Summary
This is a request for comment (RFC) for a proposal for the OlympusDAO Treasury to deposit a portion of excess idle wETH to Staked Frax ETH (sfrxETH).
Background and Motivation
OIP-20 allowed for the DAO to deploy up to 33% of the Excess Reserves (ER) of the treasury to other potential yield bearing opportunities. Currently the treasury has ~$3+ million in wETH that is sitting idle. This proposal seeks to deploy a portion of that idle wETH to staked Frax ETH (sfrxETH) to responsibly earn some additional yield on our assets.
More recently, Frax Finance released their own Liquid Staking Derivative (LSD) for staked ETH, through a dual-token model utilizing frxETH and sfrxETH. Given the extraordinary team we are all familiar with at Frax, the product quickly gained traction with over 100k ETH deposited, and has consistently offered the markets highest rates for staked ETH.
Olympus already has a productive relationship with FRAX (gOHM as collateral on Fraxlend, OHM-FRAXBP on Frax Convex, etc), so it seems reasonable for us to adopt frxETH/sfrxETH as well.
Allocation Size
These are by no means hard figures and I highly encourage debate over the specific allocation. My goal here is to start with a conservative proposal and scale from there.
My initial proposal is that we deposit $500,000 USD to sfrxETH, the ERC-4626 yield-bearing vault of their dual-token model. There is no lock required, and liquidity can be deposited or withdrawn at any time. The peg between ETH/frxETH has remained strong, and there is ~$128 million in liquidity in the Curve pool.
$500k of the ~$3m+ in wETH currently in the treasury is a conservative ~17% allocation. Moreover, it is less than 1% of the excess reserve earmarked for potential yield opportunities.
According to DefiLlama sfrxETH is the current market leader for yield at 8.56% APR, with ~$170 million in TVL. That is native staked ETH rewards auto-compounded as sfrxETH, and doesn’t require any other token emissions.
Risk Analysis
The DAO has created a framework for assessing protocol risk before depositing treasury assets based on both subjective and non-subjective data. I will go over the assessment framework here and provide a link to a spreadsheet with the data.
Frax TVL is ~$1,380,000,000. Score = 2
Protocol age is greater than 24 months. Score = 1
Strategy type is lossless. Score = 1
Subject Protocol Risk Assessment is Low. Score = 1
Targeted Allocation as a percentage of Excess Reserves is < 1%. Score = 3
Combined risk score is 1.6 (average)
This is a particularly low combined risk score relative to other past proposals. You can view the spreadsheet here.
As it is still early on since the launch of frxETH, my understanding is that the validator set used by Frax is largely centralized and controlled by their team. While normally this would be a concern, given both the history of Frax Finance and our existing partnership with them, we can trust the product and its planned transition to full decentralization, particularly with a small initial allocation.
Conclusion
Deposit $500k of $3 million in idle wETH from treasury (on Ethereum) to sfrxETH.
Low hanging fruit. Should be easy and straightforward to implement.
Add more wETH from treasury to sfrxETH as the treasury management team feels comfortable and/or as the Frax validator set becomes more decentralized.
Low risk according to the DAO’s risk management framework.
