FIP-50: ETH Yield Improvements

[Fishy]

FIP-XX
Status: Last Call
Author: @Fishy

Summary
Shift 100M USD of ETH from Compound and AAVE PCV Deposits to stETH, and 20M USD of ETH from Compound and AAVE PCV deposits to Tokemak Single Sided ETH farming.

Motivation
ETH yield is not being appropriately managed by the PCV, and this proposal seeks to increase yield on PCV assets in a safe fashion. At current APR, this proposal grows the estimated yield of the PCV by 6.4M~ USD per year.

The Curve stETH-ETH pair has 5.5B worth of liquidity. This marks stETH as being a highly liquid asset, and appropriate to add to the treasury. Currently the entire recommended stETH allocation can be sold with 0.76% slippage.

Tokemak is a newer DeFi protocol than stETH, and the TOKE token is less liquid and more unstable than ETH/stETH. As rewards for Tokemak farming are paid in the TOKE token, I recommend a smaller allocation for Tokemak. The farming rewards for one year can be sold for 1.8% slippage with current liquidity. As we are staking pure ETH, liquidity for the deposited token is not a concern. The additional TOKE also could allow the DAO to exercise more control over Tokemak, a possibly crucial DeFi primitive.

Specification

Shift 50M USD of ETH from Compound PCV Deposit to stETH
Improvement from 0.10% to 5%~ APY
50k → 2.5M Yield

Shift 50M USD of ETH from AAVE PCV Deposit to stETH
Improvement from 0.30% (Including stkAAVE rewards) to 5%~ APY
150k → 2.5M Yield

Shift 10M USD of ETH from Compound PCV deposit to Tokemak Single Sided ETH
Improvement from 0.10% to 8.33%~ APY
5K → 833K Yield

Shift 10M USD of ETH from AAVE PCV Deposit to Tokemak Single Sided ETH
Improvement from 0.30% (Including stkAAVE rewards) to 8.33%~ APY
30K → 833K Yield

Would you support the stETH allocation?

• Yes
• No

Would you support the Tokemak Single Sided ETH allocation?

• Yes
• No

[Eswak]

I’m in favor, the bonding curve fills the Aave and Compound deposits over time when FEI is over peg, so it seems reasonable to drain these from time to time, to move ETH to more (low risk) productive places.

The proposal as described would not require new solidity code, just a new proposal, so we can move quick.

I am bullish on what we can do in the Tokemak ecosystem, so earning more TOKE will be welcome.

I am currently working on PCVDeposits for Balancer v2, and later on we can even wrap the stETH to wstETH (a token which does not rebase), then deposit in the Balancer wstETH-WETH pool, to earn an additional ~3.5% APR of LDO and 0.5% APR of BAL, on top of the 5% APR of ETH staking. This pool can also be used to exit our position to pure ETH, at an even lower slippage than what is currently offered on Curve.

[Fishy]

The Balancer pool has around 2.91%~ base APY + 3.26%~ from LDO and CRV rewards, totalling 6.25%. Balancer’s pool has a 4.15%~ APY. It seems to me as if Curve’s pool is more advantageous. I’m wondering what reasons there are for the recommendation of the Balancer pool over the Curve pool.

[Eswak]

The 2.91% “base APY” on Curve UI is actually because 57% of the pool is stETH and rebases at 5% APR, so most of these 2.91% are due to the stETH token in the pool rebasing, not trading fees.

The Balancer pool is using wrapped stETH (wstETH), which does not rebase, so you’d have to add 5% APR on the wstETH part of the pool, which is also ~= 2.91%.

The difference is minimal ^^

[Fishy]

Thanks, I get it now

[joey]

Very in favor of more stETH and Tokemak exposure. I do think we should consider some alternatives:

1. Balancer stETH/WETH LP which has ~7-8% yield vs like 5% on stETH. Possibly more work/risk than its worth because most of that yield is LDO which isn’t obviously something we want in PCV.
2. TOKE/ETH LP. These yields are wayyy higher than just single-sided and was something the community was thinking about in the original Tokemak proposal.

In the interim, we can move forward as proposed its a pretty quick proposal. If snapshot passes, maybe @Fishy you could write the on-chain proposal with some guidance from me or @Eswak ?

[Fishy]

I had in mind a bigger yield improvement proposal but I wanted to get this one submitted to test the waters. I’ll definitely make sure to include those pairs in the future “Big Yield Proposal”. I’d also be 110% down with working with you guys on the on chain proposal!

[cryptozen]

In favor of this proposal

[countvidal]

In favor of this proposal as well.

[cozeno]

I feel that while stETH is emerging to be the premier form of ETH-on-ETH yield, we have to be very mindful that there is no easy way to organically unwind stETH positions.

given that the PCV already holds over 100M of stETH, (~1.5% of all stETH), increasing the position in stETH by another 100M starts to create liquidity issues. exiting these positions through the CRV pool at the current record high depth would still cause seven figure slippages. As Storm has mentioned in August, should Lido or Defi in general run into issues, the CRV liquidity can indeed dry up quickly.

Granted the PCV own more liquid assets such as 200m of other stables, which can be deployed first in defense of the peg. But we need to look forward into the future, in the case where the collateral ratio decreases significantly due to the fei-rari merger, or due to huge increases in users swapping ETH for FEI. A lower collateral ratio in the future, combined with a significant ETH bear market will cause the overall liquidity of the PCV to reach a potentially perilous state.

Of course, AAVE and COMP aren’t great yields, but they are at least liquid and could be moved out to defend the peg on a moments notice with minimal losses. we need to be mindful that the larger our Lido stETH position becomes, the more painful it would be when the PCV needs to unwind quickly.

That being said, overall I like stETH very much and I dont disagree with the spirit of this proposal at all, I just want to raise some contrarian points for consideration, as I deeply believe liquidity is overwhelmingly valuable to the PCV, in a way that isn’t true for other funds. I am even tempted to say that PCV liquidity can trump its yield in many situations, but I do not currently have analytical tools to evaluate exactly how much is liquidity worth to the PCV, and how much yield is worth giving up for that liquidity.

In the future, we can even aim to develop some quantitative metrics to evaluate the liquidity of the PCV on demand, and preempt any potential liquidity crunches.

On the issue of Tokemak, I feel it is very interesting and poses less potential systematic threat to the health of the PCV.

[Fishy]

In my next yield proposal I plan on shifting a large portion of the stETH to balancer, as that can at least play a small part in growing our liquidity. I’m interested to hear if you have any other suggestions to increase the liquidity of the PCV without sacrificing yield. Thanks for always providing detailed and thoughtful answers!

[joey]

I’d like to second the stETH thoughts of Cozeno. The PCV Guardian just finished audit and is a way to fast-exit positions in small or large sizes. Perhaps we should wait until the PCV Guardian is rolled out before moving on this FIP. I can prioritize its release on the dev side.

[Jstar]

Is it worth diversifying the ETH staking with multiple providers rather than going all in on Lido? It reduces your slashing risks and liquidity risk. There are several great liquid staking platforms out there… one I’d like to flag specifically is StakeWise (full disclosure, I do have an affiliation with the platform).

Stakewise has unique tokenomics which provides the highest staking yields and they have been the gold standard in terms of staking security (even helping Lido with an exploit a few months back). Lido is just the first name everyone thinks of when it comes to ETH staking, but it doesn’t mean they are the best/you should stake 100% of your ETH there.

@Fishy, I can provide an intro to the StakeWise team if that would help?

[Fishy]

Sure, I’d love to chat about it. I’m Fishy#0007 on discord, but open to other channels if you’d like. Welcome to the Tribe!

[Sandypaper]

The issue I see with stakewise is the inability to convert back into ETH since they lock it in and give you sETH2. If that is a limitation on all of these ETH staking services my apologies.

[Jstar]

StakeWise is a liquid staking platform. You can easily convert your sETH back to ETH anytime through AMMs, just like you can with Lido

[Jstar]

Thanks Fishy! I’ve dropped you an add on Discord, happy to chat on there

[Lior]

I like the proposal to diversify with multiple providers - both from risk management, decentralization, and liquidity - I checked & it seem that if we take 20% of the amount and use Stakewise as proposed by @Jstar , there is no compromising on liquidity (sETH2 has a v3 concentrated liquidity pool):