Summary
This is a discussion to gather feedback on the technical feasibility and the possibility of adding st-yETH as a market on FiRM, Inverse Finance’s fixed-rate lending protocol. The st-yETH market would operate like other markets on FiRM, with parameters set to manage exposure and risk efficiently.
Background
yETH is a user-governed liquidity pool token consisting of various Ethereum Liquid Staking Derivatives (LSTs) deployed and managed by Yearn. Its aim is to provide an optimal risk-adjusted yield for ETH staking by dynamically adjusting the weights of the LSTs in the pool. It has already seen some traction, amassing a around 16M TVL at the time of writting. st-yETH is the stacked version of yETH, accruing yield from the underlying basket of LSDs + the swapping fees. It currently offers around 5.35% APR, which is the highest LSD yield on the market.
Market Opportunity
I believe that st-yETH represents a strong opportunity for both Inverse Finance and Yearn for multiple reasons:
- yETH has an impressive design and has the potential to become a major player in the LSD field. I expect that the diversification and high yield that it offers, will attract a large TVL over 2024. Offering st-yETH as a collateral on FiRM would allows Inverse finance to tap into this growing liquidity of premiums collateral to back DOLA. While offering leverage on this new asset for the growing yETH user base.
- st-yETH has not yet been integrated with any lending market, creating a first mover advantage for Inverse finance and potentially catalysing all the early demand for st-yETH leverage. This is a unique opportunity to compete in the LSD space. (EDIT it has now been in added into Ajna permisionless lending protocol confirming demand for it)
- st-yETH appeal also come from voting incentives from the LSD protocols composing the pool. Inverse is uniquely positioned to offer borrowing on this asset while retaining the voting power and thus the incentive reward potential.
- st-yETH is a premium collateral whose ultimate underlying is ETH.
Technical feasability
One goal of this post is to clarify the technical feasibility of a st-yETH Market.
It seems that offering st-yETH retaining voting powers is feasible based on similar asset offered and discussion in the discord channel.
- There is a ETH-yETH curve pool so a Curve-ema + PPO oracle seems possible to implement. This part will need clarification from the product team, as the st-yETH implementation and pricing might be different from other similar token. Having the voting power intact is a must, IMO for this to be attractive to st-yETH holders.
Interest from Yearn community & yETH holders
I have gauged the interest of a st-yETH market in the Yearn community and received positive feedback. There is definitively interest from the community, I will send the link to this discussion in the yearn discord to incentivize those interested to comment here.
Risk Assessment
A comprehensive risk assessment should be conducted to evaluate the implications of integrating st-yETH into FiRM by the risk working group Key considerations include:
- Security: Yearn finance has a great development team and take security very seriously.
- Regulatory Risks: Yearn is a DAO and decentralized.
- Collateral & Liquidity: yETH showcases good and growing on-chain liquidity, which should be enough for a correctly capped borrowing capacity.
Timeline
I have waited for sDOLA to be live for this proposal, as to be attractive it will need to have some borrowing capacity. Overtiem sDOLA should help increase loan capacity for FiRM which should be able to list new collateral like st-yETH with significant borrowing liquidity. If the potential and technical feasibility are confirmed I think it should be open as soon as possible after so that we can benefit from being the first avenue to propose loan on st-yETH and catalyse the demand for it.
Conclusion
The integration of st-yETh into FiRM aligns with our objective of expanding our market offerings and showcase FiRM’s unique features and help diversify DOLA backing with a premium collateral whose ultimate underlying is ETH. Being a yield bearing token is the perfect target for a collateral on FiRM, as users will be interested to leverage it or take a liquidity loan while letting their collateral grow in value. the market opportunity is not huge at this point but I believe it is an early bet on yETH growth which has a nice risk reward ratio (depending on the necessary work to integrate it properly). Also the fact that it might not have a huge demand directly is also adapted with the limited but growing loan capacity of FiRM.
On-Chain Actions
Subject to review by the technical team, this is a general on-chain actions plan to give an idea of the step involved, and parameters are to be changed according to rwg assesment.
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Create an st-yETH Market
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Create an st-yETH Oracle Feed
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Add st-yETH Market to DBR
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Set the borrowController of the st-yETH Market
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Set the st-yETH Feed to the FiRM Oracle
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Set st-yETH Market Supply Ceiling to 2,000,000 DOLA
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Set Initial Fed Supply to 1,000,000 DOLA
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Set st-yETH Market Daily Borrow Limit to 500,000 DOLA
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Set st-yETH Market Collateral Factor to 80%
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Set st-yETH Market Liquidation Factor to 20%
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Set st-yETH Market Liquidation Incentive to 5%
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Set Staleness Threshold of st-yETH market to 86430