Given its liquidity profile and expected WETH debt borrowed against ETHx, Gauntlet recommends initial supply caps of 10k ETHx, 25% of the circulating supply.
Emode
Given its relatively short price history, Gauntlet does not recommend listing in ETH-correlated emode at this time.
The ARFC Snapshot for this proposal has ended with Aggressive Option as winning option (458K votes and quorum reached). Next stage will be the potential onboarding through an AIP vote.
This is a technical analysis of all the smart contracts of the ETHx asset and main dependencies.
Disclosure: This is not an exhaustive security review of the asset like the ones done by the StaderLabs 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, like with any security review, this is not an absolute statement that the asset is flawless, only that, in our opinion, we don’t see significant problems with its integration with Aave, apart from different trust points.
Analysis
ETHx is a repricing Token that increases in value as staking rewards, MEV, and tips accrued to the user’s staked ETH. Rewards accrue from the consensus and execution layers, and the liquid rewards from the execution layer are restaked to keep auto-compounding.
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.
Access control (ownerships, admin roles) and nature of the entities involved.
Any miscellaneous aspect of the code we can consider of importance.
General points
The upgradeability admin of all systems is an OZ Timelock, which has a 7-day time lock and is controlled by a 6-of-9 Gnosis Safe.
For proxies, it uses an OZ transparent proxy pattern.
Economic Security
To ensure the health of the system, Stader has defined different aspects of protecting staker’s ETH. Stader requests 4 ETH and 0.4 ETH worth of SD tokens (Stader tokens) from node operators as collateral to borrow the staker’s ETH to run validators. The 4 ETH security collateral protects the staker ETH by absorbing all operational risks (slashing, MEV misappropriation, and any other ETH network-imposed penalties).
Contracts
The following is a non-exhaustive overview of the main smart contracts involved with ETHx.
The so-called ETHx repricing token is an OZ Transparent Proxy contract with upgradeability by the general timelock.
ETHx also has an L2 contract with an extra PAUSER_ROLE role and without the staderConfig address present in the L1 contract. Currently, this contract is deployed at Arbitrum and Optimism.
The mint() and burnFrom() functions are controlled by the StakePoolManager and UserWithdrawalManager contracts, respectively.
Contract where users withdraw and redeem ETH and the only burner of ETHx.
OZ Transparent Proxy contract with upgradeability by the general timelock.
The redemption consists of a 3-step process: request by calling requestWithdraw(), finalize by calling finalizeUserWithdrawalRequest(), and claim by calling the claim() function.
In the request step, the staker transfers ETHx, and the amount of ETH to be claimed is calculated based on the current exchange rate.
A contract that receives the exchange rate data from the Oracle operators through the majority consensus mechanism for appropriate blocks.
OZ Transparent Proxy contract with upgradeability by the general timelock.
Node operators submit the exchange rate by calling the submitExchangeRateData() function with the total ETH staked and total ETHx supply at an x block. The exchange rate formula is defined by total ETH staked / total ETHx Supply.
Each node operator submits new data to update the exchange rate; when the minimum number of submissions is reached (submissionCount >= trustedNodesCount / 2 + 1) and the data is from a block greater than the last block updated, an internal function updateWithInLimitER() is called and the exchange rate is updated. The trustedNodesCount is set to 5 trusted nodes.
Exchange rate updates must be submitted at precise intervals of 7200 blocks (approximately 24 hours). The exchange rate update frequency (updateFrequencyMap[ETHX_ER_UF]) was set in the initialize() function.
An Inspection mode is enabled when the new exchange rate deviates more than 1% from the current rate. When enabled, the Stader manager needs to verify the validity of the new exchange rate. The Inspection mode can be turned off by calling the closeERInspectionMode() function after 7200 blocks from the block where it was activated.
The deviation ( erChangeLimit) was set in the initialize() function to 5%, but after, it was set to 1% here.
The Oracle also has a function updateERFromPORFeed() to update the exchange rate from Chainlink Proof of Reserve data feeds for ETHX and ETH supply as an alternative to the above, but it’s currently deactivated. The Stader manager can turn it on by calling the togglePORFeedBasedERData() function. The Stader Manager role is given by the general timelock.
Each Oracle operator provides security collateral to back their Oracle performance. The list of Oracle operators is here.
The minimum proposal delay of 7 days for upgradability in the timelock contract gives an acceptable time to verify the proposed changes.
There is visible work on monitoring the system’s health across several metrics. An important mention is the Oracle, which plays a crucial role in the system and is run by well-known node operators who have demonstrated technical proficiency in it. We still recommend adding some extra operators to maintain the system’s integrity, but the current configuration is already quite solid.
Conclusion
We think ETHx doesn’t have any problem in terms of integration with Aave, and there is no major blocker for listing.
Chaos Labs supports listing ETHx on AAVE V3 Ethereum as part of the community strategy to increase the offering of Aave protocol with more LST assets. Our analysis and risk parameter recommendations for the initial listing are below.
Liquidity and Market Cap
When analyzing the market cap and trading volumes of assets for listing, we look at data from the past 180 days. Over this timeframe, ETHx’s average market cap is $294M, and its average daily trading volume is $1.45M.
Liquidation Threshold
Considering the volatility and the correlation of ETHx to ETH we recommend setting the LT to 77%, similar to the parameters of other LSTs on Ethereum V3.
ETHx / ETH Volatility
Supply Cap, Borrow Cap, and Liquidation Bonus
Following Chaos Labs’ approach to initial supply caps, we propose setting the Supply Cap at 2x the liquidity available under the Liquidation Penalty price impact.
Given the liquidity of ETHx we recommend a 7.5% Liquidation Bonus and a supply cap of 3,200 ETHx.
Based on our observations, the utilization rate for LSDs has been low. Therefore, we have taken a conservative approach toward LSDs borrow caps of 320 ETHx. However, if there is a significant increase in demand and utilization, we will reassess the caps according to the utilization pattern.
IR Curve Parameters
We recommend aligning the interest rate parameters with those of other LSTs to ensure consistency across similar assets on Aave v3.
E-mode
Given the asset’s liquidity and correlation with ETH, we recommend including it in E-Mode in the ETH-correlated category.
Recommendations
Following the above analysis, we recommend listing ETHx with the following parameter settings:
LlamaRisk is supportive of @ChaosLabs’s recommendation to onboard ETHx on AAVE V3 Ethereum. Our recommendation is based on an updated report referencing our initial assessment of ETHx published under PrismaRisk on December 10th, 2023. The proposed parameter settings, including the ETH-Correlated E-Mode, are consistent with our analysis. Furthermore, the suggested CAPO recommendation is conservative and aligns with a staged onboarding approach.
Asset rating
In updating our assessment of ETHx, we are revising our risk rating. Based on the risks identified for each category, the following chart summarizes a risk rating for ETHx as collateral. The rating for each category is ranked from excellent, good, ok, and poor.
We rank ETHx ok in liquidity, as liquidity has not materially improved since the initial analysis but has become more concentrated in a single venue. Its recent history should still be a discounting factor, but considering the rapid user growth and expanded utility, you would expect liquidity to have seen a greater increase.
We rank ETHx good in volatility, as there has been no significant depeg event, and daily returns have mirrored ETH daily returns. Although direct withdrawals may be staggered and may take varying times, this design is intended to manage demand.
We rank ETHx ok in smart contracts. There has been no update from our original report.
We rank ETHx good in dependencies, as a Chainlink price feed has been introduced but can’t yet be considered as a reliable price feed relative to other more established LSDs. There has been a reduction in the number of Oracle committee members required for consensus, which should be noted.
We rank ETHx ok in decentralization. There has been no update from our original report. However, the team is still performing critical processes, and there needs to be more participation from the wider community.
We rank ETHx ok in legal. There has been no update from our original report.
In less than a year of operating, ETHx has grown its market share to 0.9% - 1% of the LSD market. During late 2023 and early 2024, it experienced significant user growth. Since the initial analysis, DeFi utility has been added, for example, with adoption as a restaking asset, which could explain recent growth.
Liquidity remains a pain point, with concentration primarily in Curve pools. The addition of an ETH/ETHx Chainlink price feed is positive. However, it is currently not as optimal as Chainlink price feeds due to the early stage of the protocol and unknown market resilience. A notable factor is the influence of EigenLayer in ETHx growth trends, which is associated with recent exuberant speculation and may expose ETHx to the risk of sudden and dramatic drawdowns. Such scenarios may expose ETHx to market pressures that test its capacity to process withdrawal demand. Additional data on the asset’s behavior in various market conditions and the maturity of its market overall will help create more confidence in its resilience.
Concerns mentioned previously related to low TVL and short market history should be considered less significant, given that ETHx has made positive strides in establishing itself in the market while remaining relatively stable in its yield and peg. A conservative onboarding approach should still be taken due to liquidity and price feed oracle concerns, with less exposure afforded than more established LSDs.
