[DISCUSSION] Growth proposal: driving demand for mETH and increasing Mantle treasury security

This proposal is authored by river0x, a member of Reserve Protocol’s core team.

Summary

Reserve’s core team proposes to integrate mETH into ETH+’s collateral basket once mETH launches. In addition, using the framework established under MIP-26, Reserve’s core team proposes Mantle allocate 1000 ETH to ETH+ at this time.

Abstract

About ETHPLUS (ETH+)

ETH+ is a safety-first diversified ETH LST index with up to 4% APY to holders deployed in April 2023 using the Reserve Protocol. It has ~$5M TVL. ETH+ is backed 1:1 and collateral is permissionlessly redeemable without fees. Moreover, ETH+ enjoys overcollateralization shielding to mitigate the effects of asset backing depegs.

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ETH+ is governed fully onchain by RSR stakers providing overcollateralization. ETH+ is currently backed 50% by rETH and 50% by stETH, though governance votes could affect backing changes in the number and proportion of assets.

About Reserve Protocol

Reserve Protocol is a free, permissionless platform on Ethereum mainnet (and Base L2) to build, deploy and govern asset-backed currencies referred to as “RTokens.” RTokens are always 1:1 asset-backed, allowing for permissionless minting and redemptions onchain. ETH+ was the 2nd RToken deployed on the Reserve Protocol (see description above).

To cultivate RToken growth, Reserve’s core team invested $20 million in the Curve governance ecosystem to incentivize deeper onchain liquidity.

RSR is the governance token for Reserve Protocol and can be staked on a particular RToken, where it has two roles:

  • RToken Overcollateralization: Staked RSR receives a portion of the RToken collateral’s revenue in exchange for being the first capital-at-risk in the case of collateral default
  • RToken Governance: Staked RSR proposes and votes on changes to the RToken’s configuration

RSR currently has a marketcap of $157m. It can be traded on centralized and decentralized exchanges like Binance, Bitget and Curve.

About Mantle Staked Ether (mETH)

Mantle Liquid Staking Protocol is a permissionless, non-custodial ETH liquid staking protocol deployed on Ethereum L1 and governed by Mantle. Mantle Staked Ether (mETH) serves as the value-accumulating receipt token.

Some 64,407ETH have been staked with Mantle Staked Ether.

Motivation

  1. Diversified LST exposure and yield

ETH+ is a yield bearing asset, passing yield to those holding it. This will grow Mantle’s treasury.

In addition, since ETH+ is an index product containing two different LSTs, the generated yield is diversified. As LST yield varies from one platform to another, this aggregated yield amount will be less susceptible to collateral yield volatility. In doing so, it may also become more predictable - assisting Mantle with runway forecasting.

At ETH+’s current estimated annualized yield of ~3.38%, a 1000 ETH mint may generate up to 33 ETH+ annually for Mantle’s treasury.

  1. Overcollateralization to protect against depegs and slashing events

Thanks to diversification, ETH+ can mitigate the impacts of a single LST protocol depegging. If Mantle staked a large amount of ETH with just one LST which later suffered a depeg (as one did in June 2022) or an exploit, Mantle’s treasury may be adversely affected as ETH staked with the provider could become inaccessible.

Contrast this with Mantle’s deposit into ETH+. Should one of ETH+’s collaterals depeg or suffer an exploit, the impact of this event would be reduced. To begin, the remaining collateral assets would remain fully capitalized, meaning a large percentage of ETH+’s asset backing is less at risk. This means that should this unlikely event occur and an LST’s value goes to 0, Mantle’s losses are mitigated compared to holding just one LST.

Furthermore RTokens like ETH+ are overcollateralized. A portion of yield generated by the RToken’s asset backing is passed to RSR stakers in exchange for providing first-loss capital. The staked RSR will be seized, auctioned and used to recapitalize ETH+ in such a scenario.

This was recently demonstrated by eUSD during the March 2023 USDC depeg event. If we revisit the previous scenario, Mantle’s ETH+ holdings may recover more than 66% (if ETH+ contains 3 LSTs, for example), as RSR staked on ETH+ will be seized and used to recapitalize ETH+.

On a smaller scale, overcollateralization is useful to mitigate LST slashing losses, which was recently a cause for concern. ETH+ overcollateralization would have been sufficient to cover these losses had it materialized. This will further increase the possibility of projecting reliable yields as the yield too enjoys overcollateralization. See this thread for a further breakdown.

The combination of these two factors helps safeguard ETH+’s value in the face of a potential black swan. This reduces the risk of capital losses - something especially important for Mantle’s treasury.

  1. ETH+ could drive demand for mETH

Should ETH+ governors vote to include mETH in ETH+’s basket, every new ETH+ minted will contain mETH. This could be a driver for consistent market share growth amongst competing LSTs. If ETH+ immediately switched its basket to contain mETH, some $1.33M would be immediately converted to mETH.

As ETH+ TVL continues to grow, the TVL of mETH would grow alongside it. This will increase market share for Mantle and boost treasury revenue through Mantle’s LSP fee.

Specification

Implementation

Using register.app, Mantle will use 1,000 ETH to mint ETH+. The Reserve development team will be able to assist in all relevant stages of this process.

Once mETH has finalized its development process and become fully established, Mantle can propose adding mETH to ETH+’s basket through ETH+ governance. Reserve’s core team will assist this process in the following ways:

  • Collateral plugin development support for mETH
  • Audit support for the collateral plugin
  • Governance process support

Should this vote pass, which is possible given ETH+ governance’s agreement to further basket diversification, ETH+ smart contracts will include mETH in its basket.

As proven by High Yield USD’s collateral change, this operation is straightforward.

The level of complexity and lift to implement this proposal is therefore low.

Potential risks and mitigation

Underlying asset risk

ETH+ is an LST index. As such, Prisma Risk Team reports on the collateral assets (stETH and rETH) should be consulted. It is important to note that Mantle already has stETH holdings in its treasury, and so rETH is the only additional asset this proposal introduces, limiting underlying asset risk.As rETH is an established asset with many integrations, this risk is measured.

Liquidity / withdrawal risk

As a treasury asset, ETH+ must be sufficiently liquid to allow exit. This occurs in two ways: 24/7 underlying asset redemption inherent to all RTokens and an ETH+ curve pools (with ~$8M liquidity). Should it need to, the treasury may sell ETH+ on Curve or they can permissionlessly redeem the underlying rETH and stETH at any time for free. Note that redemptions are throttled to 7% of ETH+’s market cap per hour. At all times ETH+ asset backing is held in smart contracts free of external interference.

Novel asset risk

ETH+ is a relatively new LST index and has been on mainnet for under a year. ETH+ could be exposed to future asset backing depegs - such as what happened with stETH. While this may be true, RToken overcollateralization has proven to counteract these effects and ETH+ enjoys this protection. Indeed, if stETH was to depeg again ETH+ would likely cause Mantle’s treasury fewer difficulties than stETH itself thanks to overcollateralization and diversification.

Governance risk

As an RToken, ETH+ is governed by those staking RSR on it. These governors can change a number of variables including asset backing. Governance could feasibly change the basket of ETH+ to include an LST (or indeed any token) not yet covered by risk analyses. Nevertheless, this process would be conducted in a manner in which Mantle’s risk analyses would enjoy sufficient time to analyze the new asset. In addition, Reserve’s core team is open to helping Mantle DAO further integrate into ETH+ governance.

Slashing risk

ETH+ is backed by two LSTs, reducing the impact of slashing from any single LST. Should a slashing incident occur, ETH+ APY may reduce. If a significant slashing were to occur, both the affected LST and ETH+ will lose value in comparison to ETH, but the decline for ETH+ (due to diversification) would be less severe. This risk is mitigated by both overcollateralization and diversification, which may reduce the impact of slashing and then recapitaliize the ETH+ to its pre-slash value.

Reserve Protocol Smart Contract Risk

Reserve Protocol codebase is complex. As with all projects, smart contract risk remains. This risk is mitigated through open source code, multiple comprehensive audits, a $5M bug bounty, an exhaustive testing methodology working in tandem with automation tools like Echidna and Slither. Over the course of Reserve’s 4 year development, the core team has taken many intentional design steps to mitigate risks before they become material.

Learn more about Reserve Protocol’s five audits below:

  • Trail of Bits: Report date: Aug 2022, review report: (link)
  • Solidified: Report date: Oct 2022, review report: (link)
  • Ackee: Report date: Oct 2022, review report: (link)
  • Halborn: Report date: Nov 2022, review report: (link)
  • Code4rena: Report date: Mar 2023, review report: (link)

Additionally, Llama Risk Team has conducted a risk analyses on RTokens with focus on eUSD - with “much of the information … applicable to … ETH+”. It found “Reserve has done a great job … to create a transparent system with good documentation and plenty of smart contract audits”, but notes Reserve Protocol has a complex codebase.

Proposal Benefits:

  • Diversified LST exposure and yield
  • Overcollateralization to protect against depegs and slashing events
  • Increased and sustained demand for mETH

Proposal Costs:

  • There are other uses for 1K ETH, including directly staking it with mETH.

Additional ETH+ analysis

ETH+ / Reserve Protocol in the news

  • DLNews: Sam Altman-backed Reserve makes $20m Curve Wars power play
  • Blockworks: Reserve Protocol: Decentralizing the Creation of Money
  • StakingRewards: ETH+ coverage in The Ultimate Guide to LSTfi
  • The Block - Reserve expands stablecoin protocol to Coinbase’s Base network

Voting

  • If you agree with this proposal, a [YES] vote would lead to the following:
    • Mantle will mint 1K ETH into ETH+.
    • Reserve’s core team will assist Mantle’s proposal to include mETH into the ETH+ collateral basket.
  • If you disagree with this proposal, a [NO] vote would result in no change.
11 Likes

Supporting the proposal. I’m giving a yes vote

5 Likes

Yes! mETH would be an awesome addition to ETH+

4 Likes

An intriguing development! The idea of diversifying Mantle’s treasury with ETH+, a yield-bearing asset, seems like a smart move, especially considering the safety net of overcollateralization against potential depegs and slashing events. It’s also interesting to see the proposal’s focus on potentially increasing mETH’s demand through its inclusion in the ETH+ basket. While the outlined benefits and potential risks provide a balanced view, it will be important for the community to weigh these carefully. Looking forward to seeing how the community’s feedback shapes the final decision!

4 Likes

An update here: ETH+’s TVL is now at $16.7M, meaning that the requested 1000ETH mint will (at 33% of ETH+’s basket) bring ~$5M (~1667 ETH) into mETH.

1 Like

Another update: ETH+ TVL is still enjoying considerable growth at just over 15000 ETH. Adding mETH to the basket (at 33% of ETH+’s basket) may bring approximately $20M (~5000 ETH) to the LST.