Summary

Due to strong and sustained user demand, the utilization of the ETH / ezETH Balancer / Aura leveraged vault on Mainnet has reached 100%. To allow new users to enter the vault, we propose increasing the maximum vault capacity from 750 ETH to 1,500 ETH. We intend to progressively raise capacity limits in response to user demand.

ezETH Liquidity

ezETH still has not enabled withdrawals which makes offering highly leveraged strategies on ezETH risky. As Notional is unable to rely on withdrawals to facilitate liquidations or ensure peg stability, Notional needs to rely on secondary liquidity for ezETH.

There is significant secondary liquidity for ezETH on Mainnet, but the primary liquidity pool (the Balancer ETH/ezETH pool) is heavily skewed toward ezETH. Currently, the pool holds ~$98M in ezETH and ~$7M in ETH.

However, this is not the only liquidity for ezETH. There is $168M sitting in an ezETH/ETH liquidity pool on Blast of which $38.8M is ETH. This puts total ETH currently backing ezETH in liquidity pools between $45M - $50M.

ezETH Withdrawals

The Renzo Protocol team has indicated that their withdrawal functionality is currently in audit and expected to complete by the end of May. Once this functionality is enabled, we can expect ezETH to quickly regain its peg. At this point, risks associated with a lack of secondary liquidity would be effectively neutralized.

Realistically, we expect withdrawals to be enabled some time in mid-late June given guidance from the team as well as a reasonable buffer period to implement and test withdrawals post-audit.

For now, ezETH is trading at 0.98 to ETH. While another depeg prior to withdrawals being enabled is definitely possible, we think it is highly unlikely that ezETH would settle at a price less than 0.9 given that withdrawals are relatively close at hand.

Assessment

We think that on balance, the risks of increasing the capacity on this vault by the proposed amount are relatively low. Even at max capacity, this vault would hold a small fraction of the total ezETH liquidity just on Mainnet.

The relative size of positions in the vault vs. liquidity in the Balancer pool suggests that liquidations would be possible if necessary. The primary risk that Notional would run into is a sustained depeg at a price significantly below 0.9.

We think this situation is not likely to occur. Even if it did occur, the risk that it would cause insolvencies on Notional is low due to the conservative risk parameters implemented by the protocol on this vault (this vault implements a ~9.7% safety margin from the point of undercollateralization).

Given these factors, we believe this proposal is in the protocol’s best interests.

Resources

• Notional V3 docs
• V3 Risk docs
• V3 Technical docs
• V3 Dune dashboard