ARFC: Add support for LDO on Ethereum v3

Oh hai, I am back. Another One. :point_up:

Proposal: Add support for LDO on Ethereum v3

References:
Project: https://lido.fi/
Whitepaper: lido-dao/README.md at master 路 lidofinance/lido-dao 路 GitHub
Github: Lido 路 GitHub
Documentation: https://docs.lido.fi/
Aragon MiniMe Token Contract: GitHub - aragon/minime: Minime Token
Dune: 鈥嬧Lido
LDO: $2.92 | Lido DAO Token (LDO) Token Tracker | Etherscan
Chainlink LDO/ETH: Chainlink: LDO/ETH Price Feed | Address 0x4e844125952D32AcdF339BE976c98E22F6F318dB | Etherscan
Governance: https://research.lido.fi/
Twitter: https://twitter.com/LidoFinance
Discord: Lido

Summary:

This ARFC presents the community with the opportunity to add LDO to the Ethereum v3 Liquidity Pool.

Motivation

Currently, stETH is listed on Aave v2 and wstETH is listed on the Aave v3 Ethereum liquidity pools. wstETH has also been approved by Aave Governance for being listed on the Optimism and Arbitrum v3 liquidity pools. Lido DAO would like to also propose to include the Lido governance token, LDO.

LDO would be the first Ethereum liquid staking protocol governance token to be listed on Aave. Aave would benefit from being the first major lending market to list LDO. Users will be able to express various trading views on LDO鈥檚 price outlook in the lead up to Shanghai.

MiniMe Contract:

Oracles:

If an LDO/USD oracle is required for v3, then a Chainlink Synchronicity Price Adapter could be used. The below details the two relevant Chainlink oracles:

LDO/ETH: 0x4e844125952D32AcdF339BE976c98E22F6F318dB

ETH/USD: 0x5f4eC3Df9cbd43714FE2740f5E3616155c5b8419

Specification

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

Jacob is a contributor to the Lido DAO.

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

Lido is a suite of software protocols that facilitates liquid staking across multiple blockchains. The Lido DAO is a decentralised autonomous organisation. The LDO token is used to vote on the use of the DAO treasury associated with the protocols, research and development, and incentive programs.

The Lido DAO is an Aragon organization. The LDO token was created using an Aragon Minime contract. Since Aragon provides a full end-to-end framework to build DAOs, Lido DAO uses its standard tools.

鈥嬧婰DO Token Ethereum Address: 0x5a98fcbea516cf06857215779fd812ca3bef1b32

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

LDO is a Top 50 token by market cap, currently ranked 36th by Coingecko. Lido Protocol is the largest minter of liquid staked ETH tokens with 4,917,554 ETH staked.

Making LDO available on Aave v3 would make Aave V3 the first major lending market to do so and would benefit from the first mover advantage. Currently, LDO is available?on Euler Finance and no other lending protocols.

  1. 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?

The LDO token was minted on the 17th December 2020 and, the Lido Protocol was launched on 19th December 2020. Within 30 days of launching, 76,600.35 ETH was staked by 1,816 users, worth a total of $93,454,474.41 at the time. At the time of this proposal鈥檚 submission, Etherscan reports that there are 5,013,290.96 ETH staked in Lido Protocol鈥檚 stETH Contract. The Lido on Ethereum smart contract accounts for approximately 29.15% of all of the staked Ether on Ethereum at the time of drafting.

Since launching on Ethereum, Lido Protocols have been deployed to four other networks as shown below. TVL is currently $8,130,077,280 with around 267,527 unique stakers across all 5 networks.

  1. How is LDO currently used?

The LDO is the token used to vote on Lido DAO governance proposals.

LDO is currently listed on Euler in isolation mode with $2.87m in deposits.

  1. Emission schedule

There is no emission schedule.

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

Aragon Minime contracts have a contract owner which controls the various active functions over the LDO token.

Controller Contract: [0xf73a1260d222f447210581DDf212D915c09a3249](https://etherscan.io/address/0xf73a1260d222f447210581DDf212D915c09a3249#code)

The Controller Contract is not a Gnosis Safe and is a Smart Contract address.

For details on how the LDO token can be used within the DeFi ecosystem, please refer to our Protocol Levers documentation. It is worth mentioning, it is possible to Mint and Burn LDO tokens from supply via the Controller Contract and to do so would require a governance vote. The DAO contracts, multisigs used by the DAO can be found in the DAO Contracts section of the Lido DAO documentation.

  1. Market data (Market Cap, 24h Volume, Volatility, Exchanges, Maturity)
  • Market capitalisation: $1,693,245,947
  • 24H volume ~$150M

Decentralized exchange liquidity pools

Balancer

Uniswap

Kyber Network

  1. Social channels data (Size of communities, activity on Github)
  1. Contracts date of deployments, number of transactions, number of holders for tokens

The below applies to just LDO on Ethereum:

2 Likes

Hello @jbeezy and thanks for your proposal.

What鈥檚 the use case for LDO on Aave? as it鈥檚 a 鈥済overnance鈥 token with no other use case I鈥檓 a bit scratching my head on a use case for it.

for example, the ACI is in favor of eventually onboarding RPL as a non-collateral asset as RPL can be borrowed to spin out mini-pools.

outside of these considerations, if governance vibes with the current proposal, the ACI is happy to support this ARFC in the governance process by publishing a snapshot & writing an AIP.

Hey Marc,

Good question. LDO is a governance token for now. We are exploring future V2 use cases as collateral in a staking module to allow anyone to validate the protocol. That is still in development.

We are often asked about additional activities in DeFi by LDO holders, and lending makes a lot of sense from our perspective. Euler already has a small but active isolated market for LDO.

With users of custody platforms, they can interact with defi but cannot participate in on-chain governance. I think this is a partial step to adding more functionality besides buy/sell/hold for that cohort.

Maybe even eventually allow aLDO to vote in governance :man_shrugging:

1 Like

Gauntlet Risk Analysis

Thanks, @jbeezy, for this proposal.

Gauntlet has provided a detailed risk analysis on the Shanghai upgrade below, which is incorporated in this set of recommendations for LDO.

LDO token has a unique profile of being heavily affected by the Shanghai upgrade. Gauntlet has provided analysis on the Shanghai upgrade before here. In particular, we have observed how LDO returns relative to ETH since the start of the year have been buoyed by positive sentiment heading into the Shanghai upgrade. Potential unforeseen mishaps with the stETH redemption process, while unlikely, could thus negatively affect public perception for LDO token, triggering a sell-off and compromising the quality of LDO as collateral.

The community can assess these idiosyncratic risks to decide when / whether to list LDO. Below are the parameters Gauntlet recommends if the community wishes to list LDO.

Recommendation

Supply cap - 6M. We recommend our conservative caps out of an abundance of caution, given the unquantifiable risk presented above.

Borrow cap - 6M. We also recommend our conservative caps here.

Debt Ceiling - $7.5M. Initializing the debt ceiling with 50% of the dollar value of the supply cap will help protect against tail events while providing sufficient room to explore LDO usage.

Isolation Mode - yes

Borrowable - yes

LT - 57%. LDO has a 160% annualized volatility, so 57% accounts for this higher volatility while giving room to explore the usage of LDO collateral.

LTV - 52%

LB - 10900 (9%). Gauntlet recommends 9% LB to properly incentivize liquidations due to the higher volatility of LDO

RF - 20%

LPF - 10%

Rates

Base - 0%

Slope 1 - 7%

Slope 2 - 300%

Stable - 13%

Uopt = 45%

2 Likes

Thanks @Pauljlei for sharing Gauntlet鈥檚 analysis.

Gauntlet鈥檚 and Chaos鈥 recommendations differ in a few areas:

  1. Chaos鈥 recommendations for LT, LTV and Borrow Caps are more conservative.
  2. Gauntlet鈥檚 recommendations for LB and and Debt Ceiling are more conservative.

Following our previous joint proposals for parameter configurations of new assets alongside the profile of LDO as also explained below, if the community wishes to list the asset at this time, we recommend adopting the more conservative parameters at launch as they can be optimized and updated later, utilizing our simulation platforms.

Recommended Parameters:

Risk Parameter Value
Isolation Mode YES
Enable Borrow YES
Enable Collateral YES
Loan To Value 40.00%
Liquidation Threshold 50.00%
Liquidation Bonus 9%
Reserve Factor 20.00%
Liquidation Protocol Fee 10.00%
Borrow Cap 3,000,000
Supply Cap 6,000,000
Debt Ceiling $7,500,000
Variable Base 0.00%
Variable Slope1 7.00%
Variable Slope2 300.00%
Uoptimal 45.00%

Chaos Labs Analysis

Overview

Chaos Labs supports listing LDO in Isolation Mode as part of an overarching strategy to increase the offering of AAVE protocol with more volatile assets. As a low market cap asset, LDO is susceptible to price manipulation, so listing it with an appropriate debt ceiling is crucial to prevent a profitable pump attack.

Liquidity and Market Cap

When analyzing market cap and trading volumes of assets for listing, we are looking at the past 180 days, especially in light of the recent market turbulence. The average market cap of LDO over the past 180 days was $1.3B, and the average daily trading volume was $90M (CeFi & DeFi). The market cap is relatively low but reasonable for listing in isolation mode. While the trading volumes are not high, they are reasonable for the asset鈥檚 market cap and can be addressed by the supply caps, debt ceiling, and borrow caps.

Screen Shot 2023-03-06 at 16.15.21

Liquidation Threshold

Analyzing LDO price volatility over the past year, we see that over the past year, we observed daily annualized volatility of 141% and 30-day annualized volatility of 121%. Considering the high volatility of LDO, we suggest an initial LT of 50%.

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

Debt Ceiling

Following Chaos Labs鈥 Isolation Mode Methodology, which we will publish shortly, we recommend an initial debt ceiling of $10M. Under the methodology for Isolation Mode, we consider two levels of probabilities for extreme price drops - Medium-High and High. We estimate the probability of an extreme price drop for LDO as Medium-High. Given this debt ceiling, we do not identify a profitable attack vector under the current liquidity levels.

Supply Cap, Borrow Cap, and Liquidation Bonus

Following Chaos Labs鈥 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, a conservative cap for the initial launch of the asset.

The recommended 7.5% Liquidation Bonus yields a supply cap of 5.5M LDO and a borrow cap of 3M LDO.

LDO_liquidity_5_3_75p

Lido Exposure

Since AAVE is exposed significantly to Lido through stETH, LDO listing increases the 3rd party exposure to Lido. However, given that the suggested LDO debt ceiling is less than 2% of the stETH collateral already on AAVE, we do not view this as a risk.

Lido DAO Governance Considerations

Lido DAO has governance power that can significantly impact stETH. Given the considerable exposure of AAVE to stETH, it is important to ensure the usage of LDO on Aave will not negatively impact stETH. The recommended borrow cap of 3M is unlikely to affect the Lido governance process. Therefore, from this perspective, we do not see a risk in allowing this borrow cap.

Having said that, any amount of LDO can impact Lido DAO votes, so if the community wishes to take an extreme risk-off approach here, borrowing can be disabled altogether.

Recommendations

We support the recommendations in the post for the Reserve Factor, Liquidation Protocol Fee, and Interest Rate curves.

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

Isolation Mode Enable Borrow Enable Collateral LTV LT Liquidation Bonus Reserve Factor LPF Supply Cap Borrow Cap Debt Ceiling
Yes Yes Yes 40% 50% 7.5% 20% 0.1 5.5M 3M $10M
1 Like

@ChaosLabs @Pauljlei Thank you for the analysis and recommendations. I agree the risk of additional exposure is something for Aave to consider. Will of course defer to the community on LDO considerations.

2 Likes

Hi Everyone :wave:

To move this proposal forward, the following options are to be presented for Snapshot starting Monday 27th March 2023.

YAE
NAE
ABSTAIN

In Summary, the below best represents the risk parameters being considered:

Parameter Value
Isolation Mode Yes
Borrowable Yes
Collateral Enabled Yes
Supply Cap (LDO) 6,000,000
Borrow Cap (LDO) 3,000,000
Debt Ceiling $7,500,000
LTV 40.00%
LT 50.00%
Liquidation Bonus 9.00%
Liquidation Protocol Fee 10.00%
Variable Base 0.00%
Variable Slope1 7.00%
Variable Slope2 300.00%
Uoptimal 45.00%
Reserve Factor 20.00%
Stable Borrowing Disabled

Hi Everyone :wave:

With the Snapshot vote nearly finished and an overwhelming YAE vote. This proposal has been scheduled into Llama engineering work stream.

https://snapshot.org/#/aave.eth/proposal/0x953f0edc544fe50e68a0aa19d31542d15458bc3394478a31a294f748198fa906

We will target submitting the AIP in the near future.

1 Like