KIP-24: Strategic Use of ETH for Yield Generation

Strategic Use of ETH for Yield Generation

kip: 24
title: Strategic Use of ETH for Yield Generation
author: DaddyMatty <matt@rook.fi>, starfire <starryfire777@gmail.com>, Wes2 <wes@rook.fi>
status: review
tags: none
created: 2022-6-2
replaced-by: none
replaces: none
dependency: none

Proposal

This document proposes that Rook DAO make its currently idle ETH holdings more productive by deploying a maximum of 75% of them across three liquid staking protocols for yield generation, using the methodology and process outlined below.

References

  1. Rook treasury holdings
  2. ETH2 liquid staking dashboard by @eliasimos
  3. Stakewise website
  4. Rook research report on Stakewise
  5. sETH2/ETH2 liquidity, from Uniswap
  6. rETH2/sETH2 liquidity, from Uniswap
  7. Rocket Pool website
  8. Rook research report on Rocket Pool
  9. rETH/wstETH liquidity on Curve (Factory 89)
  10. rETH/ETH on Uniswap
  11. Lido website
  12. Rook research report on Lido
  13. stETH/ETH on Curve

Background

As of June 1, 2022, Rook DAO holds a total of 10,537 ETH [1] that is currently not productive and not accruing additional yield. These holdings can be broken down as follows:

Asset Units
ETH 5,953
WETH 3,838
KWETH 787
Total 10,578

This KIP proposes to deploy a maximum of 7,934 ETH, or 75% of Rook DAO’s total ETH position as of June 1, 2022 across three liquid staking protocols: Stakewise, Rocket Pool and Lido. While the amounts will vary as the Official Team responds to market conditions, the baseline allocation derived from our modeling would be as follows:

Protocol/Product Max Amount (Units) % of Total
Stakewise 3,137 39.54%
Rocket Pool 2,768 34.88%
Lido 2,030 25.58%
Total 7,934 100%

This baseline allocation between the selected investments is based on a scorecard methodology developed by the Official Team that weighed key attributes and KPI’s of these protocols in relation to one another. Critical factors that materially impacted our proposed allocations to these assets were:

  • Stakewise has agreed to provide an advance on 50% of one year’s staking fee, or 5% of the earnings on staked ETH, in SWISE tokens upon staking funds. Assuming RD stakes 3,317 ETH at an average staking yield of 8%, this would result in an additional $22.5k in net revenues.
  • Rocket Pool is the newest platform and therefore is the least battle tested.
  • Lido is the dominant provider of liquid ETH staking, with a roughly 90% market share as of June 1, 2022. [2] While the protocol scored well enough in our research to merit an allocation in this proposal, we also believe that both Rook’s treasury and the broader Ethereum ecosystem would benefit from limiting this level of concentration. This led us to propose slightly larger exposures to the other two protocols relative to Lido.

Official Team

This proposal was developed by the following members of Rook DAO.

  • DaddyMatty - Labs Treasury Specialist
  • Starfire - DeFi Analyst
  • Stubbs - Treasury Analyst
  • Wes2 - Moderator
  • Breeze - Moderator

This proposal establishes these same members as the Official Team responsible for the execution and monitoring of the staking investments articulated in this proposal, subject to oversight by and reporting to the Rook DAO as established below.

Investment Analysis

The analysis supporting this proposal proceeded through two stages: analysis of individual protocols, and the development of a scorecard-based allocation to each. We describe each of these further below.

Protocol Analysis

The Official Team evaluated the liquid staking landscape using a combination of metrics and sourcing: Trustlessness/Concentration, Tokenomics, Security/risks, and Composability/Liquidity. These metrics gave context to the different trade-offs between liquid staking providers and allowed the team to discern the protocols aligned with Rook’s best interests. The analysis presented below represents a summary of the main takeaways from our research. For more analysis, see the protocol-specific research reports at [4], [8], [12], and below.

Note: All figures in the remainder of this section are as of June 1, 2022.

Stakewise [3]

The following summarizes the findings of Rook’s original research on Stakewise, available at [4].

Tokennomics

  • Current APR is 4.04% [3]
  • Current fee is 10% [3]
  • Dual token model where sETH2 represents users’ initial staking deposits and rETH2 that represents accrued rewards.
    • Pro: dual token model ensures rewards do not get diluted
    • Con: demand and liquidity are required for two tokens instead of one. Users have to manually swap rETH2 → sETH2 in order to compound rewards.

Trustlessness/Concentration

  • Permissioned validator onboarding process requiring node operators to apply and be vetted by the Stakewise DAO.
  • Open-source deployment package provided by Stakewise

Composability

  • Low composability right now, but Stakewise is exploring launching sETH2/stETH curve pool.
  • Integrated with Babylon Finance

Liquidity

  • ETH/sETH2 (Uniswap) - TVL $99.5m [5]
  • rETH2/sETH2 (Uniswap) - TVL $14.79m [6]

Rocket Pool [7]

The following summarizes the findings of Rook’s original research on Rocket Pool, available at [8].

Tokennomics

  • Current APR is 4.03%. [7]
  • Current fee is 15% [7]
  • Rocket Pool issues rETH to represent staked Ether deposits on the Beacon Chain. Instead of a rebasing mechanism Rocket Pool increases the rETH/ETH exchange rate to account for accrued staking rewards. Rewards are realized simultaneously.
    • Pro: rewards are realized instantaneously
  • Rocket Pool requires node operators to stake a minimum of 10% RPL (Rocket Pool’s native token) in the value of ETH they are staking. This serves as collateralization in the event the node operator gets slashed.

Trustlessness/Concentration

  • Permissionless node onboarding process mitigated by the RPL collateralization requirement

Composability

  • rETH is integrated with Curve, Yearn and Alchemix.

Liquidity

  • rETH/wstETH (Curve) - TVL $35.46m [9]
  • rETH/ETH (Uniswap) - TVL $3.24m [10]

Lido [11]

The following summarizes the findings of Rook’s original research on Lido, available at [12].

Tokennomics

  • Current APR is 4.00% [11]
  • Current fee: 10% [11]
  • Single token model, stETH, with daily rebasing.
    • Pro: rewards are realized instantaneously
    • Con: pool dilutes at the expense of late participants given it consists of interest bearing ETH deposits and non-interest bearing staking rewards

Trustlessness/Concentration

  • Permissioned node operator application process
    • Plans to decentralize this process through distributed validator technology
  • Protocol is controlled by the Lido DAO through LDO governance token
    • Checks and balances such as quorum and timelocks for proposals being introduced

Composability

Liquidity

  • stETH/ETH (Curve) - TVL $1.8b [13]

Allocation Methodology

To determine the allocations to the selected investments, the Official Team used a scorecard methodology to weigh each of the protocols’ key attributes and KPI’s in relation to one another. The team used following attributes in this analysis:

Trustlessness & Asset Concentration

  • Decentralization - Is the protocol fully permissionless? What is the structure of the DAO? How are node operators onboarded?
  • ETH Concentration - What is the protocol’s commitment to client diversity? Is the protocol committed to maintaining the decentralization of Ethereum?
  • Node Count - How many individual node operators has the protocol onboarded? What client is the node operator running?

Tokenomics

  • APR - What is the annual percentage return for staking?
  • Reward Asset - How are the accrued rewards paid out? Does the protocol use a single token model or a dual token model? Is the reward pool socialized?
  • Fee - What is the fee on accrued rewards?
  • Inflation - Does the token reward model introduce elements of inflation at the expense of stakers?

Security & Risk

  • Audits Performed - How many audits has the protocol received? Are the audit firms reputable?
  • Bug Bounties Offered - Are there any bounties the protocol has offered to the public in order to incentivize individuals to find bugs?
  • Length of Operation - How long has the protocol offered liquid staking?
  • Slashing Insurance - Does the liquid staking service offer native protection for slashing penalties?

Composability & Liquidity

  • Total Value Locked in Liquidity Pools - What are the main venues for trading the liquid staking derivative? Is there sufficient liquidity for Rook DAO to exit the position?
  • Additional Yield Opportunities - Is the liquid staking derivative integrated in protocols across the DeFi space? Are there additional opportunities for Rook DAO to increase the yield of the position?

Scoring and Allocations

Using the attributes referenced above, we then determined a weighting scale that reflected our assessment of the relevant importance of each attribute. We then scored each option on each attribute and weighted its total score as a percent of the grand total to establish a recommended allocation of funds.

Max Score Attribute Rocket Pool Lido Stakewise
35 Trustlessness/Concentration 35 5 25
30 Tokenomics 20 15 30
20 Security/Risks 15 20 20
15 Composability/Liquidity 5 15 10
Total Score 75 55 85
Allocation Weight 34.88% 25.58% 39.53%

Mechanistically following the scorecard’s output would translate into the following allocations of ETH:

Protocol/Product Max Amount (ETH) % of Total Staked
Stakewise 3,137 39.54%
Rocket Pool 2,768 34.88%
Lido 2,030 25.58%
Total 7,934 100%

While these recommendations will remain a primary input into allocation decisions by the Official Team, the volatility of the current market landscape in general - and the current situation around stETH in particular - necessitates some flexibility to adapt to changes. Because of this, these amounts represent a baseline allocation between the 3 protocols; the Official Team can choose to change these allocations to take advantage of changes to key criteria used to monitor these positions.

Financial Analysis

Expected Return

Based on a total initial, maximum investment of 7,934 ETH and assuming stable APYs and an average ETH price of $1,800, Rook DAO can expect to earn $575,028 or 319.46 ETH in the first year with the allocations above. The schedule below presents the anticipated rewards by protocol/product:

Protocol/ Product APY* Annual Reward (Units) Additional Incentives
Stakewise 4.04% 126.73 ETH 5% SWISE Incentive
Rocket Pool 4.03% 111.53 ETH None
Lido 4.00% 81.2 ETH None
Total 319.46 ETH 5% SWISE Incentive

*APYs listed here is as of June 1, 2022 [4][8][12]

Factors that may impact these forecasted returns include:

  • Changes to ETH’s price
  • Changes to APYs of staking protocols
  • Total ETH market volume and conditions
  • Adverse movements in SWISE price
  • Number of active stakers
  • Timing of the merge to POS ETH
  • Changes to staking and ETH protocol tokenomics

In addition to the yield gained from the staked assets, Stakewise has agreed to provide half of RD’s anticipated staking fees for one year (or 5% of the earnings of the ETH Rook DAO stakes on their platform) in SWISE tokens upon staking funds. Assuming Rook DAO stakes 3,317 ETH at an average staking yield of 8%, this would result in an additional $22.5k in net revenues upon staking of funds. Although Stakewise has not relayed any lockup period for these funds, the Official Team recommends that Rook DAO through this proposal commit to not selling any SWISE tokens for 120 days after staking with Stakewise to establish good faith with the Stakewise community. Assuming prices remain consistent for both the SWISE incentives and the ETH earned, this would bring the total expected income from these investments to $597,528.

Note: it is expected that yield derived from staking ETH will significantly improve post-merge. These yields are expected to be anywhere between 8-15%. Because the timing of the merge to PoS ETH is unknown we have excluded these returns from this analysis.

Risks

As with all investments, the benefits earned come with numerous risks that are both financial and non-financial in nature. These risks should be assessed by the Official Team in conjunction with the potential returns and would include:

  • Smart contract risk
  • Protocol business risk
  • Market conditions and directional asset exposure
  • Opportunity cost
  • Execution risk during Ethereum’s transition from PoW to PoS
  • Protocol concentration

Protocol concentration risk will be managed in light of the established maximums from the allocation process.

Execution and Management

Implementation

Actual execution to deploy these funds will be performed by the Treasury Multisig (0x9a67f1940164d0318612b497e8e6038f902a00a4). The treasury will make its best effort to deploy these funds within 120 days of adoption of this proposal, consistent with its ongoing commitment to minimizing the risk of market speculation and front-running Upon completion, an update will be announced on Discord and Twitter with the full transaction details.

Position Maintenance and Unwinding

Full management of the positions will be at the collaborative discretion of the Rook Labs and the Official Team as outlined above, with execution being performed by the Treasury Multisig. While management of the position will be at the discretion of the Official Team, this team will communicate current results and planned actions on a weekly basis. Additionally, a dune dashboard monitoring these investments in real time. This allows for agile response and risk management while also continuing to minimize the speculative and front-running risks described above.

Review: The liquid staking assets will be subject to a formal review and analysis 90 days after full deployment has been completed. The goal of this review is to assess the productivity of the positions and communicate the findings to the DAO.

Exiting the Position: This proposal imposes no timeframes on when and how to unwind the position. Full management of the position will be at the collaborative discretion of the Rook DAO Labs and the Official Team involved in drafting the KIP.

Specification

  • Stake 7,934 ETH into Stakewise, Rocket Pool and Lido in amounts described above
  • Treasury Multisig (0x9a67f1940164d0318612b497e8e6038f902a00a4) to deploy assets and make best effort to do so within 120 days of adoption
  • Official team to report weekly to community along with real-time dashboard
4 Likes

Full support of this proposal.

The level of research, preparation, discussion, and willingness to hear all options and opinions was transparent, thorough, and very well management. Amazing work by the Official Team.

2 Likes

Hi @DaddyMatty and Rook community!

I’m Davide, a core contributor in Idle DAO and part of Treasury League :wave:

Great to see Rook exploring treasury management and kudos to the authors for drafting this comprehensive investment framework.

Following up on this proposal, I’d like to introduce stETH Perpetual Yield Tranches (PYTs) and their protection features, coming along with an improvement of the generated yields.

PYTs provide 2 risk-return profiles: Senior and Junior.
Senior Tranches receive a smaller portion of the underlying yield but they’re in line to be repaid first in case of default - with Junior liquidity providers covering potential losses associated with liquid staking or PYTs.
Consequently, Senior Tranches represent a more flexible way to receive protection on deposits, with no upfront payments or locking periods.

We’d like to propose routing a portion of the ETH allocated to Lido into stETH Senior Tranche for the following reasons:

  • improve the resiliency of the Rook’s treasury by reducing your exposure to Lido, and benefit from the built-in coverage;
  • get access to the LDO (15,000/month) and the IDLE (990/day) reward programs;
  • amplify your IDLE returns with the Gauge multiplier (2.5x boosted rewards).

The potential allocation of 1000 ETH would enable Rook to overperform Lido’s native solution, directly depositing stETH.
The estimate return would be: 1.4% organic APY + 2% from LDO + 2.8% up to 7% from IDLE = 6.2% - 10.4% final APY.

Here below we apply your Allocation Methodology to Idle protocol, to let you complete the due diligence process.

Trustlessness

  • Decentralization - The DAO was launched in 2020 and is based on Governor Bravo. The protocol is fully permissionless. The DAO is operatively structured in 3 Leagues (departments of core contributors).

Tokenomics

  • APR - from 6.2% to 10.4% APY for 1000 ETH deposit, according to the IDLE boost
  • Reward Asset - Organic APY (ETH) + LDO incentives + IDLE incentives
  • Fee - 10% performance fee on gains (no maintenance or withdrawal fee)

Security & Risk

  • Audits Performed - Protocol audits: 6. Auditing firms: Quantstamp, Consensys Diligence, Certik.
  • Bug Bounties Offered - $250k via Immunefi
  • Length of Operation - Protocol is active since 2019

Liquidity

  • Total Value Locked - $70m

More info about the product suite and architecture is available in the documentation.

Excited to continue this brainstorming, happy to jump into a conversation or provide more material!


About Idle DAO
Idle DAO is a decentralized organization that builds yield automation infrastructure for DeFi. From brand new DeFi protocols to institutional and DAO treasury managers, businesses of every size use our protocol to optimize capital efficiency and manage their treasuries with DeFi.

We believe that everyone deserves the best for their idle funds, both in terms of returns and risks. Over the past three years, Idle has rolled out the features and services, defining and shaping the yield automation space.

Hi ROOK community,

I would like to start by saying y’all are doing it right - transparent investing of ROOK’s treasury ETH into non-custodial staking pools, with clear rationales and open discussion. In that spirit, I will disclose that I am a Rocket Pool (RP) community member, and I speak for myself and not that team. Also over the past year I have held a small amount of ROOK and plan on voting.

As before when I came on Rook’s Treasury Tuesdays, I try to talk about RP and not about other the staking pools.

I believe the above analysis is great and want to underscore a few more points:

  • Decentralization - Rocket Pool has been adding on average over 150 nodes a month (current count is 1,223). Remember nodes <> validators. Check out our community built site Rocket Pool Explorer that dives into the Node Operator growth and validator (called minipools in RP lingo) distribution.

  • Community/Supporters - Aside from the 1200+ Node Operators, and a very active Discord with over 2k members. Additionally, I would like to highlight a few Ethereans you may know who are part of RocketPool’s oDAO: Client Teams: Lighthouse, Nimbus, Prysm Explorers: Etherscan / Beaconscan & Beaconcha.in; Others: ConsenSys Codefi, Bankless, Fire Eyes, CryptoManufaktur

  • Liquidity - Along with all the liquidity mentioned in your great write-up above, I would like to note that rETH is currently in the pipeline with Maker and AAVE to be accepted collateral!

  • Layer 2 - 2022 will be the year of L2s!!! Or so it has been said. Rocket Pool staked ETH token (rETH) is on Arbitrum and Optimism, we also have smaller foot prints on zkSync and Polygon. This infrastructure is in place and liquidity is slowly building on these platforms.

So I hope everyone at ROOK finds those tidbits of new info all interesting and helpful; now to comment directly on the above KIP’s allocation. With a focus on decentralization, I would respectfully suggest that Lido’s allocation is too high. According to rated.network Lido’s share of Ethereum validators is at 32%. That is greater than the next 5 Ethereum staking entities combined (including Binance and Coinbase).

Please take no offense but lets talk real, ROOK’s 2k ETH deposit is insignificant to the Lido Protocol, or centralization/decentralization. It is not even a drop in the bucket to the over 4 million ETH Lido currently have staked. However, the same amount of ETH split among Stakewise and Rocket Pool is significant - lets call it a cup in the bucket. That “cup in the bucket” can go a long way to supporting a more decentralized permissionless validator community. It feels odd lobbying for Stakewise who is an RP competitor, but I believe we need not compete but elevate each other as better options to centralized staking. And Liquidity begets Liquidity

I’ll leave it at that, be impactful - instead of being a drop, be a cup in the bucket.

Good luck in all you guys do,
Danylo

1 Like

Quick clarification by the SWISE team: The additional incentives they will be providing are not 5% of the total ETH staked. Instead, it was a reimbursement in advance on 50% of the staking fee, or 5%. Assuming the average staking yield for the next 12 months is 8%, with the current ETH price at $1,800 and SWISE at $0.12 that would result in a
reimbursement amount in SWISE, paid up-front of ~188K SWISE

1 Like

DISCLAIMER: I own a position in LIDO

1 Like

Great report! I think splitting among several platforms makes sense but would (biased) suggest including the Maven11 wETH pool on Maple to diversify the kind of risk being taken.

  • this proposal seems intended to avoid credit risk by avoiding a lending protocol option, but at the expense of this it incurs depegging risk (currently stETH trades at 0.94 ETH).
  • whilst credit risk evaluation would be whether 7% yield in the Maple pool compensates for the risk of Wintermute, Amber, Auros and other market makers defaulting. However, in a balanced portfolio, there should be diversified risk exposures. Whereas multiple staking allocations diversify counterparty and smart contract risk but not liquidity or depeg risk.
  • an inclusion of the Maven wETH pool would reduce the concentration of depeg and liquidity risks whilst introducing a non-correlated (and therefore healthier for portfolio construction) credit risk.

The Maven team wrote up a (lengthy) detailed proposal here which i think would be worth the community’s time to consider: KIP Draft: Yield generation on Maple Finance (wETH pool) - #5 by Maven11

Disclosure: Maple core team

Hi @sid-maple - thank you for these thoughts! This proposal has already gone to a vote so we won’t be able to consider adding you to this round, but I’d recommend checking with @DaddyMatty about any future plans to expand this pool.

UPDATE: This proposal has now passed through Snapshot voting, with ~22k tokens in 26 wallets voting No Objection and none voting Object.