eIP 17: Promote stETH to Collateral Tier

Simple Summary

Proposal includes a batch of changes to the Lido Staked ETH token (stETH) on Euler. These include: promotion of stETH to the collateral tier. Increase of stETH collateral factor to 0.87. Increase of stETH borrow factor to 0.91. Enable cross borrowing. Reduce reserve factor to 0.10.

Motivation

This is a proposal to promote stETH to the collateral tier on Euler, enabling Euler users to borrow against it. stETH fits the collateral eligibility criteria of a collateral asset. Post eIP16, it will be backed by a robust oracle (chainlink). It is widely distributed and decentralised. It has very high liquidity on numerous decentralised exchanges. Smart contract risk is relatively low.

At the moment, the wrapped version of stETH (wstETH) is collateral on Euler and can be effectively used to go levered long and short on Lido’s staked version of ETH.

In fact, Euler is the only place on-chain where users can short wstETH, which so far has led to additional 2% yield for lenders. This is possible because wstETH has a robust oracle on Uniswap V3.

However, the more popular unwrapped version of stETH does not have a strong oracle on Uniswap V3 because Uniswap does not support rebasing tokens. This is why Chainlink is necessary and finally possible after implementing eIP14 and eIP16.

Implementation

Given the presence of a high-quality price feed (ie Chainlink), I am proposing a collateral factor of 0.87 (below WBTC and WETH but higher than DAI) and a borrow factor of 0.91 (same as WETH and WBTC).

This would make Euler’s LTVs extremely competitive while not overly increasing systemic risk.

Also, I propose reducing the reserve factor to 0.10 (just as wstETH) to decrease the Borrow/Supply APY spread and enable cross borrowing for capital efficiency’s sake.

Risk Assessment

Lido audits: https://github.com/lidofinance/audits

stETH is one the most traded assets in DeFi with over $500mil supplied on Curve, but also Uniswap and Balancer (wrapped version of stETH).

It has been listed as collateral on Aave and became immediately successful due to appetite for long basis trades. Its wrapped version (wsETH) has become one of the most utilised pools on Euler, and performed extremely well even during heighted market volatility.

Conclusion

stETH ranks high on oracle security, volatility, liquidity, decentralisation and smart contract risk. We therefore recommend implementing the proposed eIP.