Hey @Selby your input is very appreciated! I think your concerns are understandable and need to be properly addressed.
- Where is the demand for sETH2 going to come from? There has to be awareness in the market that sETH2 exists… and people have to actually go to uniswap, seek it out and buy it. How will awareness be created?
To support the peg, two things need to happen: an increase in the opportunities to put sETH2 to work (to minimize the desire to exit) and an increase in awareness about sETH2 as a staked ETH derivative, as you correctly point out. For both, the team needs to work on marketing and integrations - there is no way around it. However, we are very cognizant of this and hence work is underway to make a strong impression in the crypto community and leverage the advantages of our token system to get us the integrations we need and want.
There is going to be an initial flood of sETH2 hitting the market… this is going to create lopsided supply for sETH2/ETH LP. I don’t understand how that will be overcome. The law of supply and demand says there will have to be a price adjustment somewhere… right now it seems like we’re calling it LP incentives. So, either the seller takes a hit or StakeWise subsidizes the difference, which is allowing sETH2 sellers to devalue $SWISE to exit their position. Another way of saying it, is those that want to leave the community, will do so at the expense of the community… leaving us holding their bag. Not fair.
This is definitely a risk which we recognize. Hence, we’re doing the groundwork to create more incentives to stay and meet the demand for exit without having an impact on the peg. What is good about Uniswap V3 is that provided a sufficiently tight range is chosen by the LPs, impermanent loss is minimized and slippage is small, helping the peg - this should be the case with a correlated asset pair like ours. Then, it will be the DAO’s job to attach sufficient incentives to liquidity provision in order to attract sufficient liquidity. We will make a recommendation about the appropriate amount based on responses to the withdrawal questionnaire.
- How many liquidity providers who own sETH2, also own an equal amount of ETH? Seems like most people who staked, likely staked most of their ETH… I did. So, to provide liquidity, LPs also have to add more sETH2 to the market, just to get enough ETH to stake. This is likely cost prohibitive… and adds to the over-supply of sETH2 problem.
I am not certain that users would be selling sETH2 for ETH to add liquidity if the peg is significantly off balance i.e. if they would receive significantly less ETH for sETH2 than what they had paid for it. Hence, I am relatively confident that those who staked 100% of their capital will not contribute too much to the selling pressure in the beginning.
I don’t understand how the arbitrage opportunities exist. Arbitrage against what? You get one arbitrage opportunity, right?.. Buy sETH2 at a discount and exit when unstaking is possible. I don’t see any easy arb opportunities. Maybe the complex ones will work, but they’re over my head. How many people will actually attempt complex arbs?
There exist opportunities for triangular arbitrage i.e. where sETH2 can be paired against a volatile asset other than ETH and would be bought/sold to utilize the discrepancies in its price in that asset vs the price of ETH in that asset. Example: creating a sETH2/USDC pool would allow arbitrage opportunities between sETH2/ETH, ETH/USDC and sETH2/USDC pools, contributing to the rise in trading volume in each of the pools and the support of the sETH2 peg on the move down in ETH’s price.
As for the number of people who would attempt it - I think it would be more important to get on the radar of institutional traders who routinely find arbitrage opportunities and utilize them to their advantage. Luckily, we know a couple of them and hence have high hopes about the prospect of boosting trading APY and supporting the peg via arbitrage.
The key challenge for this will lie in finding a solution for automatic range adjustment for the LPs as discussed here: Automatic LP position management options. Otherwise, the liquidity pools like sETH2/USDC would require too much capital to enable low-slippage trades, and hence arbitrage would become more difficult to pull off.
I also don’t understand the leverage opportunities with LPs. That one is over my head too. If someone could explain how providing liquidity can create leverage opportunities, please do.
This one is indeed rather debatable. The idea is that since LP tokens from any liquidity pool involving the StakeWise tokens wouldn’t need to be locked to access the farming rewards (one of the many advantages of the new system @tsudmi developed), they could be taken further in DeFi and potentially used as collateral for borrowing, especially in places like xToken (who recently announced support for such activity). While the team will be assessing these solutions for security and usability (and vice versa) in the near future, so far we cannot say with certainty whether collaterizing LP positions will become possible. It would be great to have though.
StakeWise could build it’s own market on the website, where people could list their sETH2 for sale, so new stakers could have a choice of buying existing sETH2 at a market price (discount) or staking directly. In this way new stakers would probably absorb the supply quickly.
The discount new stakers would get from absorbing the supply would increase their APY… there could even be an automated APY calculator showing the % return based on discount plus current rewards rate.
We actually want to incorporate the ability to purchase sETH2 from the Uniswap V3 pool at the moment of deposit (if this proposal is successful) into the UI, largely achieving the purpose of the marketplace you suggest. So another reason to be more optimistic about the sETH2/ETH peg 
Let me know your thoughts on these matters!