Title: Launch the Gitcoin Staked ETH Index (gtcETH)
Authors: @allan.g, @funkmasterflex, @MrMadila
Created: 20 February 2023
1.0 Simple Summary
In partnership with Gitcoin, the Index Coop would like to propose the Gitcoin Staked ETH Index (gtcETH), which will provide diversified exposure to the top liquid staking tokens and share a portion of staking rewards with Gitcoin in support of public goods funding.
gtcETH will enable token holders to access the top ETH liquid staking tokens through a single token while simultaneously contributing to public goods funding. gtcETH will employ the dsETH methodology, which promotes decentralization and competition amongst liquid staking protocols.
Public goods are an integral part of Ethereum’s past, present, and future. Ethereum itself is built on the premise that a wide variety of stakeholders can come together to build, and ultimately depend on, public goods that serve the collective interests of the community. No single organization embodies this mission as much as Gitcoin DAO. Since 2017, Gitcoin has provided over $72m in grants and bounties funding to thousands of teams and developers. Raising funds for public goods, however, can be unpredictable and inconsistent because of the donation-dependent models in place today. DeFi–specifically liquid staking, streaming fees, and Index Coop–can help this.
gtcETH gives token holders the ability to earn and share diversified staking rewards with Gitcoin by holding an index of the top liquid staking tokens and enabling a streaming fee. For token holders, the annualized streaming fee of 2.00% (1.75% for the Gitcoin DAO and 0.25% for Index Coop) is collected in a passive fashion, so aside from buying and holding the token, gtcETH holders don’t have to do anything to earn staking rewards for themselves and fund public goods. For Gitcoin, gtcETH provides a consistent, subscription-like revenue stream for funding grants and/or bounties as well as a low-friction access point for contributions. gtcETH also provides a positive-sum option for those considering donations because token holders retain price exposure to ETH and earn some staking rewards while simultaneously donating to public goods (versus an outright donation where the user must forfeit their ETH).
gtcETH will utilize the dsETH methodology and technology, so users can effectively distribute their stake across the top liquid staking protocols and earn an aggregate staking return (minus the streaming fee). Rather than selecting a single liquid staking token and concentrating risk, gtcETH token holders benefit from its innate diversification - both at the asset and the protocol layer. The methodology is also weighted towards protocols with more node operators and balanced distribution of stake, with the objective of encouraging decentralization and competition in the on-chain liquid staking market.
Within the Ethereum ecosystem itself, public goods help create an environment that is conducive to innovation and growth and attract new developers, users, and businesses to the platform. Public goods also help advance a decentralized and democratized internet by providing a secure, accessible, and credibly-neutral ecosystem that empowers individuals, communities, and organizations. At the core of this ecosystem is ETH the asset, which stands to gain from public goods development and the associated network effects.
ETH is the most prominent and most liquid asset in DeFi. It functions as a utility token, a medium of exchange, an interest bearing asset, and store of value (amongst other things). With a market cap of $197B and an average annual return of 194% over the last five years, there are many investors eager to grow their ETH holdings.
In ETH terms, staking is one of the most popular methods for earning a return within the ecosystem. Approximately 14% of ETH circulating supply has been staked on the beacon chain with deposits earning ~4% APR at time of writing. Dozens of different “staking-as-a-service” providers have emerged as a result, ranging from centralized entities like Coinbase and Kraken to more decentralized protocols like Lido and Rocket Pool.
Within the DeFi ecosystem, protocols that offer liquid staking tokens - interest bearing tokens that represent staked ETH and its rewards - have experienced tremendous growth due to low deposit requirements and higher returns compared to centralized services. The largest decentralized protocols are also incentivized to maximize transparency and minimize trust assumptions for users, and also provide secondary market liquidity for their liquid staking tokens.
As more liquid staking protocols emerge, stakers are confronted with the decision of which one(s) to entrust with their ETH. Also, because these protocols and most of their token liquidity are native to Ethereum main net, it can be exceptionally expensive to manually deposit to multiple protocols or buy multiple tokens off secondary markets in an effort to diversify your stake. Gitcoin Staked ETH addresses these pain points and enables passive public goods funding by indexing the most prominent liquid staking tokens and bundling them up into a single ERC-20 token.
gtcETH will be built on Index Protocol and contain Rocket Pool, Lido, and StakeWise liquid staking tokens. Lido’s stETH will be wrapped in order to accommodate its rebasing nature, and StakeWise rewards will be reinvested on a periodic basis into sETH2.
Flash Minting (and Redeeming) will be enabled at launch, allowing users to deposit ETH or ERC20s and receive gtcETH tokens in return.
Though there are many different liquid staking tokens in the DeFi ecosystem today, there are no on-chain offerings that enable users to earn staking rewards and contribute to public goods simultaneously. However, this table presents the liquid staking tokens that will be present in gtcETH and their respective yields:
|token||Issuing Protocol||Protocol Fees||APR (sources)|
|wstETH||Lido||10% of rewards||5.2%|
|rETH||Rocket Pool||15% of rewards||4.7%|
|sETH2||StakeWise||10% of rewards||5.3%|
As a result, the initial composition for gtcETH will yield a 2.99% Net APR after accounting for the streaming fee (2.00%). This is a simple projection, and it is worth noting that a variety of factors - percentage of ETH staked, network fees, fee burn - fundamentally affect reward rates (thus yield is subject to change over time).
3.3 Example composition
dsETH will have the following composition at launch:
- Rocket Pool rETH: 43.9%
- Lido (w)stETH: 29.7%
- StakeWise sETH2: 26.4%
Rewards earned by the underlying assets will gradually accrue to the token’s value and be realized in the form of price appreciation. The annualized streaming fee is captured block-by-block via inflation.
3.4 Backtest results
Backtest calculations are shown for March - August 2022. The former is the earliest date for which complete price history is available for all constituents. The green plot shows the price history of gtcETH in USD terms, the blue plot gtcETH spot price in ETH terms, and the red plot gtcETH “NAV” price in ETH terms. It is important to note that the gtcETH “NAV” price (red) assumes 1:1 exchangeability between the underlyings and ETH. The gtcETH spot price in ETH terms (blue) can decrease due to decoupling between the underlying staked ETH tokens and ETH; an example would be the discounted exchange rate for stETH relative to ETH. Historical data on node operators were not available so we assumed a uniform allocation across the constituents.
4.0 Size of Opportunity
Over $72m has been donated to and distributed by Gitcoin since 2017 in support of public goods. The Gitcoin Grants program accounts for $51m of that sum with 3,588,288 unique contributions, with a median value of $1.14 and an average value of $14.26. In simple terms, if a user were to hold 1 gtcETH token for a year and earn a 5% gross staking APR during that time, their gtcETH token would ≈ 1.03 ETH and they will have contributed ~0.0175 ETH to Gitcoin over that period; applying a constant ETH price of $1,700, that contribution would be worth $29.75, or double the average historical contribution.
Additionally, at a TVL of $1m, gtcETH would contribute ~$17,500 annually to Gitcoin Grants. On a quarterly basis, this would earn gtcETH a top ten spot in Gitcoin’s Funders Leaderboard while also earning gtcETH holders the net staking rate themselves.
5.0 Market & Customer Research
5.1 Target Customers
gtcETH presents a passive, positive-sum experience for ETH holders who want to support public goods; this can include individuals, DAOs, and other active on-chain organizations.
It is worth noting that the Net APR will be significantly lower than other liquid staking products because of the high streaming fee, but regardless, gtcETH will deliver a sustainable return on ETH and support public goods in the process.
5.2 User stories
- As a token holder, I want to contribute to public goods
- As a token holder, I want to contribute to public goods but I don’t want to give away my assets
- As a token holder, I want to earn staking rewards
- As a token holder, I want to maintain price exposure to ETH
- As a token holder, I want to distribute my stake across multiple protocols
- As a token holder, I want to support decentralized and permissionless staking protocols
5.3 Product financial forecast
Financial forecast of monthly streaming fee revenue assuming $2.5M max NAV, 12 months to half max NAV, 2.00% streaming fee, and no underlying appreciation. Gas costs associated with rebalancing and reinvestment costs will paid for by the Index Coop and reimbursed by the 0.25% share of the streaming fee.
6.1 Initial Composition & Token Inclusion Criteria
gtcETH will utilize the dsETH methodology under the hood. The objective of the dsETH methodology is to give token holders diversified exposure to liquid staking tokens, with a weighting that favors decentralized liquid staking protocols as measured by the number of node operators as well as distribution of stake across node operators. To begin, constituents are equally weighted before adding a Node Operator Factor, which benefits staking protocols with more active node operators.
An HHI (or Herfindahl-Hirschman Index) Factor is then added, which measures the concentration of stake and broader competition amongst active node operators per protocol.
After applying both of these factors, gtcETH will have the resulting composition:
Token Inclusion Criteria:
- liquid staking tokens must be available on the Ethereum blockchain
- liquid staking tokens must have a minimum of $25m secondary market liquidity on Ethereum main net
- liquid staking tokens must have a competitive APR relative to alternatives
- staking protocols must be audited and reviewed by security professionals to determine that security best practices have been followed
- staking protocols must also be in operation long enough for the decentralized finance community to arrive at a consensus regarding its safety
- staking protocols must be open source
- staking protocols must have a bug bounty program
- staking protocols must establish and maintain client diversity amongst node operators
Other liquid staking tokens that meet these criteria can be added to the index over time. No one liquid staking token can exceed 50% of the index.
6.2 On-Chain liquidity analysis of underlying tokens
As of 1 Feb 2023
|Asset||Largest DEX||Pool Type, Fee, Size||Trade depth @ 1% Price Impact|
|sETH2||Uni v3||Concentrated, 30bps, $65m||~$39m or 32-24,000 ETH|
|rETH||Balancer||Meta-Stable, 4bps, $73m||~$9m or 5-6,000 ETH|
|wstETH||Balancer||Meta-Stable, 4bps, $255m||~$39m or 23-24,000ETH|
TL:DR gtcETH @ $100m TVL will likely be able to rebalance with minimal price impact.
6.3 Maintenance / Rebalancing frequency
Rebalancing will be performed semi-annually or every 6 months in an effort to minimize exposure to secondary market pricing for liquid staking tokens before staking redemptions are enabled by the Shanghai update. Reinvestment of StakeWise rewards will be automated and occur on a weekly basis. Rebalancing and reinvestment parameters may be revisited after the Shanghai update or when StakeWise v3 is launched.
7.1 Cost to customer
Holders will pay a 2.00% annualized streaming fee. There will be no mint fee and no redeem fee.
7.2 Cost transparency
NAV decay is an implicit cost associated with this strategy (though it is excluded from the effective yield communicated in this proposal). NAV decay due to impermanent loss is expected to be negligible due to infrequent rebalancing, but is possible if constituents’ exchange rate does not align with the constituents’ redemption value during rebalance periods. Price impact related to rebalance trades will also contribute to some NAV decay.
7.3 Fee split
The streaming fee split will be 87.5% Gitcoin / 12.5% to Index Coop. With a streaming fee of 2.00%, 1.75% of that fee goes to Gitcoin and 0.25% goes to Index Coop. The 0.25% directed to the Index Coop will be used to offset operational costs associated with the product; it is also on par with the streaming fee charged on dsETH.
8.0 Meta / intrinsic productivity
Token holders stand to benefit from the intrinsic productivity enabled by the underlying liquid staking tokens. There are no metagovernance rights available with this product.
This product will require approximately $300,000 in seed liquidity at launch in order to provide a target access cost of 0.3% based on the assumptions below which are subject to market conditions. It is highly likely that this product will naturally attract LPs, given that dsETH and ETH will not diverge in price quickly.
|Target Access Cost %||0.25%|
|Gas Price||23 gwei|
|Exchange Issuance Gas Required||990,000 wei|
|Exchange Issuance Gas Cost||$38|
|Total Baseline Liquidity||$29,285,369|
|Concentration - Lower Bound||-1.5%|
|Concentration - Upper Bound||+2.0%|
|Total USD Required||$252,5004|
|IC recommends an additional ~$50k be placed full range to protect the pool from manipulation.|
|IC can initialize and seed the pool with the correct ranges and provide general support and assistance|
10.0 Author Background and Commitment
The Product team is responsible for designing, developing, and deploying products for the Index Coop, as well as managing and maintaining products post-launch.
11.0 Marketing support / distribution / partnerships
Gitcoin and Index Coop will market gtcETH jointly and collaborate with ongoing growth initiatives. Both teams will work together to connect with previous grant donors, DAO treasuries, and dapp interfaces.
Copyright and related rights waived via CC0.