• General
  • RFC: Deposit Excess Treasury wETH to sfrxETH

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 There is no lock required, and liquidity can be deposited or withdrawn at any time.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.

  1. Frax TVL is ~$1,380,000,000. Score = 2

  2. Protocol age is greater than 24 months. Score = 1

  3. Strategy type is lossless. Score = 1

  4. Subject Protocol Risk Assessment is Low. Score = 1

  5. 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. 

Great proposal, interested to hear from more community members and the treasury team itself, although I think the vast majority will be in agreement.

I am highly in favour of this proposal.

V. well written proposal and solid idea overall. In favour. Love seeing this come from the community. Thanks sir!

Cheers ser! This is a lovely proposal. Thanks for taking the time to write it.

I'm curious to hear the communities thoughts around the big four in the LSD Space: Lido, Coinbase WSE, Rocketpool and Frax Ether

Hypothetically, if this RFC kicks off additional ones among the competition, I'm interested to to hear how people would evaluate those players. Would it behoove us to gauge interest from each and see if what retail is sees is 'Best and Final' or if there are partnership options that could change size and scope?

Rough napkin math, let's say we have ~60mm in the Volatile vertical and we'll call 75% of that earmarked for ETH or an ETH derivative. That makes 45mm to be allocated. I see that as a fairly large bargaining chip and don't want to discount shopping around with it.

Treasury is developing some process by which a protocol can propose more bespoke OTC and wholesale offers and perhaps we can get some cross partnership attention (IE: Additional Incentives to a Pool, a commitment to vote a gauge or some other increased attention. Does community see value in us using that bag size to shop or is the retail listing enough?

I do fully support us not having idle assets if there is conservative ways we can create exposure, realize a return but also stick to fundamentals that support our core mission. LSD's certainly fall into that space very similar to how DAI in DSR does. This is further advanced when RBS can be fed right out of the DSR Contract and minimizing friction.

Let's have some healthy debate and discussion around the entire LSD Space and how we evaluate all of the big players. Can anybody think of some synergies that could be framed in an ask?

Thanks again for OP kickstarting this.

    Thanks for writing up the proposal! I do agree with Relwyn that a potential investment from Olympus into certain LSDs is a good bargaining chip and that we should evaluate all the major players in the space - so rather than picking one today, I think we should consider them all at once.

    We could even launch an RFQ of sorts where LSD issuers can provide more information on their setup and perhaps offer additional incentives to the protocol. Those incentives don't necessarily have to be monetary, but they could be partnership-related and/or related to the new liquidity product for LSDs and stablecoins we will be launching soon. That way we have a better overview of the pros and cons for each.

      Relwyn 0xFelix thank you for the kind and supportive feedback! Here are some of my thoughts.

      • I agree diversification across LSDs may be the way to go. I don't prefer Lido because they already have such large market share, and we have a lot of ETH to work with, so we could be very helpful in diversifying the market share of LSDs themselves by directing our liquidity accordingly. I'm definitely a fan of Rocket Pool and their strong principles of decentralization. Don't have a strong opinion one way or the other about cbETH. I believe Index Coop has a LSD Index token that represents several of these options, though some more fees may be involved.
      • I had no idea we had that much ETH to work with lol. I was going on the 3m in wETH reported on the dashboard. That much additional ETH to work with changes the equation a bit.
      • With that in mind I definitely agree that we should use that as a bargaining chip if that is at all possible. I imagine that could be handled by someone on the treasury team perhaps and report to the community what kind of potential deals we might be able to make, monetary or otherwise.
      • That being said, considering our relationship with Frax, I do think it is important that we support them as much as we can, and starting off our LSD exposure with ~$500k of sfrxETH is negligible to our ETH bag and still helpful for both parties. If we're going to have diversified exposure anyways, then it doesn't have to be all at once. But there's also no rush.

      Have a great weekend!

      Relwyn

      Frax will always have the highest yield because of their model and is the only LSD we have an incentive to see succeed because we own >$2M FXS

      This should be our starting point, if anyone comes along and can do better they should make that case. In the absence of higher yield and more equity alignment the only rational choice is frxETH

      3 months later
      Write a Reply...