icETH Parameter Update #1

Title : icETH Parameter Update #1

Status : Posted, To be Implemented

Authors : @sidhemraj , @allan.g
created : 2022-05-11

Simple Summary

Update Supply Cap for icETH from 15,000 units to 30,000 units, increase Max Trade Size for rebalancing from 3,000 ETH to 6,000 ETH on Curve, and increase Ripcord Max Trade Size from 15,000ETH to 16,000ETH.

Abstract

Adjust the following parameters for icETH:

  • Raise Supply Cap from 15,000 tokens to 30,000 tokens
  • Increase Max Trade Size from 3,000 ETH to 6,000 ETH
  • increase Ripcord Max Trade Size from 15,000 ETH to 16,000 ETH

Motivation

As a response to market conditions, the Product Pod plans to update the supply cap on icETH.

The supply cap on icETH is a function of overall TVL the Leveraged Liquid Staking Strategy can support, which is a function of ETH borrow rates on AAVE ETH market and underlying stETH liquidity. The new AAVE interest rate model for ETH has led to high borrowing capability, which has quintupled the TVL ceiling for the LLSS strategy.

The target leverage ratio on icETH is 3.10, and a rebalance is only initiated once the LR hits the lower or upper LR bounds ie 3.0 or 3.2. As icETH accrues the ETH staking yield on a daily basis, the Leverage Ratio continues to decline as the value of stETH added as collateral increases. The yield accrued, apart from any temporary dislocations in demand for stETH relative to ETH(also called depeg), could trigger a rebalance back to the target LR. A rebalance would basically trade stETH for ETH or vice versa, depending on if we are levering up or down, and repay the AAVE loan/borrow more ETH.

As the supply of icETH increases, so do AUM and the associated leveraged positions. When the price of stETH against ETH falls, AUM and the associated leveraged positions must be rebalanced in order to maintain a healthy leverage ratio, and the primary tool for facilitating rebalances is Max Trade Size. Therefore, as the supply of icETH increases, it is critical to adjust Max Trade Size.

In this case, the Product Pod would like to propose the following parameter changes:

  1. Raise the Supply Cap from 15,000 units to 30,000 units

  2. Reasoning: At the time of writing, total supply of icETH has crossed 7,500 units, i.e. 50% of its initial supply cap, 1 month post-launch. We anticipate further demand from retail buyers and other large mints facilitated by the growth team, and we would also like to avoid dislocation from NAV in the event that a supply cap is reached and secondary market demand creates a premium.

  3. Increase Max Trade Size for rebalance transactions from 3,000 ETH to 6,000 ETH

  4. A higher supply cap as stated above would necessitate the need to ensure the product can rebalance safely and quickly. A change of MTS from 3,000 ETH to 6,000 ETH would only affect the exchange rate by 0.0001ETH (Price Impact).

  5. Increase Ripcord Max Trade Size for Ripcord transactions from 15,000 ETH to 16,000 ETH

  6. Background: The Ripcord function is called in extreme circumstances when the leverage ratio is dangerously outside the bounds of the safe range and leveraged positions are at risk of liquidation. For this reason, a separate set of emergency parameters apply to ripcord transactions.

  7. The Ripcord Max Trade Size needs to be increased in tandem with the increase supply cap, however the magnitude of increase isn’t as high as the Max Trade Size increase for regular rebalance transactions, due to the 2 reasons -

  • The earlier Max Trade Size for regular rebalances was set lower than possible as a precautionary measure.

  • The liquidity on Curve stETH:ETH dipped slightly since launch, with the stETH:ETH balance changing in the last few days.

Context

The Product Pod at Index Coop designed and maintains the icETH product, and parameter updates are part of the Risk Management function inside the Product Pod. The authors are contributors to the Product Pod.

6 Likes

What is the rationale for having a Max Trade Size for rebalancing? It seems potentially limiting to rebalancing speed/efficiency, so I am curious what the intended benefit is.

1 Like

Updating here that this param update has been put on hold due to the recent changes in the market conditions around the stETH:ETH peg. This will be reviewed as stETH:ETH peg improves.