Overview
Chaos Labs supports listing tETH on Aave’s Prime instance. Below is our analysis and initial risk parameter recommendations.
Treehouse Protocol Overview
Treehouse Protocol aims to become decentralized fixed income infrastructure designed to unify fragmented interest rates across the digital asset landscape. At its core, it introduces two foundational primitives: Treehouse Assets (tAssets) and Decentralized Offered Rates (DOR). These components aim to establish standardized benchmark rates in crypto, similar to how traditional finance relies on treasury yield curves or interbank lending rates like SOFR and LIBOR.
The Treehouse Protocol addresses a fundamental issue in DeFi today: on-chain interest rate fragmentation. Without a unified reference rate, the same asset—such as ETH—can exhibit drastically different lending or borrowing rates across protocols like Aave, Spark, or Compound.
tAssets, like tETH, are expected to play a critical role in addressing this by aligning interest rates with Ethereum’s staking yield, which Treehouse positions as a proxy for ETH’s “risk-free” rate. Meanwhile, DOR serves as a decentralized consensus mechanism for setting benchmark rates across various timeframes and risk levels, providing the infrastructure necessary for advanced financial instruments such as interest rate swaps, floating rate notes, and more.
Together, these tools aim to democratize access to fixed income arbitrage strategies, reduce inefficiencies in the interest rate pricing of the same debt asset across different markets, and lay the groundwork for a mature on-chain debt capital market.
tETH Technical Architecture
tETH is a yield-bearing LST and the first implementation of a tAsset, designed to unify Ethereum’s fragmented interest rate landscape through an automated leveraged staking strategy.
It aims to systematically capture the spread between ETH borrowing rates and Ethereum staking yields, effectively approximating Ethereum’s “risk-free rate” while delivering yields that exceed those of native LSTs like wstETH.
Strategy Mechanics
Technically, tETH achieves this by leveraging recursive staking strategies across lending protocols like Aave and Spark. Here’s a simplified breakdown of the process:
- Borrow ETH at a lower rate on platforms like Aave or Spark.
- Stake the borrowed ETH into wstETH via Lido to earn staking yield.
- Deposit the LST back into Aave or Spark to gain leverage.
- Repeat steps 1–3 until the position reaches a target LTV ratio.
- Continuously monitor and adjust the positions to ensure the staking yield consistently exceeds the borrowing cost, maintaining a positive carry
This rehypothecation loop continues until the marginal arbitrage opportunity is eliminated or risk parameters are met. In doing so, tETH leverages the recursive difference between borrowing costs and staking yield to extract additional return.
This strategy resembles a fixed income arbitrage play: borrow cheap (ETH lending rates), lend high (staking yields), and pocket the spread. As more capital engages in this arbitrage play—whether via tETH, other protocols like Fluid Lite, or through individual users manually deploying similar strategies—the system naturally pushes borrowing rates upward and staking yields downward, thereby closing the arbitrage window and aligning rates across the ecosystem.
tETH Leveraged Staking Strategy Visualized
Sources of Yield for tETH Holders
The yield generated by tETH combines staking rewards from LSTs with additional returns from interest rate arbitrage.
- Base Yield (LST Rewards): tETH is backed by wstETH, which generate Ethereum staking rewards.
- Market Efficiency Yield (MEY): The yield generated from the spread between staking rewards on wstETH and borrowing rates of ETH in lending protocols.
Deployed Strategies
The Treehouse Protocol manages capital across four active strategy contracts, each deployed to interact with specific lending protocols. These contracts are registered in the StrategyStorage contract, where addresses can be queried using the getStrategyAddress(id) function. The StrategyStorage contract also tracks the actions each strategy can perform (e.g., supply, borrow) and the token types it interacts with, such as ETH and wstETH.
So far, the protocol has integrated with Aave (Core & Prime), Spark, and Gearbox, with each strategy designed to either deploy leveraged positions or supply capital passively.
| Strategy ID |
Address |
Protocol |
Type |
Position |
Health Factor |
| 0 |
0x60d…943 |
Aave Core |
Leveraged |
wstETH/ETH |
1.19 |
| 1 |
0x5aE…938 |
Spark |
Leveraged |
wstETH/ETH |
1.19 |
| 2 |
0xB27…E98 |
Aave Prime |
Supply Only |
wstETH |
- |
| 3 |
0xbfd….a9d |
Gearbox |
Supply Only |
wstETH |
- |
TVL Allocation Across Strategies
The distribution of TVL across these four strategies reflects a balanced risk posture and diversified protocol exposure:
- 41.2% of the TVL is currently held as idle wstETH within strategy contracts and has not been actively deployed into any lending protocol. This passive allocation provides flexibility for future reallocation and buffers for redemptions or deleveraging events.
- 21.6% of the TVL is allocated to leveraged wstETH/ETH positions, deployed via Aave Core and Spark. These strategies are actively used to capture the spread between staking yields and borrowing costs.
- The remaining 37.2% of the TVL is deployed as supply-only positions, with deposits made to Aave Prime and Gearbox. These positions are not leveraged and are used for base lending yields and to farm additional protocol incentives.
Mint
Users can mint tETH by depositing ETH, WETH, stETH, or wstETH. The protocol’s Router contract handles each asset type accordingly—for example, if a user deposits ETH, it is first staked via Lido to receive stETH, then wrapped into wstETH. Alternatively, users can deposit wstETH directly to bypass these conversion steps. Once all deposits are standardized into wstETH, tETH is minted and sent to the user’s wallet based on the current tETH:wstETH exchange rate.
After minting, the newly deposited wstETH is sent to the Vault contract. Depending on prevailing market conditions and profitability, the wstETH may either be deployed as collateral in one of the whitelisted lending protocols to borrow more ETH (which is then restaked and looped) or held unlevered in the vault. The entire minting process is atomic and incurs no fees.
Redemption
tETH holders can redeem their tokens through one of three pathways, depending on the size and urgency of their redemption.
1. Normal Redemption (7-Day Delay, 5bps Fee)
For redemptions above the 200 tETH, users can submit a normal redemption request directly through the Treehouse dApp. In this case:
- tETH is sent to the Redemption contract upon request.
- Underlying assets are gradually unwound and repaid across lending strategies.
- The process includes unwrapping wstETH, unstaking stETH, and repaying ETH loans, which may take up to 7 days depending on the constraints of the underlying LST protocol (i.e, Lido).
- Once the process is complete, the user can claim their corresponding wstETH based on the minimum observed exchange rates during the redemption window, while the redeemed tETH is sent to the burn contract.
- A 0.05% (5bps) redemption fee is applied to offset costs incurred by the protocol.
2. Fast Redemption (Instant, 2% Fee)
For users who require immediate access to their assets, Fast Redemption is available. However, it is limited to Vault liquidity at the time. This option allows users to redeem tETH for wstETH instantly, drawn directly from the Vault’s holdings (currently up to 2,325 wstETH). A flat 2% fee is applied to fast redemptions, which is directed to the Treehouse Treasury to ensure long-term liquidity support.
3. Liquidity Pool (Instant, 0% Protocol Fee, Subject to Slippage and DEX Fees)
Users can instantly swap their tETH for wstETH via the tETH/wstETH Curve Liquidity Pool. This on-chain swap is seamless and incurs no protocol-imposed fees, though it is still subject to DEX trading fees and slippage, which may vary based on trade size and pool liquidity.
This Curve pool is supported by Treehouse’s Protocol-Owned Pegged Protection (PPP) mechanism. When tETH trades below its intrinsic value, the protocol steps in to buy tETH from the open market and redeem it, helping restore parity while capturing profit.
In addition to the PPP-backed Curve pool, users may also choose to swap tETH to wstETH via other liquidity pools on Curve and Balancer, depending on availability and pricing at the time of redemption.
Risk Overview and Mitigation Measures
The tETH system introduces multiple layers of complexity through its leveraged staking architecture and integration with external DeFi protocols. Below, we outline key risks and the mechanisms employed to mitigate them:
1. tETH Depeg Risk
Description: A deviation in the tETH market price from its intrinsic value (backing in wstETH) could impact user confidence.
Impact: Depending on the oracle design, this may lead to liquidation risks in lending platforms and systemic volatility in protocols that accept tETH as collateral.
Mitigations:
- Protocol-Owned Peg Protection (PPP): When tETH trades below its NAV, the Treehouse Insurance Fund programmatically purchases tETH from the open market and redeems it to capture arbitrage profit and help restore the peg. The size and address of the Treehouse Insurance Fund have not been publicly disclosed.
- Emergency Liquidity Retention: A portion of capital remains unlevered in the Vault, enabling rapid redemption without needing to unwind all strategy positions.
- Oracle Design: By pricing the asset through a combination of the exchange rate and the Chainlink ETH/USD feed, the oracle shields the system from short-term market price fluctuations.
2. wstETH Depeg Risk
Description: While a depeg between wstETH and ETH would reduce collateral value and trigger liquidations across leveraged positions, all of the whitelisted lending protocols that are being utilized for wstETH yield strategies, price wstETH based on the staking exchange rate and ETH/USD feed, shielding the system from short-term market price deviations.
However, Treehouse employs an automated de-pegging contingency plan that activates if the wstETH/ETH market price deviates by more than 2% for a period exceeding 24 hours. The protocol continuously monitors the ETH-to-LST ratio on a per-block basis to distinguish between sustained depeg events and short-lived price anomalies. If the threshold is breached, the system initiates an automatic unwind of leveraged positions. This involves swapping LST holdings back to ETH via on-chain liquidity pools, using the recovered ETH to repay outstanding loans on lending platforms. Once debts are cleared, any remaining LST collateral is withdrawn from the lending protocols.
However, while Treehouse does not specify whether the wstETH internal exchange rate or the market price gets taken into consideration for the triggering of the unwinding, this process could lead the wstETH to be swapped to WETH during a temporary price deviation, realizing avoidable temporary losses.
Impact: This could lead to a negative price change to the tETH/wstETH exchange rate, impacting tETH price and causing liquidations.
Mitigation:
- Reduced Exposure to Leverage: Only 20% of the total tETH backing is currently being utilized within lending strategies, reducing the expected loss during an untimely unwind.
3. Donation Attack
Description: Malicious users could inflate the Vault’s perceived holdings by sending extra tokens, manipulating the accounting used for exchange rate updates.
Impact: Incorrect minting or burning of tETH, leading to unfair dilution or value transfer among holders.
Mitigation:
- Exchange Rate Update Guardrails: The
doAccounting() function computes NAV deltas between lastNav and currentNav using actual balances and strategy-held tokens. If the positive PnL exceeds a pre-set deviation threshold, the update reverts, neutralizing the effect of donations on exchange rate manipulation.
- Correlated Assets Price Oracle: Through the use of a Capped Oracle feed for tETH on Aave, we can minimize the risk induced by exchange rate manipulation.
4. ETH Borrowing Rate > Staking Yield
Description: If borrowing costs on lending protocols exceed staking yields, the strategy could operate at a negative carry, reducing returns or even triggering losses.
Impact: Sustained yield erosion, net losses for tETH holders, and possible deleveraging spirals during volatile periods.
Mitigation:
- Dynamic Deleveraging: The protocol continuously tracks borrow rates. If profitability thresholds are breached, strategies deleverage to minimize exposure and preserve net yield.
- Short-Term Loss Coverage: The protocol claims that short-term losses arising from negative carry (i.e., borrowing rates exceeding staking yields) may be covered by the Treehouse Insurance Fund. However, the size and address of this fund have not been publicly disclosed.
5. Lending Protocol Default Risk
Description: A default, insolvency, or smart contract exploit within integrated protocols could cause capital losses.
Impact: Partial or total loss of funds allocated to affected protocols, and net losses for tETH holders, depending on the severity of the exploit and the extent of collateral recovery. Additionally, lending protocols that accept tETH as collateral may incur bad debt if collateral values fall rapidly or cannot be recovered.
Mitigation:
- Protocol Diversification: Funds are spread across multiple lending protocols to reduce exposure to any single point of failure. Additionally, with Spark being a whitelisted Aave fork, Gearbox remains the sole Lending market from tETH backing, which doesn’t use battle-tested Aave code.
6. LST Platform Risk (Lido / wstETH)
Description: Lido, as the underlying LST provider, could face validator slashing.
Impact: Reduction in asset backing tETH, leading to potential losses or redemptions below expected NAV.
Mitigation:
- Exposure Analysis: Post-Pectra, slashing penalties are significantly reduced and correlation penalties are better modeled. Refer to Chaos Labs’ separate analysis on Lido validator risk. The impact is assessed to be minimal for node operator originated slashing events.
Market Capitalization
tETH is an Ethereum mainnet-native token, launched in September 2024, and has since demonstrated steady growth in total supply and adoption. As of the latest data, tETH has reached a new all-time high supply of 75,726.8 tETH, backed by 91,128.23 ETH, representing a TVL of approximately $164 million.
While tETH is also available on Arbitrum, cross-chain adoption remains limited at this stage, with only 1,378.7 tETH (1.8% of total supply) bridged to the network.
While the total supply of tETH is still relatively modest, it has shown consistent growth over time.
Liquidity
As of now, tETH maintains approximately $12.3 million in on-chain liquidity across four pools—two on Curve and two on Balancer. Of this, roughly $5.5 million is on the buy-side, representing the depth available for tETH holders looking to exit into stablecoins or ETH with minimal slippage.
Given current market conditions and pool composition, it’s possible to trade up to 1,800 tETH (≈$3.8 million) into wsETH with less than 2% price impact via decentralized exchanges.
In addition to pool liquidity, the tETH Vault contract facilitates Fast Redemption, allowing users to redeem tETH directly for wstETH at a flat 2% fee. Since mid-March, the Vault has consistently held between $5–6 million in wstETH, with current holdings near $5 million (2,341 wstETH), available for immediate redemptions.
Combined, the liquidity pools and Vault provide approximately $8.8 million in effective liquidity for tETH holders to exit their positions within a ~2% impact range. Relative to tETH’s current $164 million TVL, this represents a solid base of accessible, low-slippage liquidity for the asset across on-chain venues.
Oracle/Pricing
The tETH smart contract maintains an internal exchange rate that reflects the supply of tETH relative to its backing in wstETH. This exchange rate is updated based on the total supply of tETH and the total assets under management in the Vault and deployed strategies.
For integration, Chaos Labs recommends creating a new CAPO adaptor for the tETH/WETH exchange rate to ensure secure and accurate pricing of tETH in USD terms. Specifically, we suggest the following oracle composition:
- Initially, the tETH/wstETH exchange rate is retrieved from the tETH contract.
- Then, the wstETH/stETH exchange rate is retrieved from the stETH contract.
- A tETH/WETH CAPO adapter is applied to the aggregate exchange rate implementation and associated yield structure stemming from both tETH/wstETH and wstETH/stETH, thereby allowing for more optimal buffer parameterization of the maxYearlyRatioGrowthPercent as opposed to a dual tETH/wstETH CAPO and wstETH/stETH adapter.
- Finally, the existing ETH/USD feed, which provides a reliable WETH/USD price feed, will be used.
LT, LTV, and Liquidity Bonus
To maintain the Prime instance’s intended purpose and limit the number of asset pairs, we recommend setting conservative LTV and LT parameters for tETH outside of E-Mode. Hence we recommend an LT of 0.10%, an LTV of 0.05%, and a Liquidation Bonus of 7.5%. This configuration aligns with the parameters adopted for other assets in the same instance. Additionally, we recommend listing this asset as non-borrowable.
Supply Cap
To ensure a controlled onboarding of tETH to the Aave protocol, we recommend setting the Supply Cap at 20,000 tETH. This configuration reflects a cautious approach to risk management while still allowing meaningful participation from users looking to supply tETH as collateral.
E-Mode
We propose creating an isolated Liquid E-Mode for tETH and wstETH. In this configuration, tETH would be enabled only as collateral, and wstETH only as borrowable to prevent unintended utilization. In order to allow for a profitable use of the Fast Redemption buffer in the tETH contracts during liquidations, we recommend increasing the Liquidation Bonus of the E-Mode to 2%.
Given the increased liquidation buffer, we similarly recommend slightly more conservative LT and LTV parameters than the ETH-Correlated E-Mode.
CAPO
tETH inherits the base staking yield of wstETH and enhances it through interest rate arbitrage strategies deployed across lending protocols. This results in a dynamic APY that reflects both Ethereum staking rewards and the spread captured from leveraging wstETH in lending markets.
Given the variable nature of ETH borrowing demand, the net APY of tETH relative to wstETH (MEY) can fluctuate. These fluctuations are primarily driven by utilization spikes in lending protocols, which may temporarily compress or amplify the interest rate spread. That said, historical data shows that these variations remain within a confined and reasonably predictable range, with no prolonged periods of extreme divergence.
To ensure a stable and manipulation-resistant price feed for the tETH/wETH CAPO adaptor, we propose a maxYearlyRatioGrowthPercent of 12.04%, capturing expected yield from arbitrage coupled with the underlying wstETH/stETH staking yield, and a MINIMUM_SNAPSHOT_DELAY of 14 days to filter out short-term volatility.
Specification
| Parameter |
Value |
| Asset |
tETH |
| Isolation Mode |
N/A |
| Borrowable |
No |
| Collateral Enabled |
Yes |
| Supply Cap |
20,000 |
| Borrow Cap |
- |
| Debt Ceiling |
- |
| LTV |
0.05% |
| LT |
0.10% |
| Liquidation Penalty |
7.50% |
| Liquidation Protocol Fee |
10% |
| Variable Base |
- |
| Variable Slope1 |
- |
| Variable Slope2 |
- |
| Uoptimal |
- |
| Reserve Factor |
- |
| Stable Borrowing |
Disabled |
| Flashloanable |
Yes |
| Siloed Borrowing |
No |
| Borrowable in Isolation |
No |
| E-Mode Category |
tETH/wstETH |
E-Mode
| Parameter |
Value |
Value |
| Asset |
tETH |
wstETH |
| Collateral |
Yes |
No |
| Borrowable |
No |
Yes |
| Max LTV |
92.00% |
- |
| Liquidation Threshold |
94.00% |
- |
| Liquidation Bonus |
2.00% |
- |
tETH/WETH CAPO
| maxYearlyRatioGrowthPercent |
ratioReferenceTime |
MINIMUM_SNAPSHOT_DELAY |
| 12.04% |
monthly |
14 days |
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this recommendation.
Copyright
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