[Proposal] Add swETH as collateral to mint R

Official Links

Website: Landing Page

Dapp: Staking Page

Docs: FAQ

Socials: Twitter / Discord

Contracts: swETH contract / deposit manager contract

Markets: Balancer swETH/Aave Boosted WETH + Balancer swETH/WETH + Maverick swETH/WETH + Uniswap V3 swETH/WETH + Curve swETH/frxETH

Dashboards: Swell Dune + swETH in DEXs + Mochi LSDfi

Introduction


Swell Network DAO is a non-custodial ETH liquid staking protocol built to help you optimize yield in DeFi. With Swell, users are able to earn ETH staking rewards and in return be provided with a yield bearing liquid staking token(swETH) to hold or participate in the wider DeFi ecosystem to earn additional yield.

swETH represents a user’s initial staked ETH along with any forthcoming staking rewards. As time passes, the ratio at which swETH is issued compared to ETH reduces, implying that the value of 1 swETH progressively surpasses the value of 1 ETH. swETH operates as a reward-bearing token rather than a rebasing token. In this model, the value of swETH increases over time to reflect the staking yields and does not maintain a strict 1:1 peg to the native token.

This proposal aims to comprehensively and sufficiently cover all relevant risk factors of swETH for collateral onboarding. Risks are categorized into:

  • Market Risk - risks related to market liquidity and volatility
  • Technology Risk - risks related to smart contracts, dependencies, and oracle price feeds
  • Counterparty Risk - risks related to governance, centralization vectors, and legal/regulatory considerations

swETH Fundamentals


Key Metrics(August 9th, 2023)

Circulating supply: 45,025 swETH ($83.47M USD)

Number of validators: 1,265

Number of operators: 8

Number of stakers: 10369

Market share of LSDs: 0.42%

Market Share of ETH staked: 0.2%

Staking Provider Fee

10% of ETH staking rewards earned in the swETH staking pool is taken as a fee and split two ways:

  • 5% to Swell DAO to support swETH, expand the protocol, pay operating expenses, and
  • 5% to Swell’s node operators for the service they provide

Node Operator Set

Since it’s genesis launch, Swell has on boarded the following 8 Node Operators:

Governance Model

At the time of writing Swell is in a pre-token period, prior to distributing governance to the community. As expressed by the DAO, Swell is running a campaign titled the “Swell Voyage” which will be the mechanism to distribute governance to the Swell community. Currently, the Swell core team manages the Swell contracts and parameters.

Audits

The Swell smart contracts have been audited by Sigma Prime, you can download and view the audit reports on our website.

Market Analysis


TVL

Since its official launch on April 24th, 2023, swETH has seen consistent and perpetual growth in terms of ETH staked and TVL. At the time of writing Swell has seen over 45,000 ETH staked totaling ~$83M in TVL.

There has been significant demand for swETH in LSTfi protocols, with swETH commanding ~2.5% of the market share at the time of writing.

Inflows for swETH have been strong and are comparable to much larger LST protocols like Frax’s frxETH. Shown in this Dune dashboard.

Liquidity

Total Value of swETH Liquidity Pools: $46,707,856

swETH Liquidity Pools

  1. Balancer swETH/Boosted Aave V3 WETH - $20,572,878
  2. Maverick swETH/WETH - $17,110,045
  3. Uniswap V3 swETH/WETH - $8,749,349
  4. Curve V2 swETH/frxETH - $275,584

Risks


Market Risk

  1. Volatility: The value of swETH, like other Ethereum-based assets, is subject to high volatility. This could lead to significant price fluctuations, impacting the collateralization ratio in the CDP protocol.
  2. Liquidation: If swETH’s value falls below a certain threshold, liquidations might be triggered, causing potential losses for users.
  3. Market Perception: As Swell is relatively new in comparison to some other established protocols, any negative market perception can lead to a rapid decline in swETH’s value.

Technology Risk

  1. Smart Contract Vulnerabilities: Even though we are audited by Sigma Prime, no audit can guarantee complete security. There’s always a risk of undiscovered vulnerabilities that could be exploited.
  2. Oracle Failures: If the oracle providing price feeds for swETH to the CDP protocol fails or provides inaccurate data, it might cause incorrect liquidations or other undesired effects.
  3. System Failures: Any disruption in the Swell protocol or the CDP protocol could impact users who have minted R using swETH as collateral.

Counterparty Risk

  1. Reliance on CDP Protocol: If the CDP protocol has any vulnerabilities or faces any issues, it could directly impact Swell users who have minted R using swETH.
  2. Interoperability: As Swell integrates with other protocols, there’s a risk associated with the reliance on these third-party systems to function correctly.
  3. Liquidity Concerns: There might be times when the demand for R or swETH drastically changes, leading to liquidity concerns, making it challenging to close CDP positions or trade.

Risk Management

  1. Monitoring: Continuous monitoring of the collateralization ratio and market conditions is essential. Users must be vigilant and proactive in managing their positions.
  2. Mint Cap: An initial mint cap of 2 million R that can be minted against swETH, that dynamically rises as swETH obtains more liquidity and TVL
  3. Education: Users should be educated about the risks associated with using swETH as collateral, including potential liquidations.
  4. Diversification: Users are advised to diversify their collateral and not rely solely on swETH. This can help spread and minimize potential risks.
  5. Updates & Upgrades: Swell should commit to regular reviews of its technology and processes, ensuring that risks are minimized, and any new vulnerabilities are addressed promptly.

Parameters


Accounting for swETH’s time on the market, and smaller market cap than some of the other LSDs, we propose the following parameters:

Parameter stETH rETH swETH
Minimum Collateralization Requirement 120% 120% 150%
Borrowing spread 0.5% 1% 1%
Redemption fee 1.5% 2% 2%
Collateral cap uncapped 20,000 rETH 3,000 swETH
Collateral cap per Position uncapped 1,000 rETH 150 swETH

Swell is open to modifying the proposed parameters in response to insights from both the Raft team and the broader R community. The integration of swETH as a viable option for R collateral promises reciprocal advantages: it amplifies the utility of swETH within the DeFi ecosystem and simultaneously offers Raft users an expanded avenue to diversify their collateral. The Swell team remains accessible for discussions at any time via the Swell Discord server.

14 Likes

What’s the reason behind the 150% collateral factor for swETH?

1 Like

Great to see this proposal come together.

Many thanks to the Raft core team also for their guidance.

The synergy between Raft and Swell is clear.

The implementation of this proposal is expected to serve as a catalyst for growth for both communities.

The Raft integration is one that many in the Swell community have been interested in for some time.

Looking forward to soon having the ability to mint R using swETH!

3 Likes

With TVL $ 80m (and keep growing) it’s promising to implement swETH as collateral

3 Likes

Adding swETH as collateral would be nice, but I guess swETH holders would want to keep earning Pearls from their position on Raft. Would that be possible?

1 Like

The higher minimum collateralization requirement (150%) comes out of a general view from Swell DAO to initially lean towards a more conservative approach to underwriting CDPs overall.

Whilst Swell is undoubtedly one of the fastest growing protocols in LSTfi - and has one of the most robust on-chain liquidity profiles proportionate to its growing TVL - the collateralization ratio proposed appears prudent from a LST-CDP risk management perspective.

This view is supported by internal analysis that showed that this ratio, whilst slightly higher than others, would still nonetheless strike a good starting balance between implementing controls to promote healthy swETH-R positions whilst enabling sustainable growth and wider utility for both communities.

In time, these initial parameter sets can be reviewed and uplifted with feedback from communities - as both protocols continue to scale, achieve wider adoption, and benefit from lindy.

Hope that helps and very open to feedback.

2 Likes

I support this proposal and the initial conservative parameters re: collaterization ratio!

swETH is the fastest growing ETH LST and its utility will only increase as they integrate on to the L2 networks.

4 Likes

I support this proposal.

2 Likes

Hi, Marcin from RedStone Oracles here - I can only vouch for the professionalism and efficiency of the Swell team. Their continuous growth and accurate responses to market movements just confirm picking swETH as collateral to mint R is a long-term and strategic move.

4 Likes

I support this proposal. As a holder of swETH, I would welcome the opportunity to participate with Raft.

2 Likes

Love this. Let’s go. Looking forward to discussing this partnership on the spaces next week.

3 Likes

swETH is a ideal example of well decentralized ETH LSD, with good spread of liquidity amongst multiple DEXes and organic liquidity growth.
the team has also suggested conservative parameters to start with.
green flags everywhere imo. :green_heart:


source : https://dune.com/maybeYonas/raft-protocol-collaterals

3 Likes

I support the proposal. Two solid and secure project joining efforts to develop LSTfi.

2 Likes

Genie(Head of Growth) here. This is absolutely possible and will be discussed as the proposal moves forward.

3 Likes

That makes sense to me

1 Like

finally, i can swap out of my stETH position into swETH position

3 Likes

Looking forward to it!

1 Like

Swell is relatively new, but has the trust of users and proven liquidity eth project. I believe that everyone will only benefit from the integration of Swell with Raft!

1 Like

I support this proposal. Let’s go!

1 Like

I am glad that from the very beginning I joined the project

1 Like