[SWIP-12] Enable rewards re-routing for Opium Finance sETH2 option vaults

Proposals
1

Summary

Ahead of deployment of sETH2 option vaults on Opium Finance, we propose to enable the routing of rETH2 to stakers in Opium contracts via a Merkle Distributor. This will ensure continued fair distribution of staking rewards for anyone participating in Opium’s vaults. Similar process has been previously followed when preparing for integrations with Uniswap V3, Rari Fuse pools & Babylon Finance.

Motivation

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One of the most interesting use cases for ETH and staked ETH derivatives are option vaults – automated strategies that sell call or put options on ETH in order to collect a steady stream of premia payments (proceeds from selling options). What makes these strategies attractive is their relatively limited risk profile – the downside is capped to the delta between the price of ETH at option’s expiration date & the strike price.

Without going into the details of how such strategies work and why they are potentially lucrative (it will be explored in a separate article), let’s say the core team deems them sufficiently attractive for certain StakeWise users, so much so that we agreed an integration with Opium Finance that offers such options vaults.

This means that sETH2 holders will have additional yield opportunities and utility for their tokens outside of liquidity farming. However, first we need to talk about the technical details of the integration (again, discussion of opportunities & risks will follow separately).

In order to enable sETH2 holders to preserve staking rewards while their tokens are locked in Opium’s contracts, we will need to engage the Merkle Distributor as means of distributing the rewards. Re-routing via the Merkle Distributor is necessary to prevent the accumulation of rETH2 into Opium, which doesn’t have the capacity to fairly distribute them to stakers. It is a mechanism that is already used with Uniswap V3, Rari Fuse pools, and Babylon Finance, and really is pretty ordinary by now.

Once the re-routing of rewards is enabled, we will be able to formally announce the strategy, enable sETH2 deposits & educate the users about the opportunities and risks of getting involved in such vaults.

Specification

[
 {
  "to": "0xFe2e637202056d30016725477c5da089Ab0A043A",
  "operation": "0",
  "value": "0.0",
  "method": "toggleRewards(address,bool)",
  "params": [
   "0x3eE101bf969FAC08Be892c737D2969B3db38D2b8",
   "true"
  ]
 },
 {
  "to": "0xFe2e637202056d30016725477c5da089Ab0A043A",
  "operation": "0",
  "value": "0.0",
  "method": "toggleRewards(address,bool)",
  "params": [
   "0xd60F0A53c7e97f78fe4AC9013F5749920C601494",
   "true"
  ]
 }
]

Risk & considerations

Risks are fairly limited at this point considering it’s a straightforward technical change. From the team’s perspective, enabling additional yield opportunities is a net positive for the protocol, and re-routing of rewards for sETH2 deposited into Opium will help achieve that.

Discussion & vote

Given the limited impact of changes on the DAO & Treasury, we propose to proceed directly to Snapshot voting, which can be found here:

https://vote.stakewise.io/#/proposal/0x1b5239a23ced8df36cefbac55845387c8058f0dbf6b454097ff89660dd1477fd

Still, we encourage all DAO members to share their comments & thoughts on this proposal and the prospects of the product it enables. LFG!

1 Like
2

I take it that opium.finance is not available for US citizens? I get a terms of service violation error when I try to access the site. Should I find it fishy that I cannot even view their site and see what they do?

3

I disagree that selling options is low-risk. If the strike price on a call is low, the payout (and thus the loss to option sellers) would be high. Additionally, the payout for calls is large precisely when SETH2 goes up. We hold ETH (and SETH2) because we believe the price will go up. Selling options caps the upside. I fundamentally disagree with this proposal.

4

I wouldn’t call this fishy - it’s their decision to limit access to the UI based on user’s geographic location, so seeing that you are from the US they deny access to you.

5

I also agree that selling options is not low-risk, but we don’t claim this in the post anyway. What I mentioned is that when using such strategies the risk is limited to losing the delta between the price at expiry and the strike price, which some users may be willing to take, depending on their expectations of the ETH price.

I also think that while fundamentally you are right re dynamics of options pricing, the size of the premium is influenced by other factors like implied volatility & duration. Personally, I’d save the discussion on this until the moment we formally announce the integration, because we’ll know most of the parameters by then and can make this an informed discussion.

Finally, your argument as to why you personally wouldn’t use option vaults is valid, but I disagree that your personal preference for what you would like to do with sETH2 should influence other token holders. Our goal as a protocol & DAO is to give sETH2 holders as many options as possible to utilise their capital in DeFi, and as long as we help them with the assessment of risks & opportunities of such strategies, the protocol is better for it. It adds a track record of integrations too, helping other relevant DAOs decide that they want to integrate our token to bring TVL in their products. This proposal is aiming to enable such an integration, and doesn’t force everyone to use it - it’s merely an option, and everyone can decide for themselves whether it meets their return objectives and carries a risk they can tolerate. What do you think?

6

I fully agree that individuals that want to take the risk of selling options should be able to do so. I just want to be sure that those holding SETH2 or SWISE are not forced to bear any of that risk.

2 Likes
7

I agree - this is a priority. The biggest risk to sETH2 holders is a mass liquidation event stemming from the price of ETH exceeding the strike, because the option vault would be selling sETH2 to settle with the option buyers. This, however, is no different to a whale selling their sETH2 and is something our pool experiences once in a while anyway. As for SWISE, I personally don’t see a clear-cut way for the option vaults to have a negative impact. Perhaps someone else could help me brainstorm this.

1 Like
8

@kiriyha - proposing that we also have an addendum to the Specification and add the following:

[
        {
                "to": "0xFe2e637202056d30016725477c5da089Ab0A043A",
                "operation": "0",
                "value": "0.0",
                "data": "",
                "method": "toggleRewards(address,bool)",
                "params": [
                        "0xe47b867b2b5b21a2022068c9ef1293783864b274",
                        "true"
                ]
        }
]

If so, I’d like to put this to a vote immediately.

Thank you.

-brian

1 Like
9

yep this is necessary to complete the integration - go for it G

1 Like
10

The technical addendum to SWIP-12 has been put to a vote:

https://vote.stakewise.io/#/proposal/0x0903eda919bda09a347c74df91a74bf194a489f738cf2f0d4cf8f70e5ec9c4b2