Creating utility for sETH2 is a key goal for the StakeWise team. We want our users to reap the rewards of staking with us, whilst being able to participate in the wider ETH landscape using their sETH2.
This proposal will allow sETH2 holders to do just that. We have teamed up with FEI protocol (now formally known as FeiRaRi) to allow users to provide sETH2 as collateral within a Fuse Pool and borrow their FEI stablecoin (pegged to $1). This will be one of many use cases of sETH2 within the Rari Fuse platform.
As it currently stands, any sETH2 used as collateral within a Fuse Pool will accrue rewards directly to the fuse pool address. The changes outlined in the specification below will fix this - allowing rewards to correctly accrue to the pool user, rather than the pool itself. Future Fuse Pools containing sETH2 will require whitelisting separately and hence individual SnapShots.
What is a Fuse Pool?
The Rari protocol allows anyone to set up their own pool with ERC-20 assets and configure the lending/borrowing parameters. As pool admin, the StakeWise DAO will be the only one able to change the pool parameters. StakeWise has submitted a proposal to the Rari DAO to become a whitelisted pool creator and thus enable StakeWise to open verified pools (proposal can be found here and the snapshot vote here). Each fuse pool is isolated, meaning no pool compromises the safety of others.
Key pool parameters between sETH2 and FEI:
Collateral Factor - the maximum amount that can be borrowed per unit of collateral. sETH2 will have a collateral factor of 75%. A 10 sETH2 deposit allows a maximum FEI loan of 10 * 75% = 7.5 sETH2 equivalent, valued in USD. This value is known as the borrowing allowance.
Liquidation Incentive - if a borrower's loan becomes undercollateralized, most likely due to a reduction in value of the collateral, then anyone can offer to repay a percentage of the loan and receive an incentive to do so. The liquidation incentive will be set to 8%, the standard value on Compound Finance.
Close Factor - the maximum fraction of an original loan that can be liquidated in a single transaction. Set to 50% as per Compound’s standard.
Price Oracle - A UniswapV3 TWAP price oracle will provide the pool with the latest sETH2 price.
Please note that these types of lending pools in DeFi move the risk from traditional lenders to the borrower. We encourage everyone to become familiar with how these pools work before looking to invest. Borrowing too close to your borrowing allowance leaves you at risk of permanent financial loss via liquidation should your collateral value depreciate. For example, ETH dropping 20% overnight when your Loan To Value is 70% will trigger a liquidation, because your effective Loan To Value after the drop would exceed the 75% Collateral Factor. Please see the risks section in our Medium post for further information.
Example use cases:
Post 10 sETH2 as collateral and borrow 5 sETH2 worth of FEI. The interest on this FEI loan depends on the % utilisation of total FEI supplied. If only 25% of the FEI liquidity is currently utilised, the interest would sit at 1.77% APY. The change in interest with utilisation, dependent on the asset, can be seen for one of FeiRaRi’s pools: https://app.rari.capital/fuse/pool/8/info
Using the borrowed FEI, purchase ~5 ETH from Uniswap and stake that ETH into StakeWise. This user gains 1.5x leverage on their ETH exposure whilst also benefiting from staking yields on their entire ETH position, minus the interest on the loan.
Or, take the borrowed FEI and deposit onto Aave, which currently provides lenders with ~10% returns on FEI deposits.
A full explanation of Fuse Pools, created by Rari: https://medium.com/rari-capital/fuse-explained-3ef2e0747953
Further information about FEI protocol: https://fei.money/
- Disable rETH2 rebalancing for sETH2 in Fuse Pool 46, so that it can be distributed by the oracles through the Merkle distributor.
- Disable rETH2 rebalancing for sETH2 in Fuse Pool 149, so that it can be distributed by the oracles through the Merkle distributor.
Note: Fuse Pool 149 is the StakeWise controlled pool in collaboration with FEI Protocol. Fuse Pool 46 is controlled by Reflexer Labs, the creators of the RAI stablecoin, who have added sETH2 as eligible collateral.
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