StakeWise V3 will introduce osETH, the new liquid staking token for the protocol. Below outlines the recommended liquidity strategy for osETH following guidance from multiple partners with expertise in liquidity. We actively encourage discussion and feedback from the wider StakeWise community before a final strategy is voted upon.
sETH2 and rETH2 Incentives
Firstly, let’s touch upon the current tokens of StakeWise - sETH2 and rETH2. StakeWise will benefit greatly from stakers transitioning from sETH2 and rETH2 to StakeWise V3 in order to bootstrap osETH supply. To encourage this transition, the core team proposes that the DAO ceases all liquidity incentives for sETH2 and rETH2 following the launch of StakeWise V3. V3 introduces withdrawals, allowing stakers who do not wish to transition the ability to natively unstake sETH2 and rETH2 should they desire.
Why is liquidity important?
As a liquid staking protocol, StakeWise should enable users to stake and unstake on-demand by swapping into and out of osETH. osETH will also be integrated across the DeFi ecosystem, allowing stakers to utilize the value of their staked capital for farming or borrowing against. Integrations require quality liquidity on the secondary markets to freely trade the asset, for example, to facilitate liquidations on money markets. Integrations also rely on secondary market liquidity to reference the price of an asset. Aave, for example, has historically used Verified Price Feeds (or price oracle) from Chainlink.
The requirements for Chainlink to build a price feed involve having quality liquidity spread across 3 or more trading venues and meeting a threshold of at least $3M in trading volumes per day. By satisfying the requirements set by Chainlink, StakeWise would not only facilitate osETH integrations but create solid foundational liquidity for the token. The proposed liquidity strategy is designed specifically to satisfy these requirements, with a focus on decentralized liquidity given the reluctance of centralized venues to list LSTs at this moment in time.
How much Liquidity is Required?
Black swan events will happen and it will be impossible for StakeWise to fully protect osETH from depegging should there be large selling pressure (as seen for stETH last year). Overpaying for deeper than necessary liquidity in an attempt to protect against volatility during such events is futile. This will cause a significant amount of liquidity to be dormant during normal market conditions and, given liquidity is ubiquitously withdrawn during extreme market conditions, likely non-existent once the Black Swan event hits.
StakeWise must instead rely on an efficient withdrawals mechanism to counter depegging, alongside building a trusted brand to ensure capital from across the ecosystem is willing to buy osETH at a discounted price and restore the peg. The DAO could also explore deploying more capital/incentives during extreme market conditions to top up liquidity needs as and when they arise.
Whilst liquidity depth is important, the DAO should focus on how efficiently users can swap into and out of osETH in a reasonable size with minimum slippage. The goal of StakeWise DAO should be simple - make osETH as liquid as it needs to be whilst minimizing the $ cost of liquidity TVL.
A soft TVL target of 10% of the osETH supply is suggested. This 10% target can be monitored and revised over time, with dashboards built to analyze the trading activity and liquidity of osETH to ensure liquidity goals are met.
By solving for the amount of TVL required in each pool, the DAO can consequently solve for the number of incentives required to bootstrap said TVL and identify the most cost-effective way to do so.
Proposed Liquidity Pools
Despite promising new AMMs coming to market (Maverick and Swaap to name a few), StakeWise DAO should focus on the most battle-tested AMMs for its liquidity strategy to reduce the risk for LPs and to the protocol. StakeWise DAO should also be careful not to fragment liquidity too much whilst the osETH supply is low, hence the focus on only 3 liquidity pools during the V3 launch:
Pool 1: osETH - ETH on Balancer
This will be the main liquidity pool for osETH. Balancer has a proven track record of creating quality liquidity for LSTs alongside its veTokenomics and partnership with AURA. Balancer will also provide the DAO with a high level of flexibility on how the pool is configured and provide LPs with a very simple user experience.
Due to the importance of this liquidity pool, StakeWise DAO should refrain from launching a boosted pool given its exposure to third-party money markets. Instead, the osETH-ETH pool should be a composable/meta-stable pool. This pool type uses the same pricing formula as Curve, providing high capital efficiency for stable asset pairs, whilst also helping adjust the pricing curve based on the native osETH price provided by StakeWise.
osETH-ETH will be a Core pool, where the revenues that Balancer earns from the pool will get reinvested into the veBAL bribing ecosystem to boost the pool’s incentives. This has the potential to significantly reduce StakeWise’s liquidity costs.
Fee Tier
The pool fee is suggested as 0.02%. This is slightly lower than the fee seen across the other like pools on Balancer, but it is expected to increase the trading volumes proportionally to help achieve Chainlink’s volume threshold. Balancer allows pool fees to be changed, giving StakeWise DAO the ability to adjust the pool fee at a later date should it be necessary.
A Factor
The A factor determines how freely the pool’s price changes based on the underlying asset composition. When osETH initially launches, volatility could potentially be high. Consequently, StakeWise DAO should consider launching the pool with a slightly higher A value than seen across the other LST pools. An A value of 200 is suggested, which would allow for 3.5 osETH per ETH for only 1% of price deviation.
Once osETH volatility has died down and the pool composition is safely at 50/50, StakeWise DAO should consider ramping up the A factor even higher to reduce how frequently osETH deviates from its peg and ensure efficient trading against ETH.
Pool 2: osETH - USDC on UniSwapV3
This pool will allow osETH to trade effectively with non-ETH assets and boost osETH’s trading volumes due to the lack of correlation between USDC and osETH’s price. A fee tier of 0.05% is suggested here to align with other volatile pools on UniV3, such as ETH-USDC.
UniSwapV3 is the largest and most battle-tested DEX providing LPs with a high degree of freedom in how liquidity is deployed. For example, liquidity providers can specify an exact price range in which they wish to deploy their capital. Whilst this allows for increased capital efficiency as liquidity can be concentrated, it requires a high level of proficiency for LPs. To resolve this, StakeWise DAO should deploy an Alpha Vault by Charm Finance - an automated liquidity management system that provides LPs with the same user experience as LPing on Balancer, whilst providing the liquidity pool with the benefits of capital efficiency.
Charm Finance has been solving for truly automated liquidity on UniV3 since day 1 and has recently launched Alpha Vaults V2. Historic testing has provided impressive results, for example, their ETH-USDT Alpha Vault achieved upwards of 25% APY even after considering impermanent loss and Charm’s fees. The Charm team have offered to create the StakeWise osETH vault and optimize it based on their experience with volatile asset pairs. For more information about Charm Finance, please see here.
More advanced liquidity providers would be free to deploy their capital directly to UniV3 should they wish to opt out of the automated liquidity strategy.
Pool 3: osETH - rETH on Curve
The third and final pool is osETH paired vs Rocket Pool’s rETH on Curve. This is a highly capital-efficient pool as all assets will earn staking rewards and require minimal incentives on top. There is a high degree of alignment between the StakeWise and Rocket Pool communities as both look to drive the decentralization of the ecosystem. It is likely that stakers of Rocket Pool will also be stakers of StakeWise, and vice versa, with this liquidity pool providing them with a place to deploy their staked capital and earn extra returns.
StakeWise should be careful to not allow the rETH-osETH pool to grow above ~20% of its total liquidity TVL. Having an oversized liquidity pool exposed to the risks of a 3rd party platform increases the risk that osETH is impacted by de-pegging or exploits of the other protocol (such as when rETH was primarily paired with wstETH).
Liquidity Incentives
StakeWise must remain AMM agnostic, with the ability to transition liquidity to different AMMs at any time without significant economic impact on the DAO. This means that liquidity incentives should focus on bribing CRV and BAL emissions, rather than the DAO owning voting power. The costs of bribes can vary greatly across the different platforms and the core team has built models to compare across the voting markets and deploy the DAOs capital in the most cost-effective manner.
Given the increased complexity of providing liquidity incentives for this liquidity strategy, a Liquidity Committee is proposed to help increase the efficiency of capital deployment. Please read the full proposal on the StakeWise Liquidity Committee.
For the osETH-ETH and osETH-rETH pools, incentives should cover the opportunity cost of unstaked ETH, plus a small risk premium (~2%). For the osETH-USDC pool, incentives are harder to judge and are dependent on the effectiveness of the Alpha Vault strategy. StakeWise should aim to provide ~5% of incentives on top of the Alpha Vault to encourage participation. As with the liquidity strategy, the incentives should be analyzed over time to evaluate their effectiveness and adjusted accordingly.
Example Liquidity Costs
Historically, StakeWise has spent around 4M SWISE per month (~$400k on average) with ~75% going to the main sETH2-ETH liquidity pool (~$90M TVL of which ~$30M is in ETH). This equates to around $0.0044 of incentives per $1 of liquidity. Or, $0.014 of incentives per $1 of non-sETH2 liquidity.
Assuming there is 15k ETH of liquidity deployed across the new pools, the below provides an example of the monthly cost for the liquidity and compares it to the DAO’s current expenditure:
- Balancer - target 4.5% APR of incentives on 10k ETH TVL ($18.6M) - ~$50k in bribes
- UniV3 - target 5% APR of incentives on 2k ETH TVL ($3.7M) - ~$15k in SWISE token emissions
- Curve - target 2% APY of incentives on 3k ETH TVL ($5.6M) - ~$8.5k in bribes
That equates to about $73.5k per month for incentives for around $28M in liquidity, or $0.0026 in incentives per $1 of liquidity - a ~40% improvement to the DAO’s current incentives.
Assuming these new pools are 50/50 osETH/base asset, that would be $0.0053 in incentives per $1 non-osETH liquidity TVL - a ~62% improvement to the DAO’s current incentives.
Note, this rough calculation does not include the fact that the osETH-ETH pool would be a Core Pool on Balancer which has the potential to save the DAO thousands of dollars each year.
Monitoring Liquidity
StakeWise should take a data-driven approach to liquidity and incentives. Dashboards should be created that include slippage/spread data, volumes, incentives, peg stability, pool composition, APY (broken down between incentives and volumes), and utilization, all on a per pool basis and aggregated. This data will allow the DAO and the StakeWise Liquidity Committee to evaluate the liquidity strategy over time and identify areas for improvement.
Conclusion
The topic of liquidity is incredibly complex with a multitude of different options for deploying and incentivising osETH liquidity. The above details a route which utilizes the most battle-tested technology to reduce the overall risk and improves upon the capital efficiency of the DAO’s current liquidity strategy. Not only will the above strategy reduce the incentive costs for the DAO, but it will also provide osETH with the liquidity necessary for a Chainlink Price feed and high quality DeFi integrations.
Please take the time to review this liquidity strategy alongside the proposal to introduce the StakeWise Liquidity Committee. Feedback from the community is important to help finalize the structure of the liquidity strategy before it heads to a vote.
Following feedback from the community, the following revisions are made to the osETH liquidity strategy:
» Monitoring must be in place to evaluate what happens to SWISE used as bribes to determine whether or not bribing does indeed increase the sell pressure compared to direct SWISE incentives. Analysis to also be done on the type of LPs in the new pool.
» Should sell pressure increase due to bribing, a fallback plan should be in place to reduce the amount of bribes and increase direct SWISE incentives. Direct SWISE incentives can be achieved by deploying SWISE emissions directly to users of Balancer and/or Aura. Quest, for example, would allow the SLC a high degree of flexibility for how capital is deployed as bribes vs direct incentives and provides a path towards a hybrid of bribing and direct incentives.
» The goal is not just to minimise the need for liquidity incentives via SWISE emissions, but to reduce those emissions to 0 in time.
» Actively explore the addition of solutions/liquidity pools that can help StakeWise obtain this liquidity goal, such as deploying a Boosted Balancer pool between osETH-ETH providing there is appetite for such pools by LPs.
