[RFC] Adding support for HOP LP tokens on Arbitrum

Partnership
1

Hey Vesta Community,

Lito from Hop.exchange here. I would hereby like to suggest adding Hop stableswap LP tokens as eligible collateral on Vesta to mint $VST stablecoins.

This would present both an opportunity for Hop LP’s to leverage their LP position and increase their returns and for Vesta to increase the circulating supply of $VST without taking on much risk due to the high quality of Hop LP tokens as collateral.

Hop LP tokens

Hop uses AMM’s on each scaling solution it supports to create markets between hTokens and canonical tokens. These AMM’s are utilized every time a user transfers assets in or out of Arbitrum. For example, if a user transfers $ETH into Arbitrum they will receive hETH from the Hop Bonder, which will be converted into $ETH in the Hop AMM.

hTokens are 100% backed by the equivalent amount of tokens in the Hop bridge contract on Ethereum to the same degree as Arbitrum aTokens are 100% backed by the Arbitrum bridge contract on Ethereum. hTokens on Arbitrum can be redeemed 1:1 at any time for the same amount on Ethereum. This is to say there is no reason hTokens should ever deviate significantly from the peg as it can easily be arbitraged. A significant deviation has never happened in over 1 year since Hop has been live.

Today, there’s around $5m tvl in the $ETH pool on Arbitrum and close to $3m in the $USDC pool. The DAI and USDT pools are fairly small and therefore uninteresting for the time being. This could change if the Hop DAO decides to introduce liquidity mining incentives for the Hop AMM’s.

The AMM’s are stableswap pools using a similar price curve than Curve or Saddle. The contracts were originally written by the Saddle team and are widely used in production across DeFi.

The price of the LP tokens can be calculated on-chain using the method calculateRemoveLiquidity which returns the amount of hTokens and canonical tokens given a specific amount LP tokens as input. If calling the calculateRemoveLiquidity using 20 LP tokens as input returns a position of 8 ETH + 9hETH and 1 $ETH = $1000 the LP tokens would be worth $17,000.

Example ETH LP tokens on Arbitrum: https://arbiscan.io/address/0x59745774ed5eff903e615f5a2282cae03484985a:

The Hop community looks forward to this collaboration and I will be on standby to respond to any questions about the mechanics of our LP tokens or associated risks.

Smart contract risk

What is the link to the main project Github repo?
Github

Please provide an Etherscan link with verified contracts.
https://arbiscan.io/token/0x59745774ed5eff903e615f5a2282cae03484985a

What is the age of token in days?
13 months

What is the number of transactions in token contract to date?
15,305

Counter-party risk

How many holders of holders of the token are there?
3568 for ETH LP token
4225 for USDC LP token

How would you describe the decentralization level of the governance of the protocol that issues this token?
Hop bridge contracts are managed by a multi-sig with a 24hr timelock. The AMM’s are fully immutable.

What is the setup of the main protocol multisig governing this token?
There is no multisig governing LP tokens.

How upgradeable is the token contract?
The AMM’s are not upgradable.

Market risk

Please provide some numbers describing the depth of liquidity on this token across some different markets.
$5m TVL for $ETH
$2.7m TVL for USDC

How accurate are oracles for this token? Do they exist? If so, for how long?
The on-chain methods to calculate the price of the LP tokens are very difficult to manipulate.

Please provide the token volatility, defined as the Standard Deviation of log-returns for specific time frames
Same volatility as $ETH.

What is the future emission schedule of the token?
Can be minted infinitely as long as capital is deposited into the pool.

What is the current total and circulating supply of the token?
2636 for ETH LP tokens

3 Likes
2

I am very much in favor of adding the Hop ETH LP token as collateral. Hop has been a reliable bridge protocol for Ethereum rollups and its decentralized design makes for an ideal collateral asset.

Some attention should be given to the question of liquidity mining. Lito, is there any kind of ETA on when this program might begin? If it’s soon, Vesta will likely need to take that into consideration as it will drastically increase liquidity and overall protocol participation.

I will say that if I had to choose only one, I would prefer to list the ETH LP rather than the USDC LP. Given recent events, the risk of centralization is on everyone’s minds and an asset 100% backed by USDC strikes me as a little too centralized. This isn’t a dig at Hop in the slightest; a bridge protocol generally doesn’t need to worry about centralized risk.

I realize this forum has also discussed GLP favorably despite its USDC component, but I feel there’s a qualitative difference between a token basket like GLP and a single-asset token like Hop’s USDC LP. In addition, the GLP market is far larger than the Hop USDC LP market by two orders of magnitude and offers significantly higher yield.

In conclusion: Yes to ETH LP, not so much a fan of the USDC LP.

4 Likes
3

Thanks for the proposal Lito, we’ve formalized this proposal into the version below:

Partnership Request

A Hop community member has already submitted a formal request for partnership! On our side, we’re confident that adding in Hop’s ETH LP token (hETH-LP) will help us further deepen our exposure to ETH and its derivatives. We see that the addition of this token would greatly help us in our quest to continue to accumulate super high quality assets like ETH while also enabling greater capital efficiency to more users on interesting assets.

We’re also pleased that hETH-LP tokens are also inherently yield bearing. As we continue to mobilize collateral in our vault into our own strategies, the native opportunities that LP tokens provide will be essential in ensuring that all users receive the payouts they deserve. That’s on top of the implicit security guarantees in Hop’s LP tokens. Oftentimes, lending protocols will shy away from collateralizing LP tokens due to impermanent loss risks that are oftentimes unavoidable. We’re confident in Hop’s ability to keep these ETH LP tokens on peg, and so we’re also confident that we can provide users with the yield of an LP token without any of the IL.

By that same token, we want Hop’s LP tokens and other secure liquidity-related tokens to play a part in Vesta’s future going forward. Expect more details and information on hETH-LP token staking when we’re ready to deploy the staking strategy as part of the risk analysis there!

Read Hop’s proposal on Curia here: https://curia.vestafinance.xyz/t/rfc-adding-support-for-hop-lp-tokens-on-arbitrum/65. They go quite in depth there so we’ll be briefer in the request section!

First Principle Categorization

Based on our assessment, we can comfortably class hETH-LP tokens as a pegged, non-governance, redeemable, decentralized liquidity provider token.

Why?

hETH-LP tokens are stableswap LP tokens, so they two sides of the provided liquidity are meant to remain close to each other in price. In this context specifically, this proximity is actually meant to be a 1:1 peg. This means that even slight impermanent loss becomes very unlikely as long as these tokens hold the peg they’re meant to. That’s something that gives us a lot of confidence and why we think hETH-LP tokens categorization into a pegged token should be emphasized. Importantly, hETH-LP tokens are not necessarily pegged to the price of a single ETH, but to a number that arises out of an on-chain calculation that’s based on the price of ETH. Beyond that, as LP tokens, these cannot be used for governance, can be redeemed, and are generally decentralized as minting can be done permissionlessly and by anyone that just provides liquidity.

We categorize assets so that we can meaningfully compare the risk profile of different assets. As such, compared to our other proposed assets under this same framework, we do not believe hETH-LP tokens to be meaningfully more risky than an asset such as GLP. These assets also have meaningful differences, with GLP being more of an index token than an LP token, so comparison becomes difficult here. Furthermore, compared to other assets already part of Vesta’s system, specifically ETH, these tokens are only slightly more risky due to depeg risks. Thus, based on the categorizations we have assigned hETH-LP tokens, we do not see anything that should prevent us from moving forward with listing at this juncture.

Risk Checklist

Please see here:

Additional Information

Vesta has not listed an explicit liquidity provider token before. As mentioned previously in this proposal, we’ve shied away from doing so due to inherent IL risks that need to be managed on top of liquidation risk for the user. This is despite the value that we feel like these diverse assets can provide to Vesta’s system both in widening our customer base and in providing safe yield to users. With a token such as hETH-LP though, we’re more confident that these risks are mitigated and manageable. Specifically, the token’s peg should remove most IL concerns from the equation, while its peg with ETH means that its risk profile is not much worse than ETH itself, which is already part of the system.

The biggest risk we see with hETH-LP tokens is thus the possibility of a depeg event. In the past 13 months of the pool’s existence though, we have not seen one of these incidents. That’s not to say a future depeg is impossible. However, we’re able to identify only one general cause of a depeg event. This is a bridge hack, probably in a pool somewhere in Hop’s system. In the past few months, we’ve seen a number of hacks on bridge networks, which have oftentimes crippled the systems that keep assets together across networks. If something like this were to happen to Hop, we believe the possibility of a depeg is large if not inevitable. Based on Hop’s track record, high quality code audits, as well as further code review by RiskDAO, we’re confident that this will not happen.

All of the information in this proposal is only the start of a broader conversation that can comprehensively identify and mitigate all the risks of onboarding hETH-LP tokens. Everything mentioned here is hardly conclusive, and you are welcomed to provide any further information you may have!

2 Likes
4

That makes total sense and I agree starting with ETH LP is a good choice!

The community has been very support of the liquidity mining proposal so I expect this to go to a vote soon.

1 Like
5

is this resilient to flash loan manipulations? if I understand correctly your algorithm is similar to that of curve fi. in this case it is not safe to read the price that way.

6

Bumping this thread, I’d like to see HOP LPs onboarded as collateral and hopefully protocol leadership can take a deeper look at getting this accomplished.

8

Appreciate the bump here. We are focused on pushing VRR right now and will re-start listing of new collaterals soon!

1 Like
9

To me this sounds like wishful thinking. I am no expert, but given the amount of bridge hacks any collateral connected to a bridge would make me lose confidence in VST. It is not worth the risk.

If this were to be accepted as collateral, I suggest there should be some mechanism like a cap on how much of the total system collateral can be in bridge asseta. That cap should be low, like 5% or less.

10

I don’t believe Hop is any more vulnerable to hacks than any other protocol involving a multisig, like GMX or OHM. I think given Hop’s great track record it could be a solid collateral asset, with appropriate limits as defined by the RiskDAO of course.

I don’t think there’s much reason to limit bridge assets specifically, since each bridge app is built differently and will have a different risk profile. A hack on one app also wouldn’t impact another app, unless they were somehow connected (which could be assessed beforehand). And if we’re being pedantic, all assets Vesta uses are bridge assets in some capacity because they depend on the security of the Arbitrum bridge, even GMX/GLP since they use bridged ETH.

Sorry to be a pest by bumping this topic again, but it’s something I really think would be a good addition to Vesta’s collateral portfolio now that VRR is implemented and the Saving module is well on the way.