IIP: 176
Title: Launch Leveraged rETH Staking Yield ($icRETH)
Status: Final
Author(s): @allan.g, @0x_Dev
Reviewers(s): @funkmasterflex, @jordan.t, @sidhemraj
Created: 8 June 2023
1.0 Abstract
This proposal is for the Index Coop to launch the Leveraged rETH Staking Yield (icRETH) token, which will provide enhanced staking yield on Rocket Pool ETH using a leveraged liquid staking strategy built on Aave v3.
2.0 Market information
2.1 Target customer segments & user stories
User Stories:
- As a token holder, I want to run the leveraged staking trade with a more decentralized liquid staking token at the core
- As a token holder, I want to earn leveraged staking yield without worrying about managing a collateralized debt position
- As a token holder, I want liquidation protection from unexpected LST discounts or premiums
- As a token holder, I want to minimize gas costs associated with maintaining a leverage staking position
2.2 Market research
Market research has identified several customer types for $icRETH:
- Onchain Retail and Whales: who are rETH supporters, concerned about Lido’s market share, and want to run a leveraged staking strategy for better returns.
- Apps & Wallets: those run by on-chain native communities (DAOs) or founders who would like to offer this to help decentralize ETH staking
2.3 Differentiation
There are currently no other tokenized products or automated services that offer the leveraged staking trade using Rocket Pool ETH. However, there are several competitors that offer a similar value proposition for Lido Staked ETH.
$icRETH will be differentiated in that it will run on Aave v3 and take advantage of High Efficiency Mode (or “E-mode”), which enables a significantly higher safe leverage ratio and higher potential returns compared to the stETH leveraged staking trade on Aave v2.
2.4 Size of the Opportunity
It is important to note that the potential TVL of this token is strictly limited by the rETH supply cap in Aave v3, which is currently set to 40,000 rETH; the rETH pool is 72% full at time of writing. The rETH supply cap has already been maxed out on multiple occasions, so there is a very strong possibility that it will be maxed out again before Aave governance is able to progressively raise the supply cap.
2.5 Marketing support / distribution / partnerships
At launch, $icRETH will be accessible through:
- the Index Coop App
Due to the supply cap constraints on Aave v3, there is a significant risk of a secondary market premium appearing if liquidity is provided on DEXs. If the supply cap is maxed out on Aave, then no more icRETH tokens can be minted; if no more icRETH tokens can be minted, then arbitrageurs would not be able to prevent icRETH from trading at a premium. This could lead to a poor user experience if DEX buyers are unaware of the premium to NAV.
Additional distribution points may be enabled after launch. Flash Mint support will be enabled through the Index Coop App and also made available through the Flash Mint SDK for external integrations.
The $icRETH will be restricted for U.S. persons according to this disclaimer.
2.6 Marketing risks and weaknesses
- supply cap for rETH on Aave v3 can reach capacity and prevent new units from being minted (redemptions will always be possible though)
- a negative yield is possible if the WETH borrow rate exceeds the rETH staking rate
- similar strategies using stETH may have higher overall returns
3.0 Financials
3.1 Revenue
$icRETH will have an annualized streaming fee of 0.75% or 75 basis points. There will be no mint or redemption fee. Any protocol incentives that may accrue to underlying positions will be claimed by the Index Coop.
3.2 Fee splits
The streaming fee will go 100% to Index Coop.
3.3 Product economics
Based on the financial forecast below, average monthly revenue for the first 12 months is expected to be $5,331 with a TVL of $10m at the end of year one. A conservative estimate for the contribution margin is ~90%, inline with icETH’s historical performance. However, costs associated with icRETH rebalancing are expected to be lower due to the high-correlation between the collateral and debt assets and the general de-risking of liquid staking post-Shanghai. A wider safe leverage range will also avoid unnecessary rebalancing during periods of volatility.
3.4 Financial forecast
Financial forecast of monthly streaming fee revenue assuming $15m max NAV, 12 months to half max NAV, 0.75% streaming fee, 0.75 growth coefficient, and no underlying price appreciation. Gas costs associated with rebalancing will be paid for by the Index Coop, and no liquidity mining rewards are planned for $icRETH.
4.0 Specification
4.1 Product design
Methodology
icRETH will employ an automated methodology similar to icETH and will be governed by a stringent set of risk parameters detailed below in the “Rebalancing approach” section. Because of the high correlation / low relative volatility of the underlying assets, the product will only rebalance when the leverage ratio moves outside of the safe range defined below. This should lead to minimal rebalancing on a recurring basis and lower operating costs on Ethereum main net, as well as minimal NAV decay due to rebalancing slippage.
Based on backtesting data, the median historical return of icRETH would have been 10.52% with an average return is 9.92%.
It is worth noting that icRETH is susceptible to periods of negative APY when the WETH borrow rate on Aave v3 exceeds the rETH staking rate. A sharp discount (or “de-peg”) in the rETH/ETH exchange rate could also put the token at risk of liquidation, but battle-tested risk automation will be in place that will detect and adapt the leverage position as needed. The “De-peg Required for Liquidation” metric in the table below assumes no intervention by the risk automation, whereas in practice, the token would be rebalanced before broaching the liquidation threshold.
Token inclusion/exclusion criteria [if applicable]
icRETH will be composed of rETH collateral and WETH debt in Aave v3.
Engineering lift
The most critical piece of infrastructure required to support this product is an Aave v3 Leverage Module; this new module will enable the product’s smart contracts to interact with Aave v3 and manage the collateralized debt position. As of today, this new module has been developed and tested and is currently undergoing multiple audits. Additional adapters must also be developed for rebalancing and flash minting against Balancer v2 (where the deepest rETH / ETH liquidity is).
Deployments and bridges
$icRETH and its components will be deployed on Ethereum main net. There is no intrinsic dependency on cross-chain assets or bridging.
Rebalancing approach [if applicable]
Rebalancing will be automated for icRETH and executed according to the Risk Parameters defined below:
- Target Leverage Ratio: 8.00
- Maximum Leverage Ratio: 8.50
- Minimum Leverage Ratio: 7.00
- Ripcord Leverage Ratio: 9.50
- Rebalance Interval: only when current LR moves outside of range above
- Recentering Speed: 100%
Initially, rebalance trades will be made against Balancer; Uniswap v3 and Curve will serve as backup exchanges. The table below defines the parameters per exchange:
These parameters may be revised closer to launch. Post-launch, the methodology will be maintained by the Internal Methodologist Committee (IMC); any material changes to the methodology will be communicated externally and subject to an $INDEX token vote.
4.2 On-Chain liquidity analysis of underlying tokens
5.0 Product liquidity
Protocol Owned Liquidity (POL) will not be deployed by the Index Coop initially because of the likelihood of secondary market premiums emerging when the rETH supply cap is reached in Aave v3.
In the event that the supply cap is reached, token holders will be free to redeem their icRETH tokens at NAV in order to exit their position; users can also mint icRETH tokens at NAV assuming the supply cap has not been reached.
6.0 Author Background
The Product Pod is responsible for designing, developing, and deploying products for the Index Coop, as well as managing and maintaining products post-launch.
7.0 Disclaimers
Disclaimer: This content is for informational purposes only and should not be construed as legal, tax, investment, financial, or other advice. Each purchaser of an Index Coop product should consult with his or her own investment, legal and tax adviser/s before purchasing.
Disclaimer: Index Coop token products are not marketed or offered to persons or entities who: are citizens of, reside in, are located in, are incorporated in, or operate a registered office in the United States of America (collectively defined as ‘U.S. persons’). If you are a U.S. person, do not use Index Coop token products. Our website restricts trading of these tokens by U.S. persons. All website users, including U.S. Persons, must read our Terms of Service and List of Restricted Tokens. U.S. person(s) must comply with our Terms of Service and not use Index Coop tokens.
Copyright
Copyright and related rights waived via CC0.
