Proposal to Launch wstETH FiRM Market and Decommission the stETH FiRM Market
Summary
This proposal seeks to add wstETH as collateral on FiRM, Inverse Finance’s flagship fixed-rate lending protocol. This will be done in tandem with decommissioning the currently live stETH FiRM market. wstETH is the wrapped version of stETH, Lido’s liquid staking derivative of Ethereum.
Motivation
The stETH market on FiRM was one of the first to be added as collateral after the initial launch of FiRM, late in 2022. However, this market has not been a huge success on FiRM throughout this time, rarely having a total debt of over 100,000 DOLA. At the time of writing, the stETH market has the 2nd lowest level of borrowing on FiRM, with 72,970 DOLA debt. However, other lending protocols such as crvUSD, PRISMA and Aave have had huge success with the wrapped version of the collateral (wstETH) on their lending markets. On all 3 of these examples, wstETH is the collateral with both the highest TVL, and has driven the most amount of borrows. On crvUSD, the average borrow rate against wstETH collateral has been 15.03% (source: curve.monitor), significantly higher than the average price of DBR in the same period.
A potential reason for the underperformance of FiRM’s stETH market relative to other lending protocols is due to the tax inefficiency of holding stETH in the majority of jurisdictions. Income earned from staking is realized to stETH every 24 hours by a rebase, meaning that holding it (even in a PCE) will potentially create a constant income tax liability (and a huge headache when it comes to reporting taxes), even if the market value falls over time. wstETH on the other hand is a wrapped version of stETH, which can be minted/redeemed for stETH and the correct exchange rate. This mitigates the tax inefficiencies of stETH, in the majority of jurisdictions. Due to this, we are going to offboard the stETH market, and in place, onboard a wstETH market to FiRM as a replacement. There is still untapped demand for fixed-rate borrowing against the largest staked Ethereum derivative, and FiRM is looking to serve this.
Parameters
The wstETH market will be deployed with the same parameters as the stETH market currently has, and the risk assessment for stETH can be applied to wstETH, given it is the same asset (but wrapped). One small change though will be a reduction in the daily borrow limit, down to 200,000 as is standard when deploying new markets to FiRM.
Launch parameters:
- Supply ceiling: 5,000,000 DOLA
- Initial Fed Supply: 150,000 DOLA
- Daily Borrow Limit: 200,000 DOLA
- Liquidation Factor: 35.8%
- Collateral Factor: 80%
- Liquidation Incentive: 10%
- Minimum debt: 2,000 DOLA
As part of the decommissioning of the current stETH market, the supply ceiling will be set to 0 DOLA and borrowing will be disabled. This will not impact any user with debt in the stETH market currently. It will just mean that no more additional borrowing will be possible on this market.
Conclusion
Adding the wstETH market to FiRM is a calculated step to both increasing borrows against staked Ethereum assets and overall diversifying the debt backing of DOLA on FiRM with high-class options.