stMATIC - Aave v3 Polygon Market Risk Assessment
Smart Contract Risk Counterparty Risk Market Risk Overall Risk
General
Lido on Polygon is a DAO governed liquid staking protocol for Polygon PoS chain. It allows users to stake their ERC20 MATIC tokens on Ethereum mainnet and immediately get the representation of their share in the form of stMATIC token without maintaining staking infrastructure. Users will get staking rewards and still be able to control their stMATIC tokens MATIC tokens will be delegated across validators that are registered and accepted by the DAO insideLido on Polygon protocol.
At the time of writing, there are 20,566,991.15 units of stMATIC in circulating supply on mainnet, worth about $12,351,259.73 on the 28th May 2022. stMATIC on Polygon represents a claim on the stMATIC on mainnet with the actual asset held in a bridge contract on mainnet. After 60 days of trading, launch date 28th February 2022, there are 15,180,666.449 stMATIC tokens in circulating supply and 25,653 transfers have taken place on the Polygon network.
There are two liquidity pools on Polygon Network, Quickswap and Balancer. Both are wMTAIC/stMATIC pools and there is a combined TVL $15.4m.
stMATIC Smart Contract Risk:
stMATIC has been audited by Oxorio and Shard Labs. An extract from the Oxoirio Audit “As stated in each particular issue, all critical, major and warning issues identified have been correctly fixed or acknowledged by the client, so contracts are assumed as secure to use according to our security criteria.”. The report did recommend further testing on Testnets and that additional audits were performed before deploying into production. The Lido team has communicated that they fixed all the issues, wrote specific tests, deployed them on a testnet before deploying on mainnet.
Oxorio audit can be found here.
Shard Labs internal audit can be found here.
stMATIC Counterparty Risk:
stMATIC is the core contract which acts as a liquid staking pool. The contract is responsible for deposits, withdrawals, minting and burning liquid tokens, delegating funds to node operators, applying fees and distributing rewards. 90% of the staked MATIC rewards go to stMATIC holders, node operators (5%), Lido DAO (2.5%) and the Treasury (2.5%). Staking MATIC via “Lido on Polygon” is near instant, with the user receiving an amount of stMATIC based upon the current ratio between MATIC and stMATIC token. Withdrawals on the other hand can take approximately 9 days to process according to the “Lido on Polygon” documentation.
The stMATIC contract is an ERC20 contract that represents the account’s share of the total supply of MATIC tokens inside the “Lido on Polygon” protocol. Unlike stETH, stMATIC is a non-rebasable token, which means that the amount of tokens in the user’s wallet is not going to change. During time, while rewards are accumulated, the value of stMATIC tokens increase. Therefore, when listing stMATIC as collateral there is no need for a wrapper like there is with wstETH.
“Lido on Polygon” is a protocol that runs on the Ethereum blockchain and it is upgradable. The address that controls the ability to implement day-to-day changes and upgrade the protocol is controlled by a Gnosis Safe with a 3 of 5 multisig signer requirement. The signers are established validators and ecosystem partners who can execute privileged operations. Further details can be found here. In the future we expect stMATIC to be upgraded to v2 which is currently undergoing an audit.
Relevant addresses are linked below:
Mainnet Contract Address: 0x9ee91F9f426fA633d227f7a9b000E28b9dfd8599
Mainnet Bridge Address: 0x40ec5b33f54e0e8a33a975908c5ba1c14e5bbbdf
Polygon Contract Address: 0x3A58a54C066FdC0f2D55FC9C89F0415C92eBf3C4
Quickswap liquidity: 0x65752c54d9102bdfd69d351e1838a1be83c924c6
Balancer v2 Liquidity: 0xaF5E0B5425dE1F5a630A8cB5AA9D97B8141C908D
stMATIC Market Risk:
With stMATIC listed as collateral, there is exposure to the oracle price. At the time of writing Chainlink is in the process of creating a calculated stMATIC oracle. It is very strongly recommended that a Chainlink oracle is used to support the stMATIC asset listing. The chainlink oracle for stMATIC is the MATIC/USD Chainlink oracle plus the calculated MATIC/stMATIC conversion rate. The only factor that can influence the conversion rate changes are the new rewards coming into the system from validators as there is no slashing.
There are 361 holders of stMATIC on Polygon of which at least two are smart contracts, being the Balancer v2 BPT gauge and Quickswap’s staking contract, that receive Liquidity Mining rewards. There are 63 LPs in the Balancer v2 pool, of which 85.3% is deposited into the rewards gauge by 324 different wallets. One of these wallets makes up 39.4% of the tokens within the gauge contract. There are 49 LPs in the Quickswap pool, of which 98.9% deposited into the dual staking rewards contract to receive QUICK and LDO rewards. At the time of writing the Quickswap staking contract holds over $5m of user funds. There is some concentration within the liquidity providers for stMATIC on the Polygon Network which if pulled has the potential to affect slippage on swaps.
In the future there is expected to be a Curve pool when Curve v2 launches on Polygon and a Uniswap v3 pool. It is reasonable to expect incentives for liquidity providers and for this to attract new liquidity providers into the market. The introduction of well supported decentralised exchange pools will offer better support and on-chain conditions for liquidating bad debt on the Aave market.
As with stETH and sAVAX, this proposal recommends listing stMATIC with borrowing disabled.
As of 28th May 2022 for stMATIC(MATIC):
30 Day Average Daily Volume: $254.11k ($633.5m)
30 Day Average Daily Volume: $153.01k ($612.1m)
90 Day Average Daily Volume: $151.01k (674.6m)
1 week Normalised Volatility: 0.04511 (0.04678)
1 month Normalised Volatility: 0.08524 (0.08670)
3 month Normalised Volatility: Insufficient Data (0.05936)
6 month Normalised Volatility: Insufficient Data (0.06224)
1 year Normalised Volatility: Insufficient Data (0.06462)
Risk Parameters
We recommend the following parameter configuration upon listing stMATIC.
Risk Parameters:
Collateral: Yes
Borrowing: No
LTV: 50%
Liquidation Threshold: 65%
Liquidation Penalty: 10%
Reserve Factor: 20%
Variable Interest Rate Parameters:
UOptimal: 45%
R_0: 0%
R_s1: 7%
R_s2: 300%
stMATIC eMode Parameters
LTV: 95% → 92.5%
Liquidation Threshold: 97% → 95%
Liquidation Penalty: 2.5% → 1%
** Amended 21/08/2022 to reflect conversations with @bgdlabs highlighting these parameters should match those used by sAVAX on the Avalanche market.
Supply Borrow Caps
NewSupplyCap $7.5m stMATIC
Opinion / Comments
When more information about the timing of a Chainlink Oracle is made available for stMATIC, we will be able to reassess the liquidity and circulating supply on Polygon and determine if Isolation mode is suitable. In time E-Mode is possible and this will require a new category to be created.
At this point in time the concentration amongst liquidity providers and overall amount of stMATIC in liquidity pools gives reason for caution. We know from listing stETH, that listing stMATIC, could lead to significant recursive behaviour. This creates a risk for lenders. Something to keep in mind is the Polygon market is not covered by the mainnet Safety Module.
Upon discussing the asset listing with the Lido community, we learned there are likely to be new decentralised exchange liquidity pools emerging in the near future. Pending the timing and success of these pools, along with the Chainlink Oracle, the risk assessment may improve. A conservative listing would include Isolation mode with a Supply ceiling in place until liquidity and circulating supply improves. The following Isolation mode parameters would be a good starting place based upon current market conditions:
Supply Borrow Caps
NewSupplyCap 7.5m stMATIC
Regarding systemic risk considerations, the v3 Polygon market has approximately $64m of TVL and if stMATIC was 15% of the TVL (collateral) then $9.6m or 16m stMATIC tokens at 60 cents each could be deposited into the lending pool. Having 15% of the borrowing on the market backed by one asset is a lot given the volatility of the asset. It also happens to be a very high percentage of total supply and close to 100% of all stMATIC tokens on the Polygon network. From this we can conclude the limitation is not systemic risk, but rather the circulating supply and liquidity of stMATIC.
The limitation for stMATIC is circulating supply; roughly in crude terms, ⅔ of it is in DEX pools and ⅓ elsewhere within the Polygon ecosystem. The Balancer pool holds 6,627,553 stMATIC and the Quickswap pool holds 4,282,849. Using these two main pools, that is 10,910,402 stMATIC tokens in DEX liquidity pools. 50% of stMATIC circulating supply on Polygon is 7.59m. If 50% of stMATIC was deposited into Aave lending pools, then the stMATIC in DEX pools would contract.
A NewSupplyCap of 7.5m is a reasonable place to start.
Contributors: @MatthewGraham, @uhom and 3SEHoldings.