[ARFC] Add rsETH to Aave V3 Ethereum

Title: [ARFC] Add rsETH to Aave V3 Ethereum

Author: ACI (Aave Chan Initiative)

Date: 2024-05-13


ARFC has been updated with Risk Parameters provided by Chaos Labs.

Summary

Kelp DAO is seeking community support for adding its Liquid Restaking Token, rsETH, to Aave V3 on Ethereum. In addition, rsETH depositors into Aave will accumulate additional Kelp miles and EigenLayer points.

Motivation

KelpDAO (https://www.kelpdao.xyz/restake/) is one of the largest liquid restaking protocol built on top of the Eigen Layer. Restakers on Kelp get access to multiple benefits like restaking rewards, staking rewards and DeFi yields.

Latest stats:

  • USD 800 Mn+ (~270k Eth) TVL
  • 20K+ restakers onboarded
  • Accepts ETHx, stETH, sfrxETH, and Native ETH as collateral
  • Live across mainnet and L2s such as Arbitrum and Polygon zkEVM

KelpDAO has undergone multiple security audits by top tier audit firms including Sigma Prime, Code4rena. More about KelpDAO’s security here: Kelp DAO Audit reports.

The motivation for this proposal is to introduce a new asset class LRT (Liquid restaking tokens) to Aave and add to the diversity of LST/ LRT category.

Restaking Innovation

KelpDAO’s innovation in the restaking ecosystem has been focused on bringing about the following benefits to users and services-

  • Restakers
    • Liqudity for restaked assets (stETH, ETHx, sfrxETH and Native ETH)
    • Access to additional staking rewards
    • Participate in DeFi using rsETH
  • AVSs
    • Bootstrap economic security
    • Lowered incentive spends
  • Operators
    • Higher revenue earning potential
    • Service onboarding and community support
    • Marketing for node delegation

Specification

Risk Parameters have been provided by Risk Service Providers:

Parameter Value
Isolation Mode No
Borrowable Yes
Collateral Enabled Yes
Supply Cap (rsETH) 10,000
Borrow Cap (rsETH) 1,000
Debt Ceiling -
LTV 72.50%
LT 75.00%
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
Flashloanable Yes
Siloed Borrowing No
Borrowed in Isolation No
E-Mode Category ETH Correlated

CAPO recommendations:

maxYearlyRatioGrowthPercent ratioReferenceTime MINIMUM_SNAPSHOT_DELAY
8.75% monthly 7 days

Detailed explanation on Kelp’s technical architecture - Technical Architecture - Kelp

KelpDAO will have its own token $Kelp that will be the main governance token of Kelp protocol. Kelp token holders will be able to participate in governance related matters including Whitelisting/ delisting of Assets, Node operators, AVS’, setting and updating fees for Kelp protocol.

Kelp’s on-chain stats can be viewed on Dune.

Liquidity Pools for rsETH

Following are liquidity stats for rsETH:

  • rsETH has >55 Mn USD liquidity across several DEXs on the mainnet including
  • ~$10 Mn+ average daily trading volume (Last 7 days on 12th May)

Oracles:

rsETH is supported by Chainlink and Redstone oracles. Posted links below to the Oracle contracts:

Chainlink calculated price feed: Kelp DAO: Chainlink Price Oracle | Address 0x78C12ccE8346B936117655Dd3D70a2501Fd3d6e6 | Etherscan

Chainlink market feed: RSETH / ETH | Chainlink

Redstone market feed:

https://app.redstone.finance/tokens#/app/token/rsETH\\ETH

rsETH exchange rate mechanism:

rsETH exchange rate is defined based on the underlying assets and rewards generated by those assets.

Accepted assets include ETH, stETH, ETHx, sfrxETH.

Exchange rate calculation -

A → Total ETH + Staking rewards accumulated from the chain

B → [Amount of ETHx] * [Value of 1 ETHx in ETH]

C → [Amount of sfrxETH] * [Value of 1 sfrxETH in ETH]

D → [Amount of stETH] * [Value of 1 stETH in ETH]

E → Total supply of rsETH

Exchange rate (rsETH / ETH) = [A + B + C + D] / E

Withdrawals and risks

Prior to this ARFC, the only way to exit rsETH was via DEXs.

Nevertheless, KelpDAO users can now unstake rsETH, with an unbonding period of 7 to 8 days, due to Eigenlayer withdrawal period. That also means that any of the LST’s including stETH, ETHx or sfrxETH from Eigenlayer can be unstaked as well.

Proof of Liquidity and Deposit Commitments:

Anyone who deposits rsETH into Aave will accumulate additional Kelp miles and EigenLayer points.

Useful Links:

Disclaimer:

This proposal is powered by Skywards. The Aave Chan Initiative is not directly affiliated with Kelp DAO and did not receive compensation for creation this proposal.

Next Steps

  1. Publication of a standard ARFC, collect community & service providers feedback before escalating proposal to ARFC snapshot stage
  2. If the ARFC snapshot outcome is YAE, publish an AIP vote for final confirmation and enforcement of the proposal

Copyright:

Copyright and related rights waived under CC0

7 Likes

Overview

Chaos Labs supports listing rsETH on Aave V3 Ethereum as part of the community’s strategy to increase the offering of Aave protocol with more LST/LRT assets. Following is our analysis and risk parameter recommendations for the initial listing.

Note: The following analysis is conducted solely from a market risk viewpoint, excluding centralization and third-party risk considerations. If the community aims to reduce exposure to rsETH, adopting more conservative supply and borrow caps should be considered.

Liquidity and Market Cap

The amount of ETH restaked with Kelp DAO has grown rapidly, from 65K ETH in mid-January to 255K ETH today. Note that withdrawals were opened on May 4, 2024, which led to a 10K ETH decrease in TVL.

Untitled - 2024-05-16T171922.488

Currently, users may stake using ETHx, WETH, stETH, or sfrxETH. Rewards are reflected in the price of the token rather than rebasing. Since inception, it has registered $6.67M in average daily volume.

On Ethereum, its liquidity is concentrated on Balancer V2 ($38M TVL, paired with WETH) and Uniswap V3 ($14M TVL, paired with WETH).

rsETH / ETH Volatility

Untitled - 2024-05-16T171925.871

Liquidation Threshold

Considering the volatility and the correlation of rsETH to ETH, we recommend setting the LT to 75%, mirroring weETH on Ethereum V3.

Supply Cap, Borrow Cap, and Liquidation Bonus

Chaos Labs’ approach to initial supply caps is generally proposed through setting the Supply Cap at 2x the liquidity available under the Liquidation Penalty (7.5%) price impact, which leads us to recommend a starting supply cap of 10,000 rsETH.

Based on our observations, the utilization rate for LRTs and LSTs has been low due to additional borrowing costs. Therefore, we have taken a conservative approach and recommend a borrow cap of 1,000 rsETH. However, if there is a significant increase in demand and utilization, perhaps due to external incentives, we will reassess the caps according to the utilization pattern.

IR Curve Parameters

We recommend aligning the interest rate parameters with those of weETH on Ethereum to ensure consistency across similar assets on Aave v3.

E-mode

Given the asset’s overall liquidity and risk profile, namely the recent opening up of withdrawals, we support including rsETH in the ETH-correlated E-mode category.

Recommendations

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

Parameter Value
Isolation Mode No
Borrowable Yes
Collateral Enabled Yes
Supply Cap (rsETH) 10,000
Borrow Cap (rsETH) 1,000
Debt Ceiling -
LTV 72.50%
LT 75.00%
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
Flashloanable Yes
Siloed Borrowing No
Borrowed in Isolation No
E-Mode Category ETH Correlated

CAPO recommendations:

maxYearlyRatioGrowthPercent ratioReferenceTime MINIMUM_SNAPSHOT_DELAY
8.75% monthly 7 days
5 Likes

Before the escalation of this proposal, I would like to request an Oracle evaluation about the rsETH pricing model.

I’m yet to be convinced an Index approach is safe; we currently have large growth and “infinite” demand with weETH, and we thus have the luxury to be conservative with other LRTs even if diversity is appreciated.

3 Likes