Proposal: Add Support for stETH (Lido)

Possible to do this as well for aETH (Ankr Ethereum) from Stkr?

Is Lido’s slashing statistics being published?

There was a collateral onboarding call on Maker with some details:

1 Like

Yes :+1:

Awsome !!!
I have lots of ETH on AAVE and it will be nice to SWAP to stETH :laughing:

Have that said the proposal adds value and liquidity to the protocol and fees for stakers.

Win win in my view.

Hope the devs can make it work asap :pray:

:beers:

Greatly support this proposal.

Lido / stETH is by far the most active and liquid staked ETH token. There is more than 100k stETH in the curve pool and more than 2k in the 1inch pool. This protocol is huge and growing with more than 200mil in staked ETH already.

Please add support for this as collateral as it will further legitimize ETH2.0 staking tokens.

Very much in support of this proposal. Is there anything the community can do at this point to help make this happen?

1 Like

More than 250k eth have now been staked with lido, it would be perfect to be able to use them as collateral in Aave

stETH Risk Assessment

Summary

Lido allows users to earn staking rewards on the Ethereum beacon chain without locking Ether or maintaining staking infrastructure. This is done through the stETH token. stETH tokens represent a tokenized staking deposit and can be held, traded, or sold.

Onboarding stETH to Aave would allow users to lend and borrow against stETH.

Motivation

There is strong interest in using stETH to earn additional yield with minimal IL risk. This is evident through the growth of the stETH/ETH pool on Curve Finance, which has become the 2nd most liquid pool on Curve with liquidity of $1.8 billion.

The addition of stETH on to Aave can work to attract a larger audience to both Aave and Lido. More ETH staked with Lido would subsequently benefit the decentralization and security of the Ethereum network, to the benefit of the community as a whole. stETH would likely bring new borrow demand to Aave as market participants look to borrow against their staked ETH or lend their stETH for a yield.

stETH Overview

Lido launched in December 2020. Lido allows users to deposit ETH and receive stETH. The deposited ETH is then pooled and staked with node operators selected by the Lido DAO. stETH represents the user’s staked ETH balance of the beacon chain along with staking rewards accrued or penalties inflicted on validators in the beacon chain. When transactions are enabled on the beacon chain, stETH can be redeemed for unstaked ETH and accumulated rewards.

stETH as DeFi collateral is beneficial for a number of reasons.

  • stETH is almost as safe as ETH, price-wise: barring catastrophic scenarios, its value tends to hold the ETH peg well;
  • stETH is a productive, yield-generating asset;
  • stETH is a very liquid asset with over $1.8 billion in liquidity locked in the Curve stETH/ETH pool.

The current stETH supply stands at 309,075 - worth $1.1 billion using current stETH prices. stETH is held by 5,467 unique holders.

The Lido DAO consists of, amongst others, Semantic VC, ParaFi Capital, Libertus Capital, Terra, Bitscale Capital, StakeFish, StakingFacilities, Chorus, P2P Capital and KR1, Stani Kulechov of Aave, Banteg of Yearn, Will Harborne of Deversifi, Julien Bouteloup of Stake Capital and Kain Warwick of Synthetix.

The Lido treasury has been recently diversified and DAO members now include Paradigm, Three Arrows Capital, DeFiance Capital, Jump Trading, Alameda Research, iFinex, Dragonfly Capital, Delphi Digital, Robot Ventures, Coinbase Ventures, Digital Currency Group, The LAO and angels.

Audit

Lido has been audited by Sigma Prime, Quantstamp, and MixBytes (see Audit / Relevant Links).

Liquidity & Volumes

stETH is primarily traded on Curve’s stETH/ETH pool.

  • The pool currently holds $1.8 billion of stETH and ETH.
  • 82.5% of the stETH supply is in the Curve pool.

The price of stETH has remained relatively stable since launch in December 2020 ranging from a low of 0.94 to a high of 1.02 ETH. Initial instability arose due to relatively large withdrawals from Curve which disrupted the peg.

As liquidity in the stETH/ETH pool increased, we have seen more stability in the stETH peg.

Integrations

stETH is currently integrated across the following platforms:

  • Curve Finance
  • ARCx
  • Yearn Finance
  • SushiSwap
  • Harvest Finance

Risk Assessment

  • Smart contract risks: C-

Lido faces smart contract risks. To mitigate these, Lido has been successfully audited three times - by Quantstamp, Sigma Prime, and MixBytes (see Audits).

  • Counterparty risks: C

Lido is a DAO. Decisions in the Lido DAO are made through proposals and votes - community members manage protocol parameters, node operators, oracle members and more. The Lido staking infrastructure for stETH consists of 9 node operators, with a focus on decentralization.

Lido relies on a set of oracles to report staking rewards to the smart contracts. Their maximum possible impact is limited by the recent upgrade, and the operators of oracles are all well-known entities including Stakefish, Certified One, Chorus, Staking Facilities and P2P.

  • Market risk: B

stETH is the most liquid staked ETH primitive with a $1.1 billion marketcap and $1.8 billion of liquidity in the Curve Finance stETH/ETH pool. 82.5% of the stETH supply is in the Curve pool. The pool facilitated $60MM+ in 24 hour trading volume.

  • Staking risks

stETH faces staking risks, specifically validator risks including slashing and hostage risks. To mitigate these, Lido works only with best-in-class validators with a track record of success. In addition to this, staked ETH with Lido is protected from slashing using the Unslashed Finance insurance protocol. At the time of writing, Lido is covered for 5% slashing on more than 400,000 ETH staked until June 22nd. To date, no slashings have been incurred.

  • Withdrawal risks

To mitigate withdrawal risks, Lido staking went live on December 18th through a withdrawal key ceremony. Chorus One, Staking Facilities, Certus One, Argent, Banteg (yearn.finance), Alex Svanevik (Nansen), Anton Bukov (1inch), Michael Egorov (Curve/Nucypher), Rune Christensen (MakerDAO), Will Harborne (DeversiFi) and Mustafa Al-Bassam (LazyLedger) came together over a four-day event to generate threshold signatures for Lido’s withdrawal keys in a secure environment on air-gapped machines. Lido plans to move over to a fully non-custodial solution in the near future.

  • Price feed risk

stETH is not traded on CEXs and thus the oracle has to use the Curve pool price and ETH price feed to determine the current price. Lido is working on its own price feed which is expected to launch in the next 2 weeks. Lido is also working with Chainlink to release an stETH price feed.

Proposed stETH Risk Parameters

  • LTV: 70%
  • Liquidation Threshold: 75%
  • Liquidation Bonus: 5%
  • Reserve Factor: 10%

A LTV of 70% is slightly higher than the 56% average LTV across non-stablecoin assets and 10% lower than ETH’s 80% LTV. This gives the protocol more room to safely liquidate stETH with a volatility profile similar to ETH.

Interest Rate Model:

UOptimal: 65%

Base: 0%

Slope 1: 8%

Slope 2: 100%

Relevant Links

Should stETH be added to Aave v2 with the proposed risk parameters?

  • Yes
  • No
  • Yes, with different risk parameters

0 voters

7 Likes

Great initiative, stETH seems like a natural collateral to use on AAVE in addition to ETH.
What could be very interesting too would be curve stETH-ETH LP tokens on the AMM market, with an adapter to keep the CRV rewards while having those LP tokens deposited on the market.

2 Likes

insightful thread from monet about stETH and appropriate liquidations ratios

Thanks for making this proposal! I have a few comments on the proposed risk parameters.

Liquidation ratio

I think 75% may be a bit aggressive. This accommodates for up to an additional ~10% price drop for stETH vs ETH (82.5% liquidation ratio), which may be insufficient under adverse market conditions.

Currently the stETH curve pool has very high liquidity, but this is dependent on users being able to earn excess returns - the LDO + CRV rewards need to be at least 50% of stETH staking rewards or it would be more profitable to hold the assets individually. This creates some risk of changes in rewards allocations from Curve and Lido governance.

If pool liquidity thins out due to lower rewards or higher alternative returns for ETH, it’s possible for liquidations to cause large price impact. This blow out risk becomes relatively more severe as the price discount grows as well, because Curve pools concentrate liquidity around the 1:1 price ratio leaving less liquidity for the tail end of the price spectrum.

Aave doesn’t have the benefit of debt ceilings (although exposure ceiling may be available in the future). Aave is therefore unable to limit market impact directly by limiting debt exposure, and needs to choose liquidation ratios that are sufficiently conservative to liquidate any size position.

I think a 60% max LTV and 65% liquidation ratio would be more appropriate. This would accommodate for up to a 21% price discount vs ETH, which should be enough to incentivize buyers even during a sharp market downturn.

Liquidation bonus

Liquidation bonus needs to be large enough to ensure liquidations are profitable, accounting for gas costs as well as market impact. For small positions, the additional gas required to swap stETH to ETH could be problematic. For larger positions, and particularly if stETH is already trading at a discount (due to the Curve amplification noted above), 5% may not be enough to cover the market impact of immediately dumping stETH back to ETH.

I think a 10% liquidation bonus would be more conservative and safer for the protocol, while having a limited adverse impact on borrowers (as most users manage their position responsibly to avoid liquidation).

6 Likes

FDV hasn’t been mentioned and I feel it most certainly should be all things considered particularly for the sake of transparency

I’m working on a blogpost with my analysis of stETH stability - expect it to be out end of this week. TLDR is I think that with liquidity incentives going on we’re going to keep peg tight, and in the absence of them there’s an immense support for stETH between 5 to 25% discount that is really hard to gauge more correctly now.

@aavedegen FDV and market cap are one and the same for stETH.

2 Likes

Took a bit more than I thought, but here it is: Concerning stETH Liquidity | Lido Blog
TLDR: When beacon chain withdrawals are enabled, stETH’s liquidity is ensured by the fact it’s possible to unstake and withdraw it with a slight delay. Right now it’s not the case, but stETH is very liquid because the liquidity is incentivized. The incentives will keep on being provided at least until the Merge and withdrawals are enabled, which is expected to happen in less than a year. Even without incentives, there’s some credible desire to a) MM with stETH b) do a time-based arbitrage for stETH. It’s very hard to predict what that desire would be organically (incentives add a lot of noise to the market data) but different ad-hoc mental models for the market all converge on significant support at a 5-25% discount.

2 Likes

Relevant read:

2 Likes

Apologies if this has been answered elsewhere, but would AAVE be listing stETH or wstETH? The advantage of the latter is that staking rewards are recognized as appreciation of wstETH, whereas with stETH they’re recognized as an increase in balance. The advantage of stETH though is they’ll be exchangeable at a 1:1 rate with ETH once ETH2.0 goes live.

I think using wstETH is a better idea, as all other underlying tokens on AAVE have static balances. Plus, it will make it easier for users to distinguish gains from staking vs lending. Curious to hear other opinions here.

3 Likes

Are there any updates to this proposal? Thanks!

I agree with this thought. wstETH can be a better idea because user’s collateral value appreciates overtime. With increasing value of collateral, the users have lower risk of liquidation. It is also great to separate the rewards from lending and rewards from staking.

Although, the issue will be the additional liquidation complexity. If we assume 6% APY, wstETH / stETH exchange rate will be round 1.79 (1.06^10). Curve might not be the best venue to trade wstETH/ ETH anymore. Liquidators have to find other way to hedge its positions

Any updates on this proposal?

Today, more than 1.2M ETH (~$4.4B) are staked through Lido.
It seems even more of a no-brainer now due to the growth in TVL and reputation Lido - and stETH - have had since January.

Would love to know Aave’s team thoughts too

4 Likes

Hi everyone,

Since it has been some time, we have updated our proposal for listing stETH on Aave using the A.R.C. format. Please find the new proposal here: ARC: Add support for stETH (Lido)

1 Like