[Request For Comment] VST ETH Vault stETH Strategy
Authors: The Vesta Core Team + Review from Frens.
Note we recognize this is a period of immense market volatility and would look to implement this strategy after this calms down and the peg is held for longer.
With close to $10M worth of Ether in the ETH system on Vesta, our collateral reserves represent a huge pool of untapped potential. Currently, it sits idle in the pool, doing nothing of worth. While we stand by the service we provide by giving you on-chain utility with vaults, we believe that it is still possible to make your locked assets work for you even when they’re in a Vault.
This RFC suggests the implementation of depositing ETH collateral into a stETH strategy from the ETH vault and requests comment from the community on the functionality, design, and timeline. Currently there is ~3689 ETH sitting idle inside of the ETH Vault. While the ETH acts as collateral for the VST debt, the ETH is quite passive and not, as we believe, as capital efficient as it could be. However, sourcing sustainable ETH yield strategies, especially in this environment of yield compression is difficult.
While we are proposing what we believe is a close-to-optimal strategy for ETH utilization, it is important to note that you as the users have ultimate control over your own collateral. To that end, we encourage you to post your own thoughts on the risks, rewards, and alternative approaches. Community interaction is key in a large operation such as mobilizing $10M worth of collateral.
Currently, we believe that we can strike a desirable balance between security and yield with the Aave v2 (then eventually v3 which will allow us to squeeze even more ETH yield in high efficiency mode with high LTVs) stETH-Lido strategy. This is a widely used and trusted strategy, which would give the platform a substantial amount of extra revenue. This is a rather simple strategy to execute, which just involves depositing the collateral ETH into Lido.
Core risk is stETH-ETH depeg risk which leads us to being liquidated.
Current yield is 4.5% then 9% post merge which can be boosted by recursive borrowing in Aave. A key question for our community to decide is on the fee share between the earnings to the users in the vault and the governance token.
We could also offer two vaults, one of the vaults with a yield bearing stETH:ETH strategy and that doesn’t. This way the risk is separated and only placed upon users who are aware of it and want to take advantage of it. In the non-yield bearing vault we would change the lowest collateral ratio to 110% and in the yield bearing vault we would have 150% collateral ratio.
On the non-yield bearing vault, we have a 0 mint fee. The strategy would occupy a range of between 30-60% of the eth vst vault.
Finally, it is essential to note that stETH is redeemable for 1 ETH once the merge occurs. A stETH:ETH depeg may cause those with leverage to be liquidated in the short term, but as the merge date gets close any arbitrage opportunity becomes more valuable for those holding ETH.
We aim to be the first L2 lending protocol that takes advantage of idle collateral to generate fees back to token holders. By taking advantage of relatively low risk strategies to mobilize collateral we increase capital efficiency of idle ETH.
The ETH on Arbitrum would be bridged over through Synapse (incurring a bridging fee) then deposited into the generalized strategy through a fee different approaches:
- Instadapp steth vault (note that this vault has limited capacity on the withdraw and deposit side)
- Run the AAVE V2 strategy ourselves
Notes on liquidation risk and recent stETH depegs:
Due to recent market volatility, there have been some reasonable concerns regarding liquidation risks on strategies similar to this one. At Vesta, we are committed to providing you with the most upside on your liquidity while maintaining the least risk possible. To this end, we are committing to the following:
- Voluntary risk-taking by implementing both yielding and non-yielding ETH vaults
- Responsible recursive borrowing. In the context of recent volatility, we will recur in small and justifiable amounts with frequent communication.
- Responsible timing. As of right now, stETH-ETH peg appears to remain off by around 400 bps. This has held for a few weeks now, and nothing indicates that this will widen in the future. In fact, we and many observers believe it is more likely that the peg will improve over the future weeks and months. Thus, we commit to timing any moves responsibly and safely.
- Alternative strategy proposals. Part of the timeline of collateral mobilization includes giving more choices to the community. As part of this, we are committing to outlining multiple strategies when risk is involved such as with this ETH strategy. In the near future, we will be outlining alternative ETH staking strategies involving modules such as frxETH or squETH. Stay tuned!
The implementation itself wouldn’t take that much time and be executed in weeks.
After sufficient community discussion on this RFC, the authors of this proposal will open a poll and decide whether to move forward with execution.