[ARFC] Onboarding sfrxETH to Aave V3 Ethereum

Title: [ARFC] Onboarding sfrxETH to Aave V3 Ethereum Market

Author: @0xTogbe - Aave Chan Initiative

Date: 2023-11-27


Summary

This ARFC proposes the addition of sfrxETH from Frax to Aave V3 Ethereum to enhance LST liquidity and asset diversity.

Motivation

sFrxETH is the Staked version of FrxETH from the Frax Ecosystem. Users can freely mint frxETH in exchange for ETH deposits.

The Aave-Chan Initiative supports LST diversity in Aave V3 as shown with our historical support of cbETH, rETH, and, parallel to this proposal, our support for ETHx.

This proposal is a reboot of ARC Proposal: Onboarding sfrxETH from Frax Protocol to Aave V3 Ethereum Market 10 from January. More details for sFrxETH can be found in the first proposal.

Specification

Risk Parameter Value
emode Yes
Isolation Mode No
Borrowable in Isolation No
Stable Borrow No
Enable Borrow Yes
Enable Collateral Yes
Loan To Value (LTV) 71%
Liquidation Threshold 76%
Liquidation Bonus 8%
Reserve Factor 15%
Liquidation Protocol Fee 10%
Supply Cap 80000 sfrxETH
Borrow Cap 5000 sfrxETH
Debt Ceiling N/A
uOptimal 45%
Base 0%
Slope1 7%
Slope2 300%

Next Steps

  1. Solicit feedback from the Aave community.
  2. If community sentiment is favorable, proceed with the ARFC snapshot.
  3. Success in the snapshot leads to the development of an AIP.

Disclaimer

This proposal is powered by Skywards.

The Aave Chan Initiative is not directly affiliated with Frax Protocol and did not receive compensation for creation this proposal.

Copyright

Copyright and related rights waived via CC0.

6 Likes

This parameters do not seem to take into consideration the big centralization risk that sfrxETH suffers, as @WintermuteGovernance and @monet-supply have previously pointed out.

The supply limit cap is even above rETH and cbETH. Aave approach should be much more conservative given this unsolved issues on Frax end.

sfrxETH

Overview

Chaos Labs supports listing sfrxETH on Aave V3 Ethereum as part of the community strategy to increase the offering of Aave protocol with more LSD 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 considerations related to centralization and third-party risk. If the community aims to reduce exposure to sfrxETH, adopting more conservative supply and borrow caps should be considered.

Liquidity and Market Cap

When analyzing market cap and trading volumes of assets for listing, we look at data from the past 180 days. The average market cap of sfrxETH over the past 180 days is ~$300M, and the average daily trading volume was $600K (CeFi & DeFi).

Untitled - 2023-11-27T170244.645

Liquidation Threshold

Considering the volatility and the correlation of sfrxETH to ETH, we recommend setting the LT to 77%, similar to the rETH parameters on Ethereum V3. (a relatively similar token in terms of market cap and liquidity)

sfrxETH / 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 concentrated liquidity of sfrxETH, we recommend a 5% Liquidation Bonus and a supply cap of 40,000 sfrxETH.

Based on our observations, the utilization rate for LSDs has been low. Therefore, we have taken a conservative approach toward LSDs borrow caps of 4,000 sfrxETH. 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 rETH on Ethereum to ensure consistency across similar assets on Aave v3.

E-mode

Given the liquidity and risk profile of the asset, we support including sfrxETH in the ETH-correlated E-mode category.

Recommendations

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

Parameter Value
Isolation Mode No
Borrowable Yes
Collateral Enabled Yes
Supply Cap (sfrxETH) 40,000
Borrow Cap (sfrxETH) 4,000
Debt Ceiling -
LT 77.00%
LTV 74.50%
Liquidation Bonus 5%
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
Flahloanable Yes
Siloed Borrowing No
Borrowed in Isolation No
E-Mode Category ETH-correlated
5 Likes

Hi Scipio,

Sam from Frax here. I want to address your concerns that also reference Monet’s and Wintermute’s prior posts about Frax Ether centralization risk.

Firstly, yes there’s certain centralization vectors that Frax Ether currently has but not exceedingly different than other LSDs so I wanted to clarify a few things. Frax Ether validators are indeed whitelisted similar to how Lido runs their validators. With that said, Lido does have about 30 different entities whitelisted and currently the Frax Core Devs are the only ones on Frax Ether whitelist. Secondly, while Lido has fully onchain governance, Rocket Pool de facto has a public multisig system nearly identical to Frax Ether with their “oDAO” signers (many of whom are the Rocket Pool team themselves). As I’m sure Aave risk team knows, oDAO has the ability to change the rETH minter address/redemption etc which is de facto msig minting perms. To be clear, I personally don’t have a specific issue with that. I just bring it up to make it clear that both rETH and stETH have similar qualities in certain areas that sfrxETH suffers from as well. Of course, Lido has fully onchain governance with no msig which is better than rETH and sfrxETH. It’s worth pointing out that completely onchain governance is also slated for Frax Ether v2 with no msig trust assumptions. Additionally, when it comes to safety of the asset regardless of any centralization vector, sfrxETH is fully redeemable for 1 ETH at all times through the onchain redemption queue.

Secondly, Frax Ether has the all time best performing validator set compared to any major LSD according to independent 3rd parties like Rated.Network. So while the node operators are currently behind a whitelist and consist of the core devs at this current time, it is slated to entirely change in Frax Ether v2 in the first half of 2024. This will make frxETH completely permissionless in the node operator portion of the protocol. Regardless, Frax Ether validator performance today speaks for itself with its all time historic top performance compared to every single node operator in Lido, Rocket Pool, cbETH, etc.

Lastly, on another topic, I wanted to point out that the great analysis @ChaosLabs posted actually undercounts the sfrxETH liquidity because it does not count the frxETH liquidity on Curve which is in the 100s of millions. sfrxETH is a unique LSD in that it is the yielding token of frxETH (the token backed by ETH validators but gets no PoS yield). sfrxETH is always redeemable for frxETH and is an ERC4626 token so for a liquidity analysis, you should always add the liquidity of both sfrxETH (pools on Balancer) and all frxETH pools (many AMMs). Doing this you will see that (s)frxETH is more liquid than any other LSD other than stETH which dramatically makes it a safer asset (centralization risk aside, just counting liquidity).

I’m confident with the low/reasonable cap on borrowing sfrxETH, the extremely deep liquidity of the asset, the lindy and performance of sfrxETH validators since inception, and improvements coming shortly in v2, this modest inclusion into Aave is warranted and will bring value (both revenue to Aave DAO and utility) to all.

Thanks a lot for everyone’s analysis and thoughts. We hope to address any concerns and have been active in the Aave community since Frax’s inception :slight_smile:

5 Likes

Summary

Should the community wish to list sfrxETH, Gauntlet recommends the following parameters. We give further color below.

Recap

In February, Gauntlet’s analysis indicated that listing sfrxETH may require higher levels of trust compared to stETH. We cautiously suggested delaying any action until frxETH v2’s release.

Following Ethereum’s Shapella upgrade in April 2023, which enabled token withdrawal for stakers, there has been great advancement in Protocols. By November 2023, the value of funds staked via Ethereum LSTs reached around 20 billion USD.

We provide a re-evaluation of the risk parameters for sfrxETH below from a market risk perspective.

Assessment

Market Share

sfrxETH has ~2.5% of the overall LST marketshare as of end of Nov, ranking it 5th by market share.
image

Liquidity

  • sfrxETH has a circulating supply of 210k sfrxETH.
  • The primary liquidity venues include two frxETH - ETH/WETH pools on Curve (~$136m TVL).
  • A swap of 20k sfrxETH to WETH incurs ~2% slippage.

Staking yield

sfrxETH has realized yield of 5.83% over 2023, which has been more attractive than its competitors with yield below 5%. sfrxETH’s higher yield is achieved by its unique dual-token model and Frax’s strategy managing liquidity via Curve gauge incentives. The yield generated from all staked ETH by frxETH holders is allocated to sfrxETH holders. Frax’s governance stake and its AMO market-making strategy incentivizes liquidity for frxETH within the Curve platform.

Screenshot 2023-11-30 at 3.30.37 PM

Recommendations

Borrow and Supply Caps

Given its liquidity profile and expected WETH debt borrowed against sfrxETH, we recommend initial supply caps of 55k for sfrxETH, 25% of the circulating supply. Should the community wish to adopt a more conservative view towards sfrxETH due to trust related or other considerations, it may wish to adopt lower caps.

Parameter Recommendation
Isolation Mode NO
Emode ETH-correlated
Borrowable YES
Borrowable in Isolation NO
Collateral Enabled YES
Stable Borrowing NO
Supply Cap 55,000
Borrow Cap 5,500
Debt Ceiling N/A
LTV 71%
LT 76%
Liquidation Bonus 7.5%
Liquidation Protocol Fee 10%
Reserve Factor 15%
Base Variable Borrow Rate 0
Variable Slope 1 7%
Variable Slope 2 300%
Uoptimal 45%
4 Likes

This ARFC has been escalated to the ARFC Snapshot stage and vote will start tomorrow.

The ARFC Snapshot for this proposal has ended with Aggressive Option as winning option (416K votes and quorum reached). Next stage will be the potential onboarding through an AIP vote.

1 Like

What happened with the proposal?

As you know Governance V.3 is about to be ready but we’ve been under governance embargo the last couple of weeks.
It is expected to shortly have an AIP published ready regarding this proposal.

El El sáb, 6 ene 2024 a las 12:55, ApuMallku via Aave <notifications@aave.discoursemail.com> escribió:

2 Likes

@0xTogbe when can we expect to have the AIP vote?

The AIP coding work is in progress. There is also some further work needing to be done with regards to the price adapter for this asset. Once these pieces are completed the AIP will be published for voting.

2 Likes

Is there an ETA for this AIP? or not yet? Any plan on listing other LST like mETH, swETH or pxETH? Thanks @0xTogbe @ACI

2 Likes

Maybe this time I will get lucky, any news about the question above?

Any progress? @ACI if not, what’s the blocker? I think is fair to keep the community updated about proposals that were approved.

All voted LST listings are in progress and are waiting on the implementation of CAPO for safe activation.

I believe there is also some work on an oracle adapter for sfrxETH underway.

Once these development items are complete then these assets should be ready to go live.

For other liquid staking and restaking tokens, please review in the governance forum. There is a current proposal to add eETH and sure proposals for others could be well received. A reminder to the community that anyone can propose an asset listing following the Asset Onboarding framework and the ACI will move this through governance process with the Skywards program.

3 Likes