[TEMP CHECK] Onboard pufETH to Aave V3 Core Instance

[TEMP CHECK] Onboard pufETH to Aave V3 Core Instance

Date: 2025-01-23

Author: Amir (Puffer Finance)


Summary

Puffer Finance (https://www.puffer.fi/) proposes adding pufETH as a collateral asset in Aave’s Ethereum V3 market. pufETH is a liquid restaking token that enables users to earn both Ethereum staking rewards and additional returns through restaking on EigenLayer. Its growing adoption, deep liquidity, and robust security measures make pufETH a strong candidate to enhance Aave’s asset offerings and attract additional liquidity.


Background

pufETH is the liquid staking token of Puffer Finance, the only premissionless liquid restaking protocol built on Ethereum. By leveraging EigenLayer’s restaking capabilities, pufETH allows users to participate in Ethereum’s Proof-of-Stake (PoS) with as little as 2 ETH, offering enhanced returns and decentralized validator participation.

Key highlights of pufETH and Puffer Finance include:

  • Grant:

    • Ethereum Foundation for developing Secure-Signer
  • Innovative design

    • Leading anti-slashing design for AVSs and validators
    • First preconfirmation AVS on EigenLayer with 2.8M ETH of economic security
  • High Adoption and TVL:

    Puffer Finance holds over $279 million (~80K ETH) in total value locked (TVL) within its ecosystem, with an additional $141 million integrated across DeFi platforms like Curve, Pendle, and Karak.

    • Puffer has established approxmiately $11 million pools of pufETH on Curve (Curve.fi)
  • Security and Trust:

    Puffer has been audited by 10 leading firms and employs Secure-Signer technology and anti-slashing mechanisms to safeguard user funds and validators.
    Six security partners audit Puffer’s code base.

  • Permissionless Participation:

    Puffer’s anti-slashing technology allows for permissionless and decentralized validator participation, ensuring robust network security while reducing slashing risks.

  • Strong Industry Backing:

    Puffer Finance is supported by top-tier investors such as Binance Labs, F-Prime, Franklin Templeton, and Coinbase Ventures.


Benefits for Aave

  1. Yield Opportunities:

    By listing pufETH, Aave users can earn Ethereum staking and restaking rewards in addition to traditional borrowing and lending income. This enhances capital efficiency and provides a competitive advantage over other lending platforms.

  2. Security and Transparency:

    Puffer Finance’s advanced security measures and transparent on-chain operations ensure a high level of trust and reliability for borrowers and lenders.

  3. Diversification and Market Growth:

    Adding pufETH as the only permissionless LRT allows Aave to diversify its collateral offerings, catering to a growing demand for liquid staking assets. This can further increase Aave’s TVL and protocol activity.


Incentives

To encourage user participation and support the listing of pufETH on Aave, the Puffer Finance Foundation proposes:

  • Governance Incentives:

    Allocating up to 10% of Puffer’s $CARROT (Puffer’s onchain incentives) token supply to incentivize borrowers and lenders interacting with pufETH on Aave. These incentives will reward early adopters and help seed liquidity in the pufETH market.

  • Borrowing and Supplying Rewards:

    A portion of the $CARROT token incentives will be distributed to users borrowing against or supplying pufETH on Aave, enhancing protocol activity and adoption.

Specification

Details of the onboarding of the asset will be discussed at ARFC stage.

Token Contracts

  • Ethereum: 0xd9a442856c234a39a81a089c06451ebaa4306a72

Chainlink Feed

  • 0xDe3f7Dd92C4701BCf59F47235bCb61e727c45f80

Conclusion

Listing pufETH on Aave represents a significant opportunity to integrate a highly liquid and secure restaking token into Aave’s ecosystem. By offering additional yield opportunities, diversifying collateral assets, and providing robust security, pufETH can contribute to Aave’s growth and strengthen its position as a leader in DeFi lending markets.

The Puffer Finance team is committed to collaborating with Aave’s risk assessment partners and the community to ensure a smooth and compliant listing process.

Next Steps

  1. If consensus is reached on this TEMP CHECK, escalate this proposal to the Snapshot stage.
  2. If the Snapshot outcome is YAE, escalate to ARFC stage.
  3. Publication of a standard ARFC, collect community & service providers feedback before escalating proposal to ARFC snapshot stage.
  4. If the ARFC snapshot outcome is YAE, publish an AIP vote for final confirmation and enforcement of the proposal.

Disclaimer

Current proposal has been edited by ACI, as this proposal is powered by Skywards. ACI did not received payment for proposal edition and is not affiliated with Puffer Finance.

Copyright

Copyright and related rights waived under CC0.

23 Likes

I strongly aggree adding $PufETH to Aave’s Ethereum V3 market. With robust security measures, deep liquidity, and an innovative restaking model, $PufETH not only offers Aave users dual staking and restaking rewards but also enhances the platform’s capital efficiency and TVL.

really attract is Puffer Finance’s $CARROT incentives, allocating up to 10% of the token supply, are designed to boost adoption and activity within the Aave ecosystem. these incentives lay a strong foundation for integration and reflect Puffer Finance’s commitment to sustainable growth and long-term value creation.

I’m support this proposal and drive mutual growth both !

8 Likes

Bullish on pufETH and strongly agree on pufETH listing on Aave.

  • Dual Rewards: Earn Ethereum staking and EigenLayer restaking yields alongside borrowing/lending income.
  • Security: Advanced anti-slashing, Secure-Signer tech, and audits by 10 firms ensure trust and reliability.
  • Liquidity: $279M TVL, $11M Curve pools, and growing DeFi adoption.|
  • Unique Offering: The only permissionless liquid restaking token (LRT) available.
  • Incentives: $CARROT token rewards to drive adoption and liquidity.

Overall, I think adding pufETH enhances Aave’s collateral offerings by providing a secure, high-yield, and liquid staking token. It diversifies Aave’s ecosystem, attracts liquidity, and strengthens its position as a DeFi leader.

8 Likes

I m in favor of this proposal

pufeth can offers dual rewards, deep liquidity, and restaking benefits. The $CARROT incentives would drive adoption and activity. I think PufETH can be a good choice for broadening Aave’s collateral offerings by providing a secure, high-yield, and liquid staking token, and attracting liquidity as well.

5 Likes

I support this proposal as well !

pufETH holders will use Aave and it will be win - win for both projects !

5 Likes

Been waiting for this, have so much pufETH sitting around.

5 Likes

Upvoted! :heart_eyes_cat:

I strongly support the proposal to add pufETH to Aave’s Ethereum V3 market. Thinking this integration is a win-win for both ecosystems
Look forward to seeing this collaboration drive growth and innovation for both of my favorite platforms! :smiling_face:

4 Likes

ACI has edited the current proposal to be governance compliant, under Skywards help.

We have also escalated the proposal to TEMP CHECK Snapshot.

Vote will start tomorrow, we encourage everyone to participate.

7 Likes

The addition of pufETH to the AAVE ecosystem will be a net positive for both ecosystem. Puffer has been building it’s LRT for over 1 year and it’s growth will only grow larger as other products are released in the very near future.

pufETH provides high yield and security to restakers. A lot of pufETH is waiting to be deposited on aave once this proposal goes through. Boosting AAVE TVL and growth even further as pufETH holders seek to deposit for additional returns, benefiting all parties.

Highly support this!

4 Likes

Note: We’re offering our preliminary review of pufETH to offer Stakeholders insights; while we believe that pufETH could be safely integrated within Aave, we find very little upside given the current liquidity and trends observed.

Summary

LlamaRisk does not recommend onboarding pufETH to Aave V3 Ethereum at this stage, given its current market trajectory and lack of demand. After the pufETH withdrawals were enabled on October 14th, 2024, its total supply declined sharply from $1.7B (535k pufETH) to $235M (73k pufETH) currently, with the downtrend continuing. This contraction has also impacted DEX liquidity, now at just $5.9M, representing the value of tokens available in LPs against the remaining 3k pufETH, a 12x reduction from the 36k pufETH available before the airdrop in October 2024.

pufETH Total Supply Flows. Source: IntoTheBlock, January 29th, 2025.

Additionally, new pufETH mints have been minimal, indicating a lack of demand. The validator cap has fallen from 0.84% to 0.16% in relation to its self-imposed 22% Burst Threshold. Key risk factors include double-slashing exposure from native restaking, pricing complexity due to its unique validator ticket (VT) model, and the absence of an active bug bounty program.

Collateral Risk Assessment (preliminary)

1. Asset Fundamental Characteristics

1.1 Asset

Key Statistics (as of January 29th, 2025):

  • Circulating Supply: 72,589 pufETH
  • Market Cap: $235M
  • Current Yield: ~2% APY
  • Launch Date: January 31st, 2023.

Contract: 0xD9A442856C234a39a81a089C06451EBAa4306a72

Puffer Protocol is a decentralized native liquid restaking protocol (nLRP) built on Eigenlayer. pufETH is a reward-bearing nLRT token, different from LRTs as it generates the rewards through native restaking. Users can deposit ETH, stETH, and wstETH to receive pufETH. The yield for pufETH comes from a diversified streams like PoS rewards, Validator Tickets (VTs) and Restaking rewards.

Users can withdraw pufETH using two different methods. The first one is one-step and is instant ETH redemption with a 1% fee (configured by DAO and burned); however, this option is only available as long as the PufferVault has enough ETH liquidity. The second method is a fee-free two-step withdrawal process that takes longer (14+ days) to process.

1.2 Architecture

Stakers can deposit ETH and mint the pufETH nLRT via the PufferVault (pufETH token) contract, which is a redeemable receipt for their restaked ETH. At the protocol’s inception, the pufETH/ETH ratio was 1:1. Currently, this ratio is around 1.032.

Conversion Rate = (deposits + rewards - penalties) / pufETH supply

Puffer Protocol Architecture. Source: Puffer Docs

Since pufETH is reward-bearing its value increases from Validator Tickets (VTs), PoS rewards, and restaking rewards. Validator Tickets are ERC20 tokens that grant the right to run a staker-funded validator by depositing ETH, and this ETH goes to pufETH holders for financing the validators. pufETH is minted when node operators (NoOps) deposit collateral worth 2 ETH (VTs + some ETH) to PufferProtocol contract. As soon as the PufferVault accrues 32 ETH in chunks from NoOp deposits, it creates a new validator within EigenPod to natively restake on Eigenlayer.

Though the VT model makes it capital-efficient to run a validator, it complicates the yield reward calculations for pufETH since it is repriced daily and can be traded on secondary markets. PoS rewards distribution is done through execution (immediately deposited into NoOp wallets) and consensus rewards (accrue in EigenPod via PufferModule and withdrawn upon NoOp exit). Restaking rewards comprise the accumulated fee commission restaking operators receive for executing AVSs on the module’s behalf. Users also accumulate Puffer Points on their pufETH holdings, but they’re separate from the LRT yield and rewarded via PUFFER airdrop.

Penalties are another factor affecting the rewards, and they happen when a validator gets slashed on PoS or the restaking operator gets slashed while running AVSs.

1.3 Tokenomics

PUFFER is the governance token for all Puffer products and services. The total supply is capped at 1B. It also has a vote escrow governance mechanism (vePUFFER). vePUFFER is used for voting and doesn’t require users to specify a lockup duration. The voting power increases over time, rewarding long-term engagement, but resets upon withdrawal, incentivizing rigid lockups.

PUFFER Distribution and Vesting Schedule. Source: Puffer Medium

Puffer has already distributed 85.5% of the 7.5% amount set aside for Season 1 of their airdrop, with the remaining tokens subject to a 6-month vesting period, which will conclude on April 14th, 2025. Season 2 has also commenced, with a total of 5.5% of the supply allocated for this round.

1.3.1 Token Holder Concentration

pufETH Top 100 Token Holders. Source: Etherscan, January 29th, 2025.

The top 5 holders of pufETH are:

The top 10 holders own 61.2% of the total supply. When considering the top 100 holders, this concentration increases to 89.7%.

2. Market Risk

2.1 Liquidity

pufETH/ETH swap within 7.5% price impact. Source: Odos Router, January 29th, 2025.

Odos Router shows that a user can swap up to 1740 pufETH ($5.59M) for ETH on Ethereum within 7.5% price slippage.

2.1.1 Liquidity Venue Concentration

pufETH DEX Liquidity. Source: IntoTheBlock, January 27th, 2025.

About 76.7% of pufETH’s liquidity (3104 pufETH, roughly $10M) is held by Curve’s pufETH/wstETH pool, followed by Balancer’s pufETH/wstETH (16.9%) and Uniswap’s pufETH/WETH pools (6.4%).

2.1.2 DEX LP Concentration

The liquidity for pufETH on DEXs across Ethereum is evenly distributed with moderate concentration among a few uesrs. The breakdown for the top 3 pufETH pools by TVL (as of January 29th, 2025):

2.2 Volatility

pufETH Peg Monitor. Source: IntoTheBlock, January 27th, 2025.

pufETH has crossed the -1% depeg threshold multiple times over the past month, indicating low liquidity in secondary markets. On August 5th, 2024, it experienced its largest depeg event, deviating by -5.46% against WETH and -4.35% against wstETH.

2.3 Exchanges

pufETH is exclusively traded on DEXs and is not currently listed on any centralized exchange despite being backed by Coinbase Ventures and YZi Labs (prev. Binance Labs).

2.4 Growth

Puffer TVL. Source: Dune, January 24th, 2025.

A massive decline in the total supply of pufETH was observed after October 14th, 2024, triggered by several key catalysts like Puffer Finance enabling withdrawals on pufETH, PUFFER token launch (end of airdrop season), and EigenLayer concluding its Season 2 Stakedrop and enabling transfers a couple of weeks prior in September 2024.

Once the airdrop season concluded, many airdrop farmers, including notable figures like Justin Sun, unstaked their pufETH, contributing to the rapid decline in its TVL. Since then, Puffer Finance has failed to maintain its dominance among other LRT protocols, and as a result, the TVL continues to decline to date.

Puffer has had two campaigns till now with the Season 2 ongoing. But its incentives aren’t targetted towards pufETH directly.

3. Technological Risk

3.1 Smart Contract Risk

Puffer Finance has been audited multiple times by leading audit firms:

The deployed smart contract code is verified, and the presence of these audits goes some distance in mitigating smart contract risk.

3.2 Bug Bounty Program

Puffer Finance does not currently have an active bug bounty program. Previously, they collaborated with Immunefi to launch Puffer Boost, an audited competition that ran from February 22nd to March 7th, 2024. The program offered a $50,000 guaranteed reward pool and an additional $200,000 for critical vulnerabilities. Over the course of the audit, 14 valid vulnerabilities (categorized as medium or low severity) were identified. The program’s full scope can be found here.

3.3 Price Feed Risk

Chainlink recently deployed a pufETH/ETH feed. The update trigger parameters are set at a 0.5% deviation threshold and 24-hour heartbeat.

3.4 Dependency Risk

EigenLayer Native Restaking
While the concept of restaking is promising, it introduces inherent risks to stakers. These revolve around potential AVS slashing. Puffer relies on reputable restaking operators (ReOps) like Eigenlayer to mitigate these issues and uses its anti-slashing mechanism (Intel SGX and its Secure-Signer, a remote signing tool to prevent slashable offenses). Since Puffer relies on native restaking by allowing PufferModules to service any AVS, it exposes the stakers and node operators to increased slashing risks. To mitigate this, Puffer initially restricted ReOp participation.

4. Counterparty Risk

4.1 Governance and Regulatory Risk

PUFFER is the governance token of Puffer Finance. The voting rights are reserved for the users who lock their tokens in the voting escrow token vePUFFER.

Puffer DAO Governance Model. Source: Puffer Docs

A minimum five-day discussion period allows community members to study the proposal on the Puffer Governance Forum. After the discussion period is over, the Puffer Governance Review Committee evaluates and finalizes the proposals for voting (min. 2 days).

The voting is exclusive to vePUFFER holders and is conducted through this platform. Voting epoch lasts seven days and occurs every Thursday at 12 am UTC. A simple majority decides the quorum. A minimum warmup period of 3 days is required for vePUFFER to become active for a vote. A staker needs to hold the escrow token for at least a month before withdrawing the underlying tokens through the exit queue, which takes 1 month to process the exit.

4.2 Access Control Risk

4.2.1 Contract Modification Options

pufETH is powered by two contracts:

The AccessManager contract handles the role-based controls for criticial protocol functions.

Role ID Role Label Role Granted
25 Withdrawal Finalizer Beacon Depositor, Puffer Operations Multisig
26 Revenue Depositor Puffer Operations Multisig
1235 Puffer Vault Withdrawer Puffer Protocol
1236 pufETH Burner PufferWithdrawalManager, Puffer Protocol, Puffer VT

4.2.2 Timelock Duration and Function

Puffer Finance has a 7-day timelock configured on the AccessManager contract.

4.2.3 Multisig Threshold / Signer identity

AccessManager has the authority of the pufETH ERC20 contract. The Puffer Operations Multisig, which handles critical roles like withdrawal finalizer and revenue depositor, is a 3/6 threshold safe.

Note: This assessment follows the LLR-Aave Framework, a comprehensive methodology for asset onboarding and parameterization in Aave V3. This framework is continuously updated and available here.

Disclaimer

This review was independently prepared by LlamaRisk, a community-led non-profit decentralized organization funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.

The information provided should not be construed as legal, financial, tax, or professional advice.

6 Likes

Here are some key figures on liquidity:

  • TVL: 74k ETH
  • Immediate withdrawal liquidity: ~19k ETH Puffer Vault
  • Onchain liquidity: ~1.8k ETH
  • Current APY today: 3.89%

One of the main drivers of LRT and LST protocol’s growth has been the leverage that AAVE provides, as demonstrated by platforms like Lido, EtherFi, and Kelp, as well as significant value generation for AAVE.

We are allocating up to 10% of our Season 2 airdrop (CARROT and PUFFER tokens) to AAVE, currently valued at $6.7M(Carrot (CARROT) Token Tracker | Etherscan) which does not include the extra benefits users can get after participating in the lending activity.

As LlamaRisk has mentioned, we are safe to integrate with AAVE in terms of both liquidity and onchain liquidity. The only downside is the current demand which will be resolved through our innovative incentive program.

To provide more options to users and diversify risk, similar to Rocketpool VS Lido, I believe it would also be beneficial for AAVE to list the only permissionless LRT.

16 Likes

After reading this proposal I support it! I’ve staked on Puffer for a while and this is nice step to grow both AAVE and Puffer ecosystems. :ok_hand:

7 Likes

Listing pufETH on Aave’s Ethereum V3 market offers a unique opportunity to diversify collateral with the only permissionless LRT. This listing can boost Aave’s TVL and diversify its collateral offerings!

9 Likes

This makes sense. As noted by LlamaRisk, pufETH meets safety standards for integration, with strong on-chain liquidity and market demand. Given pufETH’s position, demand will only strengthen, especially post-Aave listing.

This integration not only enhances Aave’s value proposition, making the lending ecosystem more appealing to both new and existing users, but also reinforces Aave’s leadership in decentralization and user choice by listing the only permissionless LRT.

Let’s make it happen!

8 Likes

Absolutely agree with this proposal! With 74k ETH TVL, strong liquidity, and the 10% airdrop allocation to AAVE, integrating pufETH into Aave V3 would enhance collateral diversity and reinforce Aave’s leadership in decentralization. This move is a win-win for both protocols—let’s make it happen!

7 Likes

After some analysis, I am in support of onboard pufETH to Aave v3. Some key reasons:

  • Puffer is a tier-1 US-based LRT project backed by the likes of top names from Web2 TradFi (Franklin Templeton) and Web3 VCs (Coinbase, Binance)
  • While new pufETH mints has been lower, the launch of their new Season 2 ($Carrot) is bound to attract more inflow. I personally hold quite a significant amount of PufETH
9 Likes

I am 100% in support on onboarding pufETH to Aave and commit to using personally and for my fund. The team and product are Blue-chip and importantly, making sure that pufETH is on Aave is important for Ethereum’s decentralization by making sure theirs’s a robust diversity of LSts/LRTs

5 Likes

Great stuff! Supporting this as I have some pufETH around in my wallet

6 Likes

Onboarding pufETH to Aave V3 could bring more utility, unlock new opportunities for users, and promote adoption in both ecosystems.

The added liquidity and composability benefits make this a strong candidate for integration.

Looking forward to seeing how this develops! :rocket:

5 Likes

I’m strongly in favor of adding pufETH to Aave V3. It’s the only permissionless LRT (offering double yield from staking and EigenLayer restaking) and comes with strong security (anti-slashing, Secure-Signer). Puffer’s upcoming incentives (up to 10% of $CARROT) will jump-start demand. For Aave, this means more TVL, diversified collateral, and a compelling new yield option for users. Let’s make it happen!

4 Likes