[ARFC] Onboard weETH to Aave v3 on Ethereum

Governance
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Proposal updated to include Risk team feedback

Title: [ARFC] Onboarding of weETH to Aave v3 on Ethereum

Author: Ether.fi & @ACI ( Aave Chan Initiative)

Date: 2024-02-27

Summary

The current ARFC seeks to add Ether.fi Liquid Restaking Token weETH to Aave V3 Ethereum, after the successful TEMP CHECK and TEMP CHECK Snapshot.

The intention behind this initiative is to enhance the diversity of assets on Aave and bolster liquidity within the ecosystem.

Motivation

eETH is an LRT that allows users to stake their ETH, accrue staking rewards, and receive additional rewards through native restaking on EigenLayer. As of February 3rd, approximately 290,310 ETH ($670M) in TVL has been deposited into the ether.fi 1 protocol, and XX has been natively restaked in EigenLayer.

Ether.fi stands as the pioneering decentralized and non-custodial delegated staking protocol featuring an LRT (eETH). A notable feature of ether.fi is the control it provides stakers over their keys. The team behind the protocol is guided by the following principles:

  1. Decentralization is the foremost objective. Ether.fi is unwavering in its commitment to maintain the protocol’s non-custodial and decentralized nature, ensuring that stakers always have control over their ETH.
  2. Ether.fi operates as a legitimate business with a sustainable revenue model, with the team dedicated to its long-term success. There is no place for deceptive or unsustainable financial practices.
  3. Ether.fi is committed to always acting in the best interest of the Ethereum community. In the event of any missteps, the team at ether.fi will take responsibility and swiftly rectify the situation.

Risks:

ether.fi’s LRT eETH is 100% redeemable. Users who deposit ETH into the protocol can withdraw their stake at any time. The holdings are publicly auditable on-chain and the protocol retains healthy reserves to offset any losses.

Proof of Liquidity and Deposit Commitments

Anyone who deposits weETH into Aave will accumulate ether.fi and EigenLayer points to be used for future incentives.

Users are given eETH on a 1:1 basis with a minimum deposit of 0.001 ETH.

ether.fi is also the first LSP to natively restake on EigenLayer — a move that helps improve network efficiency and provides stakers with additional rewards for their network contributions. ether.fi has also launched a series of partnerships with DeFi protocols to incentivize users and drive liquidity (weETH) to various platforms.

Specification

weETH: 0xCd5fE23C85820F7B72D0926FC9b05b43E359b7ee

Oracle: weETH will use a exchange rate oracle developed by BGD.

Risk Parameters

Risk Parameter weETH
Isolation Mode NO
Enable Borrow YES
Borrowable in Isolation NO
Enable Collateral YES
Emode Category ETH-CORRELATED
Loan To Value 72.5%
Liquidation Threshold 75%
Liquidation Bonus 7.5%
Variable Base 0.0%
Variable Slope1 7.00%
Variable Slope2 300.00%
Uoptimal 45.00%
Reserve Factor 20%
Liquidation Protocol Fee 10%
Supply Cap 8000
Borrow Cap 800
Debt Ceiling 0

Useful Links

Ether.fi

TEMP CHECK

TEMP CHECK Snapshot

Disclaimer

This proposal is powered by Skywards. The Aave Chan Initiative is not directly affiliated with Ether.fi and did not receive compensation for creation this proposal. The co-author is a team member Ether.fi

Next Steps

  1. If consensus is reached on this [ARFC], escalate this proposal to the Snapshot stage.
  2. If the ARFC snapshot outcome is YAE, publish an AIP vote for final confirmation and enforcement of the proposal
  3. Copyright: Copyright and related rights waived via CC0.
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Overview

Chaos Labs supports listing weETH on Aave V3 Ethereum as part of the community 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 weETH, adopting more conservative supply and borrow caps should be considered.

Liquidity and Market Cap

The launch of eETH withdrawals, or the native “liquidity pool,” occurred at the end of December 2023, indicating the relative freshness of the asset from a risk perspective. Since then, alongside a speculative point-based incentive structure, EtherFi’s TVL has skyrocketed exponentially, reaching $1.6 billion, while weETH has averaged $5.3 million in daily volume. This component underscores the necessity for a more conservative listing approach, as the pursuit of rapid, speculatively incentivized growth can potentially precipitate substantial rapid liquidity drawdowns in the future.

weETH / ETH Volatility

Liquidation Threshold

Considering the volatility and the correlation of weETH to ETH, we recommend setting the LT to 75%. This mirrors the other LSTs on Ethereum V3, albeit with a slight adjustment to account for the smaller liquidity and the asset’s relative novelty. Consequently, there might be slightly more variance expected in the future.

Supply Cap, Borrow Cap, and Liquidation Bonus

While Chaos Labs’ approach to initial supply caps is generally proposed through setting the Supply Cap at 2x the liquidity available under the Liquidation Penalty price impact, given the minimal weETH historical data, we initially recommend a 1x value. Although on-chain liquidity could allow for higher caps, our preference is to set the caps conservatively to observe user behavior and demand before optimizing the caps. Should demand scale, we will reassess and parameterize accordingly.

Given the current DEX liquidity profile of weETH, we recommend a 7.5% Liquidation Bonus and a supply cap of 8000 weETH.

Based on our observations, the utilization rate for LSTs has been low due to obvious additional borrowing costs. Therefore, we have taken a conservative approach toward LST/LRTs borrow caps of 800 weETH. 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 cbETH and rETH on Ethereum to ensure consistency across similar assets on Aave v3.

E-mode

Given the asset’s overall liquidity and risk profile, we support including weETH in the ETH-correlated E-mode category. The EtherFi protocol currently boasts a 12.7k ETH withdrawal buffer in the native liquidity pool, and weETH can always be redeemed for the underlying ETH depending on the user’s involvement within the protocol. As mentioned above, the relative distribution of debt collateralized by weETH will motivate our decision to increase caps in the future, assuming ample demand and relative liquidity exist. Given the relative conservatism outside of E-mode and external speculative elements and rewards within the LRT ecosystem, we naturally expect the majority of weETH collateral to be utilized to borrow ETH and/or explicitly loop. In such cases, the contingency on DEX liquidity is mitigated due to the lack of liquidations within the mode, thereby opening up to greater increases in the future.

Recommendations

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

Parameter Value
Isolation Mode No
Borrowable Yes
Collateral Enabled Yes
Supply Cap (weETH) 8000
Borrow Cap (weETH) 800
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:

Given weETH employs buffered withdrawals for its underlying ETH equivalent exchange rate, the weETH/ETH exchange rate/USD will be utilized as the oracle alongside the correlated asset price oracle. We present our recommendations below.

maxYearlyRatioGrowthPercent ratioReferenceTime MINIMUM_SNAPSHOT_DELAY
8.75% monthly 7 days

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By “liquidity available under the Liquidation Penalty price impact”, we mean the maximum amount that can be sold atomically on-chain, such that the slippage on that trade is less than the liquidation penalty, in this case 7.5%. Most of the on-chain liquidity for weETH is on two balancer pools:

Assuming that liquidity doesn’t change significantly, it should suffice to liquidate the entire amount of 8000 weETH:

Based on this liquidity data collected over the limited history of the token - we set the supply cap to 8000 weETH, providing high confidence that any weETH collateral could be liquidated if necessary. The borrow cap is derived from the supply cap - no more than 10% of the supply cap can be borrowed in the lack of a clear use case to borrow this token.

5 Likes
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I see I can safely swap 9500 weETH on balancer for a lot less than the 7.5% liquidation bonus. So 8000 is not the maximum amount that can be sold atomically on chain as you mentioned. why is that? also why 800 borrow cap? thank you for your explanation.

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@ChaosLabs can you provide an update?

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The current proposal has been escalated to ARFC Snapshot.

Vote will start tomorrow. We encourage everyone to participate.

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Following Snapshot monitoring, the current ARFC Snapshot has just ended, reaching both Quorum and YAE as winning option, with 538K votes.

Next step will be the publication of an AIP.

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weETH technical/security analysis


Summary

Given this is the first time an asset with LRT (Liquid Restaking Token) characteristics is listed into Aave, this is a technical analysis of all the smart contracts of the asset and main dependencies.

Disclosure: this is not an exhaustive security review of the asset like the ones done by the Ether.fi team, but an analysis from an Aave technical service provider on different aspects we consider critical to review before a new type of listing. Consequently, same as with any security review, this is not a absolute statement that the asset is flawless, only that in our opinion, we don’t see major problems for its integration with Aave, apart from different trust points.


Analysis

weETH (and its underlying eETH) is technical a Liquid Staking Token similar to stETH, but integrated natively with Eigenlayer, and so its nature of LRT (Liquid Restaking Token).

For the context of this analysis, our focus has been on the following aspects, critical for the correct and secure integration with Aave:

  • Mechanism to update the exchange rate of the asset for the underlying ETH. This is specially important because the asset should be price based on “primary market”, given its thin secondary liquidity and risks associated.
  • Access control (ownerships, admin roles) and nature of the entities involved.
  • Any miscellaneous aspect of the code we can consider of importance.

The following is a summary of the main contracts involved in the chain of dependencies of weETH, including weETH itself.


General points

  • The upgradeability admin of all systems is an OZ Timelock, with 3 days time lock (last changed here) and controlled by a 4-of-7 Gnosis Safe. Roles were granted on constructor to the Gnosis Safe.
  • For proxies, it uses an OZ proxy contract, with beacon pattern, industry standard.

Contracts

The following is a non-exhaustive overview of the main smart contracts involved with weETH


weETH

High-level, weETH is a so-called wrapper for eETH, in order to hide rebasing dynamics and be more compatible with systems like Aave.

  • Proxy with upgradeability by the general timelock.
  • The exchange rate is queried from the Liquidity Pool contract (more later).

eETH

Underlying of weETH.

  • Proxy with upgradeability by the general timelock.
  • eETH is controlled in terms of minting/burning by the Liquidity Pool contract.

Liquidity Pool

Entry point for deposits/withdrawals, in some cases by using the an NFT ownership system, and others for the Membership manager contract.

  • Proxy with upgradeability by the general timelock.
  • A rebase() function injecting rewards can only be called by the Membership Manager contract

Membership manager

Smart contract for deposits into eETH and misc other actions, like some migration features from previous versions or claiming of rewards.

  • Proxy with upgradeability by the general timelock.
  • The Etherfi Admin contract is the one in charge of calling rebase() here, which in turn calls the Liquidity Pool and eETH.

Etherfi Admin

Contract in charge of validators management features and rewards accrual.

  • Proxy with upgradeability by the general timelock.
  • Has the function _handleAccruedRewards(), called by the Timelock to initiate the chain of calls for changes on the exchange rate of eETH. It contains validations on maximum absolute numbers, capping by time and update how much the exchange rate can change on both the positive and negative sides.

Etherfi oracle

Contract receiving information about validators and rewards accrued. It acts as reporting and validation layer for different parts of the system.

  • Proxy with upgradeability by the general timelock.
  • Controlled by non-multisig address, but for our understanding, no critical action can be performed superseding the limitations of the Timelock on other layers.

Miscellaneous

  • The connection with Eigenlayer doesn’t seem to cause any major security concern. With upgradeable systems on both sides, this could change in the future, so should be taken into account by the community.
  • After this analysis, we can say that the team has put effort on both security and decentralisation, including taken immediate measures when requesting on behalf of Aave. We think that given the criticality of the system, the 4-of-7 timelock could be extended, but we believe currently is acceptable.
  • The current architecture is highly layered, both architectural and flow-wise. This is not a problem per-se, just a design approach, but it makes more difficult to reason about the system.
  • The system has multiple audits, with some well-known entities involved, like Zellic or Nethermind. We still recommend to add some extra, given the layered nature of the system.

Conclusion

We think weETH doesn’t have any problem in terms of integration with Aave, and there is no major blocker for listing.

However, the community should be mindful of the upgradeable nature of the system and its relatively complex access control and layers, which means certain level of trust is expected. In addition, the asset is pretty new in the market, but that should be more of a consideration for risk contributors.

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@bgdlabs thanks for your diligence! Given that other LRTs will be listed and each LRT likely has very different smart contract considerations, are additional LRTs also going to undergo this kind of technical review? I’m sympathetic to concerns about workload here. It need not come from @bgdlabs of course -I’m sure there are other service providers that can do this work. Thoughts @ACI @EzR3aL ?

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bgdlabs is fittest Aave service provider to do this job.

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As the community has voted to onboard weETH to Aave v3 Ethereum, ACI has created the following proposal to include onboarding of weETH to Aave v3 Arbitrum as well. This proposal can proceed direct to AIP and can be included in the upcomming AIP vote for weETH onboarding absent any dissent from the community.

Title: [ARFC] Onboarding of weETH to Aave v3 on Arbitrum

Author: ACI ( Aave Chan Initiative)

Date: 2024-04-01

Summary:

This ARFC seeks to add Ether.fi Liquid Restaking Token weETH to Aave V3 Arbitrum. After the successful ARFC Snapshot to onboard to Aave v3 Ethereum, this proposal will go direct-to-AIP following the asset onboarding framework.

Motivation:

eETH is an LRT that allows users to stake their ETH, accrue staking rewards, and receive additional rewards through native restaking on EigenLayer.

Ether.fi has also launched eETH on Arbitrum, allowing users on the L2 to get exposure to the LRT yield and points. As weETH has already been approved for onboarding to Aave v3 Ethereum by the DAO, this proposal aims to extend the onboarding of weETH to Aave v3 Arbitrum.

Proof of Liquidity and Deposit Commitments:

Anyone who deposits weETH into Aave on Arbitrum will accumulate ether.fi and EigenLayer points to be used for future incentives.

Specification

weETH Arbitrum: 0x35751007a407ca6feffe80b3cb397736d2cf4dbe

The oracle for this asset is expected to use a CAPO implementation.

Risk Parameters

Parameter Value
Isolation Mode No
Borrowable Yes
Collateral Enabled Yes
Supply Cap (weETH) 1000
Borrow Cap (weETH) 100
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

Useful Links

Ether.fi

ARFC Snapshot to onboard weETH to Aave v3 Ethereum

Disclaimer

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

Next Steps

  1. Discussion period on the governance forum with addition of risk parameters.
  2. Publish an AIP vote for final confirmation and enforcement of the proposal.

Copyright

Copyright and related rights waived via CC0.

2 Likes
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Certainly. I was asking more whether or not we should expect to see this sort of diligence for every single LRT being onboarded onto Aave. Is this something @bgdlabs is committing/volunteered to do?
cc: @sakulstra @eboado

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Llamarisk already providing such information although they are not formally engaged with the DAO yet. See here [TEMP CHECK] Onboard LlamaRisk as Aave Risk Service Provider - #12 by LlamaRisk

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Appreciate the good feedback @midapple.

Historically, we have been doing evaluations of assets to be listed on Aave that have some type of non-standard mechanics, and on which we identify that due to growth potential, require extra due diligence.

Generally it is a purely technical internal evaluation on listing candidates, on the components we consider totally critical for Aave, even if we have not created comprehensive reports. For example, this applies to past assets like sDAI.
The rationale is that for example, it is not possible to decide which type of oracle to use without really understanding the asset itself.

For some extra LSTs/LRTs pending for listing, we will do something similar in the upcoming weeks, but this reports should not be understood as any type of endorsement of the asset, just a technical evaluation from a entity (ourselves) looking at exactly the points that could have consequences for Aave.

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Following up on our recommendations for Ethereum, we propose the following recommendations for Arbitrum, accounting for the differences in liquidity between the chains. Similar to our approach on Ethereum, our preference is to set the caps conservatively to observe user behavior and demand before optimizing the caps. Should demand scale, we will reassess and parameterize accordingly.

Parameter Value
Isolation Mode No
Borrowable Yes
Collateral Enabled Yes
Supply Cap (weETH) 1000
Borrow Cap (weETH) 100
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
3 Likes