Proposal to add st-yETH Market to FiRM

FiRM
1

Summary:

This proposal seeks to add the st-yETH market to FiRM, Inverse Finance’s fixed-rate lending protocol. Staked yield-bearing tokens, such as st-yETH, represent an innovative approach to maximizing returns in DeFi. By integrating st-yETH into FiRM, we can offer users the opportunity to leverage their Ethereum holdings to access fixed-rate lending, further expanding the utility and accessibility of our platform.

Background:

ETH Liquid Staking Derivatives (LSDs) represents a sizable and still growing segment of DeFi, with 13.05MM ETH or ~$39.2B in TVL. Lido is market leader in this category, and FiRM already has a live wstETH market that has shown strong demand since launch.

Inverse Finance and Yearn Finance, a long-time partner, have been exploring collaborative opportunities centered around Yearn’s yETH. yETH is a user-governed liquidity pool token consisting of various Ethereum LSTs. Each of the 8 LSTs in the yETH pool is priced according to the amount of beacon chain ETH it represents. Users deposit their LSTs into the pool and receive yETH tokens pegged 1:1 with beacon chain ETH. Users can also stake their yETH tokens to mint st-yETH, accrue yield, and participate in yETH governance.

The yETH protocol is governed by its users who vote every epoch on yETH composition (up to 10% of the weight is redistributed every epoch with weight limit per LST set to 33%), accepting new LSTs into yETH, as well as governance proposals and parameter configurations. All yields generated by yETH go to Staked yETH (st-yETH) holders, making yETH an ideal token for liquidity providing in stableswap pools like those on Curve, and st-yETH an ideal collateral option on lending protocols such as FiRM. By bundling LSTs, st-yETH aims to generate the best risk-adjusted yield from ETH staking.

Risk Assessment:

Inverse Finance’s RWG produced a risk assessment on yETH and the potential of st-yETH as collateral within Inverse Finance’s FiRM protocol. This can be accessed here. The assessment covers various aspects including governance structure, security measures, collateral analysis, oracles, token statistics, utility, and competitive analysis. Key points highlighted in the assessment include:

  • Governance Structure: st-yETH holders vote on the backing of yETH, adding and removing assets, as well as changing the exposure to each one.
  • Security: Yearn has robust security frameworks, multiple audits from reputable firms, and an active bug bounty program on the ImmuneFi platform.
  • Collateral Analysis: yETH showcases decent on-chain liquidity, stable price pegging mechanisms, and has undergone audits to ensure security.
  • Oracles: We utilizes Curve’s stableswap pool to price yETH against ETH, then using the ETH chainlink price feed, providing a reliable mechanism for real-time valuation.
  • Escrow Design: It has been clarified that Yearn Finance plans to transition from snapshot to on-chain voting for yETH governance, though an exact timeline has not been confirmed. Therefore, for the upcoming deployment, the voting power associated with st-yETH within FiRM will be inactive.
  • Token Statistics: yETH has $17M TVL (5,770 ETH) and is primarily staked or deposited in liquidity pools.
  • Utility & Use Case: While yETH itself doesn’t earn yield, it is used for providing liquidity in pools like Curve, and staking yETH into st-yETH allows users to earn yield from underlying LST.

Based on the assessment, st-yETH is considered a solid collateral option for FiRM, with appropriate risk mitigation measures in place. Parameter recommendations are provided to ensure stability and risk management within the protocol.

Conclusion:

The addition of the st-yETH market to FiRM represents a strategic move to expand our platform’s offerings, aligns with our goal of diversifying collateral backing for DOLA, and caters to the growing number of LST users. By providing access to fixed-rate lending against st-yETH, we empower users to build on top of their DeFi strategies while contributing to the stability and growth of DOLA.

On-Chain Actions:

  1. Add st-yETH Market to DBR contract
  2. Set borrowController of Market to FiRM BorrowController
  3. Set FiRM Oracle price feed for st-yETH to the deployed st-yETH PriceFeed contract
  4. Set market supply ceiling to 2,000,000 DOLA
  5. Set daily limit in BorrowController to 100,000 DOLA
  6. Set Liquidation Factor to 48%
  7. Set Collateral Factor to 70%
  8. Set Liquidation Incentive to 10%
  9. Set MinimumDebt in BorrowController to 3000 DOLA
  10. Set stalenessThreshold for st-yETH market to 86430
  11. Approve st-yETH market on the DBR Helper