Onboarding weETH <> wstETH vault to Fluid

[DMH]

Summary

This proposal seeks community support to introduce a weETH/wstETH vault within the Fluid Protocol. The initiative aims to tap into the growing interest in the Liquid Restaking Token (LRT) space, particularly from protocols like ether.fi, to enhance the protocol’s competitiveness and market positioning. This proposal would introduce Wrapped Ether.Fi ETH (weETH) into the Fluid ecosystem.

Proposal

This proposal taps into the growing LRT market with the addition of a weETH/wstETH vault, capitalizing on the rapid expansion of the LRT segment and the unique position of Fluid to offer the market’s cheapest leverage. This move is anticipated to not only capture a significant share of the LRT market but will also bring utilization to the wstETH liquidity on Fluid that is currently not being utilized at all!

Recap of Fluid Vault Parameters

Fluid’s vault protocol features some familiar and as well as some new concepts for understanding the vault’s limits and parameters. See the following below:

C.F (Collateral Factor): Limit till which user can borrow.
L.T (Liquidation Threshold): Limit at which the user starts to get liquidated.
L.M.L (Liquidation Max Limit): Limit above which the user gets 100% liquidated.
L.P (Liquidation Penalty): Penalty at liquidations. Applied between L.T to L.M.L.
W.G (Withdrawal Gap): Extra gap on Liquidity Layer limits reserved for liquidations.

Liquidation Max Limit or L.M.L which denotes a level at which a position is fully liquidated. While most positions will incur liquidations over time the Liquidation Max Limit prevents the debt from becoming undercollateralized in a sudden downfall.

weETH/wstETH Vault Parameters:

The proposed vault will feature the following initial parameters:

• Collateral Factor (C.F.): 91%
• Liquidation Threshold (L.T.): 93%
• Max Liquidation Limit (L.M.L.): 95%
• Liquidation Penalty (L.P.): 1%
• Withdrawal Gap (W.G.): 5%

These parameters are set up to offer high LTVs which maintain a tight liquidation threshold. These limits may change over time as the vaults operate in a live environment. Liquidity, Dex routing and other factors may affect the vault. The team will monitor the overall health and liquidation rates and may propose adjustments to the vault parameters.

Summary of Changes to Fluid:

• List weETH/wstETH (Wrapped Ether.fi ETH/Wrapped Staked ETH) as a Vault

Reasons

Risks

The proposal acknowledges potential risks associated with the rapid growth of weETH and proposes monitoring weETH backing at the contract level to mitigate price manipulation and ensure robustness against major slashing events.weETH has experienced rapid growth over a short period of time driven by high incentives and speculation around the Eigen Layer. Such growth also comes with a risk of rapid unwinding if the new technology faces critical issues (EtherFi is 4x audited).

On-chain liquidity for weETH is sufficient to liquidate 8100 weETH at once with less than 1% slippage.

LRT Opportunity and Landscape

LRT space is one of the hottest and fastest-growing segments in DeFi right now. Eigen Layer, the biggest restaking protocol, has reached $8.9B TVL while EtherFi, the biggest staking protocol has reached $1.7B TVL in a matter of 2 months.

One of the reasons for their success is the Points system which allows users to farm future airdrops from multiple protocols at a time (EigenLayer + EtherFi). Other protocols that integrated LRTs have shown similar results.

Pendle has grown from $200m to $1.8B TVL in 2 months:

Gearbox recently integrated LRT and has shown incredible growth limited by the internal caps:

One of the main reasons for Pendle’s and Gearbox’s growth is the ability to leverage points by the users.

The cost of leverage on the above protocols is around 25%-30% APR.

By implementing weETH/ wstETH, Fluid would be able to offer the cheapest leverage on the market: weETH and wstETH native yield cancel each other and if Fluid applied the same interest rate model as on the ETH market, leverage cost would only be around 2-3% which is around 13 times cheaper than on other platforms (with the current Interest Rate Curve).

Moreover, with the recent proposal to add Fluid wstETH/ETH Vault to Lite Allocation Pools, adds to the utility of the wstETH liquidity in the Fluid protocol.

Fluid tapping into LRT space would potentially bring hundreds of millions in TVL increasing its revenue and adoption.

Result

The successful addition of the weETH/wstETH to the Vault protocol with the aforementioned parameters an on-chain vote is required from governance to finalize and approve this proposal.

[miscao]

Not as familiar with this segment of the market, but it sounds like a good opportunity to increase TVL and ultimately revenue for the protocol.

[samyak]

Interesting proposal!

wstETH is an idle asset sitting in Liquidity Layer. This will allow users to borrow wstETH and allow them to leverage farm points.

weETH seems to have pretty decent liquidity in market to allow any instant liquidation and also weETH has withdrawal open which will make sure that depeg risk in extremely low.

Majorly, I believe the risk here is of slashing and other risks are considerably low.

And on oracle related risk. As the vault is ETH based debt & collateral, I think it would make sense for oracle to follow the same pattern as what we are using wstETH/ETH vault which is getting the price of wstETH from wstETH contract rather than open market. This updates the oracle with slashing losses, although ignores the short term depeg or price manipulation in open market.

@DMH

By implementing weETH/ wstETH, Fluid would be able to offer the cheapest leverage on the market: weETH and wstETH native yield cancel each other and if Fluid applied the same interest rate model as on the ETH market, leverage cost would only be around 2-3% which is around 13 times cheaper than on other platforms (with the current Interest Rate Curve).

According to current leverage market of eETH which is Pendle & Gearbox. I feel the accepted borrow rate for users to comfortably leverage is around 25-30%. So I believe Fluid should also update the interest rate curves for wstETH market such that user have a borrow rate should be between 15-30% this will allow Fluid’s wstETH lenders to get better APRs and thereby attracting more wstETH lenders.

Final thoughts

Overall I’m in support of this proposal!

Although for smooth and secure launch of this market Fluid will need to make some adjustments:

1. Launch the weETH/wstETH vault with a tight debt ceiling.
2. Update interest rate curve atleast for wstETH.
3. Use backing of ETH as oracle price rather than current market price.

[TQT-dev]

Would bring a lot of TVL to Fluid! I’m definitely a supporter!

Suppose it will be launched with limits like we do now and like gearbox did aswell!

[ignas]

Much needed addition to make Fluid competitive in the market.

A few thoughts:

First, shortly after DMH proposal, Prisma together with Llama Risk research team conducted a report on Etherfi examining Market Risk, Technology Risk, and Counterparty Risk.

They found that EtherFi ranks just “ok” or “good” in most criteria, but recommends compromise by introducing “weETH as a collateral asset on permissionless lending protocols, set with conservative parameters including suitable max loan-to-value ratios and debt ceilings that anticipate potential depeg events or sharp declines in liquidity.”

As Fluid would introduce an isolated market for weETH, I believe this report fits well for Fluid as well.</

Full report: Collateral Risk Assessment - Wrapped EtherFi ETH (weETH) - HackMD

Secondly, market opportunity for LRTs is massive. It’s highly likely that LRTs will be introduced in all major lending market places like Aave and Compound, therefore Fluid could lead instead of following the market, establishing itself as the leading lending/borrowing protocol for the new LRT era of DeFi.

Third, EtherFi is giving rewards in points, but it’s highly possible that EtherFi will launch the token after the market on Fluid is launched, therefore the airdrop speculation shouldn’t be a factor to influencer deploying the weETH/wstETH market.

Overall, I believe suporting the weETH/wstETH market is the right move forward.

Currently, weETH works more like an LST and the risks are lower, but as the market develops and more AVSes by Eigenlayer are launched, the risk profile of weETH will change, therefore there needs to be a continuous due diligence.

[mattgurbiel]

Hello,
Matt from RedStone Oracles here.

RedStone has been selected by ether.fi in November 2023 as the Oracle provider (with the price discovery based on DEX’es liquidity) and for the past couple of months, we’ve been serving the weETH price feed to multiple protocols across Ethereum Mainnet and Arbitrum, soon on other L2s.

We believe that a purely market-based approach to pricing weETH is currently the most robust option as it gives protocols access to the true liquidation price. This is the solution selected by the vast majority of the lending protocols that partner with us. We prepared the methodology dedicated to LST/LRT assets, where we constantly monitor the on-chain liquidity of weETH and in real-time we can disconnect the sources when slippage increases above the safe level. The weETH market-based feeds denominated in USD and ETH have been operating on production since December 2023 and are available for consumption with the below details:

weETH/USD
Active Users: Sommelier
Deviation Threshold: 1%
Heartbeat: 6h
Address: 0xdDb6F90fFb4d3257dd666b69178e5B3c5Bf41136

weETH/ETH
Active Users: Morpho, Silo, Gearbox, Prisma, Gravita, Term Finance
About to launch: Ion Protocol, SturdyV2, Venus
Deviation Threshold: 0.5%
Heartbeat: 24h
Address: 0x8751F736E94F6CD167e8C5B97E245680FbD9CC36

However, if Fluid has a strong preference towards a contract-based price feed, we would suggest merging the market price feed with the contract exchange rate to improve the data quality. The access to both feeds could also protect against exploiting Fluid in case of a depeg of the asset (i.e. the protocol could block deposits to prevent malicious arbitrage).

Whatever the final choice of pricing methodology is, the RedStone team is here to cooperate closely with Fluid and set up the right price feed for this use case. We’ve been observing the progress, we’re in close contact with the core team and are excited about the expansion ahead!

[Seb_EthMonk]

I concur that leveraging wstETH as an idle asset within the Liquidity Layer is beneficial for borrowing and leverage farming. The high liquidity of weETH supports swift liquidation, and the option for withdrawal minimizes depeg risks. The proposed factors work well with the asset. The primary concern around slashing is recognized and other risks appearing manageable.

For ETH-based debt and collateral, using a strategy similar to the wstETH/ETH vault, which relies on prices directly from the wstETH contract, will avoids the pitfalls of short-term market price manipulations. The weETH contract, similar to stETH, is fully backed with the downfall being issues around withdrawal/redemption times.

[samyak]

Interesting points!

@samyak

And on oracle related risk. As the vault is ETH based debt & collateral, I think it would make sense for oracle to follow the same pattern as what we are using wstETH/ETH vault which is getting the price of wstETH from wstETH contract rather than open market. This updates the oracle with slashing losses, although ignores the short term depeg or price manipulation in open market.

All consider Fluid won’t be affected with the temporary depeg or price manipulation as I explained above.

Liked the report on weETH!

[DMH]

Thank you for your reply!

One of the main points I haven’t spoken about is that wstETH is the biggest market on Fluid and it generates 0 revenue.

With the implementation of the weETH <> wstETH vault, Fluid will be able to monetize this liquidity.

[DMH]

Thank you for your reply and for attaching the report - it was very insightful however I might not agree with some points in there.

Another reason why adding the weETH market could be beneficial for Fluid - is because, in my opinion, LRTs will replace LSTs over time, and being early in this market gives a competitive advantage for the lending protocol.

[samyak]

Hey Matt! Good to see you here.

So on LSTs or LRTs oracles, what I believe is if the pair is stable (eg: ETH <> stETH, ETH <> eETH, ETH <> rETH) & LST/LRT is redeemable then the main risk is of slashing and the risk of depeg is very minimal and people can instantly arbitrage the depeg, hence using current market price can result more riskier as a few minutes of depeg can create a cascading effect of liquidations.

However if the pair is not stable (eg: stETH <> USDC, eETH <> USDT, rETH <> WBTC) then the current market price is very important as tokens volatility can even be -+10% w.r.t each other in just few hours which will need to trigger instant liquidation to not put the protocol in bad debt.

With that being said, the current params as suggested by @DMH keeps the protocol safe even at 7% depeg.

Another thing, the vault will be launched with tight debt ceiling and as Fluid has automated debt ceilings. Sudden depeg won’t allow new users to come and do leverage as the limits will be reached.

In general, what I believe is using market price of these pairs might even result riskier for protocol & users if the market liquidity of the pair is thin or there is a sudden sell offs.

Additional things to consider for the market of stETH <> ETH & market of eETH <> ETH.

• In case of stETH <> ETH market, your position gets safer overtime as the interest on wstETH is higher than borrowing ETH.
• In case of eETH <> ETH market, your position gets riskier overtime as users are farming points and they are fine paying more on borrowing (even upto 30-40% borrow rate).

That means having liquidation of eETH <> ETH vault are much more likely which adds a risk of force selling which can temporary impact price. For example, a user with 1,000 weETH can create a 10x leveraged position of 10,000 weETH. If this user gets liquidated fully that means a sudden sell off of 10,000 weETH in the market which at current situation will move the price by 30% which will create a cascading effect of liquidation for all other leveraged positions if market price is used.