Greetings, everyone!
I would like to kick off the discussion about the creation of liquidity pools for the StakeWise tokens. In this post, I will talk about the elephant in the room - a liquidity pool for sETH2/ETH pair - and propose to set it up on Balancer v2 as a stable pool.
Motivation
Creating a liquidity pool for sETH2/ETH pair will allow seamless entry and exit from staking before and after Phase 1.5. It is a requirement for inclusion into lending protocols (so that borrowers or liquidators could exit their position) and a core pillar of our tokenomics. The choice of a pool type (stable vs usual) will determine how successfully this goal is achieved.
We have seen countless examples of staked ETH tokens quickly losing their peg with ETH when listed in permissionless DEXs like Uniswap. The reason is simple: the bonding curve of a traditional AMM (e.g. Uniswap v2 and its forks) is not fit for conducting transactions in otherwise pegged assets. As the weights of two assets in the liquidity pool oscillate around 50%, the price fluctuates too wildly due to the x*y=z curve being very steep in the middle.
The result: even the smallest shift in weights in favour of one of the assets results in a price move that discourages further trades in the pool. In case of staked ETH tokens, it is more often than not that the smallest a reduction of ETH weight in the LP results in a 3-4% discount for the staked ETH token, making exit from staking unattractive.
Stable pools exist to fix this problem for pegged assets. They utilize a different bonding curve that is much flatter in the center, resulting in low price variability even when the weights of two assets substantially deviate from the 50%.
For this reason, stable pools are the preferred choice for pegged assets like sETH2 and ETH - with small variability in price, swaps of staked ETH tokens into ETH do not result in a substantial discount for the token even at large volume. This preserves the purpose of having liquidity pools for any-time entry and exit from staking.
Specification
After considering the alternatives, the team believes that Balancer v2 is the best place for listing the sETH2/ETH pair.
Created over the past year, the new version of the Balancer protocol boasts highly gas-efficient contracts, utilizes stale capital in lending to generate more income for the LPs and offers permissionless stable pools. This will allow StakeWise users to benefit from liquidity pools with low gas fees and minimized discounts on exit from staking, on top of generating a higher income for LPs. There is an excellent article that goes into the details about Balancer v2, and we highly encourage everyone to read it.
The StakeWise team has signed up for becoming a launch partner for v2, examining the code well in advance of launch. We are very pleased with what we have seen and are bullish on Balancer after the release of v2. We think it would be a great place to list liquidity for sETH2/ETH pair.
Drawbacks
Time. Until recently, the Balancer team has publicly indicated that the launch shall happen around late March/early April. Initially, this put the ETA on sETH2/ETH liquidity pool around Balancer v2 launch, which was acceptable in the team’s opinion. However, it seems that the audits and front-end work for v2 were pushed back a couple of weeks to implement last-minute changes that will reinforce the protocol’s competitiveness. This has obvious implications for the ETA on sETH2/ETH liquidity pool - its creation would be delayed until Balancer v2 launch if we were to wait for the release. This pool is a crucial component for StakeWise tokenomics and has been widely awaited by the community and the development team alike, so longer delays are tough to justify.
Alternatives
Create a temporary sETH2/ETH liquidity pool on SushiSwap or SnowSwap and migrate to Balancer once v2 has been launched and audited.
The development team is looking forward to hearing your thoughts on the subject.
