzing LSD assets. This approach will also better facilitate the future inclusion of rETH in E-Mode.

Recommendations

We recommend aligning the interest rate parameters with those of rETH on Ethereum to ensure consistency across different Aave v3 deployments. It is worth noting that rETH is not yet included in the V3 Ethereum eMode, and therefore it has been excluded from this proposal.

Following the above analysis, we recommend listing rETH with the following parameter settings:

Parameter Value
Isolation Mode No
Borrowable Yes
Collateral Enabled Yes
Supply Cap (rETH) 1,000
Borrow Cap (rETH) 150
Debt Ceiling N/A
LTV 67.00%
LT 74.00%
Liquidation Bonus 7.50%
Liquidation Protocol Fee 10.00%
Variable Base 0.0%
Variable Slope1 7.00%
Variable Slope2 300.00%
Uoptimal 45.00%
Reserve Factor 15.00%
Stable Borrowing Disabled
Stable Slope1 13.00%
Stable Slope2 300.00%
Base Stable Rate Offset 3.00%
Stable Rate Excess Offset 5.00%
Optimal Stable To Total Debt Ratio 20.00%
Flahloanable No
Siloed Borrowing No
Borrowed in Isolation No
3 Likes
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The demand for LSTs to act as supply on L2 networks is huge given withdrawals opening and L1 gas fees pricing out many user. I believe Aave would be well positioned to capture this flow so would be in full support of this.

1 Like
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Fully agree, would love to see rETH onboarded as collateral on Arbitrum, and would be great if Optimism could be next (rETH liquidty is quite deep over there).

5

Hi @3.1415r,

As soon as Chainlink provides an oracle for rETH on Optimism, an ARFC will be presented by Llama to the community for consideration.

1 Like
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Gauntlet recommendations for rETH on Arbitrum

The following table contains Gauntlet’s recommended initial parameters for rETH on Arbitrum. We recommend rETH be initialized with e-mode enabled to allow rETH to grow most naturally and to capture its intended usage in the early stages. We discuss in more detail below.

Risk Parameter Gauntlet Rec
Isolation Mode NO
Enable Borrow YES
Enable Collateral YES
Borrowable in Isolation NO
Loan To Value 67%
Liquidation Threshold 74%
Liquidation Bonus 7.5%
Reserve Factor 15%
Liquidation Protocol Fee 10%
Borrow Cap 85
Supply Cap 325
Debt Ceiling N/A
Base 0%
Slope1 7%
Uoptimal 45%
Slope2 300%

rETH is Rocket Pool’s liquid staking derivative. It does not rebase, instead gradually increasing in value relative to ETH. On Ethereum mainnet, users can mint and burn rETH in exchange for ETH via the Rocket Pool smart contract. However, rETH on Arbitrum needs to be bridged back to mainnet in order to be arbitraged against the smart contract. This creates the possibility of temporary divergences between the rETH price on Arbitrum and the underlying ETH contained in the pool.

rETH has previously been listed on Aave V3 Ethereum. For the initial rETH listing on Arbitrum, we follow many of the same parameters that it has on Ethereum.

We recommend the following parameters for rETH on Aave V3 Arbitrum:

Isolation Mode - No
Borrowable - Yes
Collateral Enabled - Yes
E-mode - Though e-mode is not covered in the proposal, we recommend adding rETH to the ETH-correlated category e-mode, as we anticipate this will be the primary usage of rETH collateral. From a risk perspective, enabling e-mode from the onset vs at a later time is preferred in order to allow rETH to grow most naturally and to capture its intended usage in the early stages. As we’ve discussed before, e-mode vs non e-mode borrowing exhibit different risk profiles, and potentially raising supply caps before e-mode has been enabled can be tricky.

Supply and Borrow Caps

Supply Cap (in tokens) - 325 / Borrow Cap (in tokens) - 85
Given that emode is not enabled in the original proposal, our supply and borrow caps are set in accordance with our borrow and supply cap methodology, which is bounded by the 25% DEX liquidity. However, as we have stated above, we recommend rETH to be initialized with e-mode.

Conditioned on rETH pricing being appropriately configured with the CSPA, as well as the majority of user debt to be in ETH, the supply cap can be raised to 50% of the circulating supply, as described in our LST methodology.

LTV - 67% / LT - 74%

Gauntlet recommends the same rETH LTV and LT on Arbitrum as on Ethereum.

Liquidation Bonus - 7.5%

Gauntlet recommends the same rETH Liquidation Bonus on Arbitrum as on Ethereum.

Liquidation Protocol Fee - 10%

Gauntlet recommends an LPF of 10%, matching the LPF for rETH on Ethereum.

Reserve Factor - 15%

Gauntlet recommends a reserve factor of 15% for rETH on Arbitrum, matching the RF on Ethereum.

IR Curves

We recommend the same IR curves used for rETH on Ethereum:

Parameter Recommendation
Base Variable Borrow Rate 0%
Variable Rate Slope 1 7%
Optimal Usage Ratio 45%
Variable Rate Slope 2 300%
1 Like
7

The ACI is entirely in favor of this proposal.

Approve

8

Hi Everyone,

@Llamaxyz will move this proposal forward to Snapshot. Our preference is to user @ChaosLabs Supply and Borrow caps which are most aligned with the original post. We also seek to avoid what happened with wstETH listing on Polygon.

Do let us know if both Supply and Borrow Cap options should be presented on Snapshot.

We will publish the Snapshot to commence voting on Monday 15th March 2023.

1 Like
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Following past instances where risk providers have provided differing recommendations, we suggest adopting the more cautious approach for the launch. Considering that Chaos and Gauntlet have put forth identical proposals for the remaining risk parameters, we propose moving forward with the following option:

Risk Parameter Rec
Isolation Mode NO
Enable Borrow YES
Enable Collateral YES
Borrowable in Isolation NO
Loan To Value 67%
Liquidation Threshold 74%
Liquidation Bonus 7.5%
Reserve Factor 15%
Liquidation Protocol Fee 10%
Borrow Cap 85
Supply Cap 325
Debt Ceiling N/A
Base 0%
Slope1 7%
Uoptimal 45%
Slope2 300%
10

Hi @ChaosLabs and @Gauntlet,

We have created this Snapshot vote to start Monday 15th May and run through to Friday 19th May. Please let us know if any of the parameters presented within require adjusting.

https://snapshot.org/#/aave.eth/proposal/0x2ed2fc859ef993e3c2d581513c6b5c11b81971e14fe38a44c9d40e5f8a9fb00c

11

Hi Everyone :wave:

A general update, the payload has been shared with @bgdlabs for peer review on the 24th May.
Pull Request.

Once the peer review process is complete, the AIP will be submitted for the community to vote on.