Add stETH on AaveV2

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aip: title: Add stETH to Aave V2 status: ARC posted, pending snapshot vote author: Jbeezy (@jbeezy1) shortDescription: Create a new Aave V2 market for stETH ARC discussion: https://governance.aave.com/t/arc-add-support-for-steth-lido/5793/6 created: 2021-10-18 updated: N/A

Simple Summary

Lido allows users to earn staking rewards on the Ethereum beacon chain without locking Ether or maintaining staking infrastructure. This is done through the stETH token. stETH tokens represent a tokenized staking deposit and can be held, traded, or sold.

Full ARC and discussion can be viewed here: https://governance.aave.com/t/arc-add-support-for-steth-lido/5793

Proposed voting choices:

1. Yes: Add stETH as proposed (no borrowing)
2. No: Do not add stETH

Abstract

There is strong interest in using stETH to earn additional yield without taking a lot of risk. This is evident through the growth of the stETH/ETH pool on Curve Finance, which has become the most liquid pool on Curve with a liquidity of $3.8 billion.

The addition of stETH on to Aave can work to attract a larger audience to both Aave and Lido. More ETH staked with Lido would subsequently benefit the decentralization and security of the Ethereum network, to the benefit of the community as a whole. stETH would likely bring new borrow demand to Aave as market participants look to borrow against their staked ETH or lend their stETH for a yield.

We want people who want to be responsibly long ETH (i.e. via taking leverage on AAVE) to be able to put some extra staking rewards on top.

Motivation

stETH as DeFi collateral is beneficial for a number of reasons:

• stETH is almost as safe as ETH, price-wise: barring catastrophic scenarios, its value tends to hold the ETH peg well;
• stETH is a productive asset. Earning rewards on collateral effectively lowers the cost of borrowing. This could make borrowing more attractive on Aave and help to increase market utilization (and therefore Aave’s protocol revenue from stablecoin reserve factors).
• stETH is a very liquid asset with over $3.8 billion in liquidity locked in the Curve stETH/ETH pool.

Proposed Risk Parameters

These have been modified since the last proposal. The reasons are described below. Generally, the functions of stETH have held consistent during growth and market volatility.

LTV: 70% Liquidation Threshold: 75% Liquidation Bonus: 7.5% Reserve Factor: 10%

A LTV of 70% is higher than the 56% average LTV across non-stablecoin assets and 10% lower than ETH’s 80% LTV. This gives the protocol more room to safely liquidate stETH with a volatility profile similar to ETH.

Interest Rate Model (we plan to not have stETH borrowing available initially):

UOptimal: 60% Base: 0% Slope 1: 8% Slope 2: 200%

As stETH is more suited as collateral instead of a borrowing asset we adjusted the utilization rate to 60% and doubled slope 2 in order to safe guard enough liquidity in the event of market consolidation and liquidation events.

stETH liquidity and risk considerations

• stETH inherits all of ETH’s market risk, so they should be considered together for the purpose of evaluating market risk
• stETH value is defined and backed by the value of Ether and expectations on the beacon chain withdrawals timeline. As the expected merge gets closer, stETH risk will drop down significantly.
• stETH is one of the most liquid tokens in crypto with low exchange volumes and extremely high liquidity
• stETH liquidity is ensured by Lido’s strategy incentivizing a consistent stETH peg

References

• Website
• GitHub
• Whitepaper
• stETH Contract
• wstETH Contract
• Blog
• Primer
• Audits
• Lido Forum
• Discord
• Twitter

Copyright

Copyright and related rights waived via CC0.