Proposal: Allocate ETH to StakeWise

Introduction

StakeWise is a liquid ETH 2.0 staking solution, which uses a novel two-token approach which allows for efficient compounding of rewards. We believe that StakeWise is a strong option for investing the mutuals’ ETH for the foreseeable future.

Rationale

The mutual is holding significant amounts of ETH which should be used to generate a return. Currently only 20% of the ETH is being staked, with another active proposal to allocate 10% to Maple. We believe we can invest another 20% in an ETH staking solution while still being able to eventually balance our currency mismatch situation (too heavy in ETH, not enough stables compared to active covers) and hold cash equivalents to pay out claims.

Of the larger liquid staking solutions that are available, we already invest significantly with Lido on the one hand, and Rocket Pool, while promising, is being held up by an oracle issue.The third obvious option to consider is StakeWise. We’ve spent countless hours with their team to get comfortable with the counterparty risk, their diligence, approach to risk and codebase.

Currently, StakeWise is the best liquid staking alternative for us to stake ETH. Liquidity is one of their primary concerns, hence they’re investing in maximizing pool liquidity. They have impressive uptime and server stability. The two-token system allows for efficient compounding.

The core Nexus Mutual team is also in the late stages on a cover deal with StakeWise, to protect them against slashing, downtime and revenue loss on validators. There will be some residual correlation risk, in terms of server exposure, geographic and client diversity between the proposed investment and the slashing cover, as well as the existing Lido investment.

We believe that an investment into StakeWise aligns our interests and allows for a more fruitful partnership going forward.

Proposal

The mutual should use 10% of the assets in the capital pool to stake ETH in the StakeWise liquid staking pools.

Amount & Duration

At the time of writing, the mutual has 153,446 ETH. This proposal is to use 15,344 ETH for staking in StakeWise. The duration will be perpetual until the mandate of the mutual changes, claims need to be paid out in excess of our cash equivalent positions, the yield no longer justifies the risk, or the members decide to make a change for any reason.

Technical

To do so, the ETH will first need to go into an Enzyme vault (the same as the Maple proposal) and then be deposited into StakeWise. This will involve the same fee structure as Maple, meaning the yield will be impacted by a material amount.

However, given the current developer focus on getting Nexus Mutual V2 to audit and complexity of the oracle work required by Chainlink, we think it’s worthwhile to use Enzyme for this immediately. In the future, we can remove these assets from Enzyme to save on fees, or negotiate a lower fee structure. However, given the effort that Enzyme has put into making this work, it seems fair and reasonable to stay with the same fee structure for now and focus on moving faster to get investments live.

Implementation

The Enzyme vault will be created for the Maple proposal and for this, presuming both pass. The governance vote for this proposal will action the transfer of ETH from our capital pool to the Enzyme vault. The Enzyme team will then facilitate the staking.

Rewards

StakeWise is currently generating a 4% APY on staked ETH, after fees (charged at 10% of the return).

The cost of using Enzyme will be the same as for Maple:

  1. Fixed fees = 0.25%
  2. Performance fee estimate = 0.5% * 4% = 0.02%

Total fee = 0.27%

Net yield = 3.73% APY

Assuming the rewards remain the same, after converting the initial 15,344 ETH into sETH2, we will generate 3.73% = 572 rETH2, which can also be re-staked at regular intervals to compound our returns efficiently to earn more than 3.73%. Our expectation is that in the short term, as further ETH is staked in the Beacon chain, this yield might decrease. In contrast, post-merge, as demand for using the Beacon chain increases, this return is likely to increase back above the current level.

Uniswap LP Possibility (Not part of Proposal)

There is also the possibility for us to become a liquidity provider in the sETH2/ETH Uniswap v3 pool, and earn a fee in return for this service. There’s a reasonable argument, in my opinion, that this is worth doing with some portion of the tokens. By doing so, we’ll be able to enhance our yield, support the growth of the protocol and provide better liquidity for others. This suggestion is not part of the proposal, but we wanted to open the discussion on this topic.

Risks

Intrinsic to the investment

Liquid ETH staking solutions are relatively lower risk compared to investing in DeFi protocols which tend to come with significant market, liquidity and currency risk. StakeWise has a few notable risks:

  1. Depeg risk
  2. Slashing / downtime
  3. Smart contract risk

Following the well-known depeg on stETH from ETH, it’s worth considering what a prolonged depeg might mean for us. With our liquidity needs it’s possible that we could be forced to sell any staked ETH token below peg. This is because depeg events are more likely to coincide with hacks and exploits that become systemic (Terra was not this, but had similar wide reaching consequences), and this contagion leads to panic, forced selling and staked ETH depeg events.

We shouldn’t assume that all selling of staked ETH products will happen at peg, which is why an accurate oracle is particularly important.

Secondly, there is the risk of penalties or slashing events on the Ethereum network, downtime and other similar events which can lead to revenue loss and loss of capital. StakeWise has not experienced this to date and given the quality of their setup, diversification and internal controls for managing these events, we believe this risk is acceptable.

Finally, the other big risk is smart contract risk. Liquid solutions always rely on relatively broad smart contracts, meaning more attack vectors. A possible exploit could be a way to access the pool and drain all ETH in the exit / entry mechanism, or a way to mint staked ETH tokens and crash the market, or some other attack that we haven’t thought of yet.

StakeWise found a bug in Rocket Pool last year, and privately disclosed it to their team. To us, this is strong proof that the StakeWise team is technically competent and takes security and ecosystem sustainability seriously. You can find their last five audits here.

Despite this, smart contract risk is very real, hard to quantify and needs to be actively managed. The addition of the Enzyme protocol into the process also adds material smart contract exposure. Ultimately, we believe that the risk is acceptable and we will be compensated fairly pre and post-merge.

Nexus-specific

The biggest risks to Nexus are:

  1. Investment losses prevent us from paying out claims
  2. Trust is lost, preventing cover buys and growth

These are the two mortal risks which we have to avoid when making investments from the capital pool. Therefore, we have to be particularly cautious, far more than a hedge fund, who can justify losses as long as the expected value was reasonable. That logic doesn’t apply to Nexus Mutual where preventing capital loss is the biggest priority.

Staking ETH is a relatively low risk investment, it’s long-term and involves little to no management. These characteristics make it the ideal choice for a risk-sharing protocol.

Sizing is also critical, which is why we’re only recommending a 10% position in StakeWise. Even in the worst case scenario where the entire position is lost, it should make little to no difference to our ability to pay out claims even under black swan scenarios.

At the proposed size, Nexus is poised to become 20% of the StakeWise TVL. While this is a significant amount, we feel that the quality of the product and team justify this size of investment.

Governance

This post is the start of the governance process. This will stay live for at least 5 days before a governance vote is created. Voting will take place on-chain as a full-member vote, meaning that any NXM holder can vote, with 1 NXM representing 1 vote.

4 Likes

Nexus must play its part in supporting diversified POS staking on Ethereum. Although LIDO is a bulwark against CEX domination of ETH staking, more can be done. Long term ETH HODLers like Nexus Mutual currently face big opportunities to acquire de-pegged, discounted stETH. More diversified, and more active management of staked ETH, with more structured asset management alternatives and staggered mandates is incumbent on an ETH-centric insurance mutual like Nexus Mutual. The current macro environment combined with pre-Merge uncertainties make NOW the right time to be diversifying staked ETH asset management mandates across various structured investment vehicles. Stakewise deserves community support. Agree that Enzyme is quickest route, but ultimately unnecessary. Also would like to see all (w)NXM AMM liquidity moved to Bancor.

In my opinion, adding more stETH to the capital pool exposes the mutual to too much concentration risk, so I’d rather see members explore other ETH staking options, like this proposal to allocate 10% to Stakewise.

There are quite a few technical hurdles to acquiring assets directly from a DEX, as swapping assets directly from the capital pool is fairly complex.

Using Enzyme for asset management presents a variety of benefits for the mutual. The core benefits are below:

  1. As more assets are added to the capital pool, it does have an impact on gas costs.
  2. Instead of having to add multiple assets, an Enzyme integration allows us to deploy capital by way of the integration, and members can allocate capital to new investment strategies without requiring more resources from the engineering team with every additional asset and initial deployment of capital.

And regarding your comment on Bancor: there is currently 50,000 wNXM from the Community Fund deployed in Bancor v2.1, and I’m sure a decision will be made about migrating to Bancor V3 at some point. But that is the extent of the DAO’s owned liquidity. The rest of liquidity is provided by other users and members. Agree that Bancor presents us with the best options, but that’s more a community initiative than one that concerns the capital pool.

Fully in support of adding more staked ETH to the capital pool and diversifying our staking exposure. My support is behind the Stakewise allocation :turtle:

1 Like

Hello, it is my first time posting in these forums although I have been a member of the Mutual since 2019. I wanted first to agree that this use of treasury funds is a good idea, we should be exploring ways to earn low risk yield for the treasury. To that end, I wanted to highlight another, very similar, direction we could take.

Babylon Finance is a decentralized asset management platform, much like Enzyme. However, some notable differences are in tokenomics design, platform ownership & existing DeFi integrations. If we were to use Babylon, we would be earning an extra return on top of the StakeWise strategy in the form of BABL tokens which represent an ownership claim on Babylon’s protocol fees. Babylon has integrations required to complete this proposal.

I’ve included some details about the protocol as well as some live examples of current ETH strategies employed to earn a yield for members within Babylon’s investment funds.

Benefits of using Babylon:

  1. Diversification of treasury risk. To @BraveNewDeFi point, concentration risk is something to keep in mind for the Mutual, and it is very much present on the protocol level as well. With funds on Enzyme, and funds on Babylon, we are further isolating capital so in the worst case event where one protocol gets exploited, at least the Mutual doesn’t lose everything from both the Maple Finance strategy and the StakeWise strategy.

  2. Earn extra yield from the Mutual’s activities with the mining program. (1/2 of the total BABL supply has been allocated towards the mining program for the next 10 years)

  3. Inclusive fee structure where BABL tokens represent a claim on current and future fees. These fees can be directed back into Nexus Mutual’s stETH strategy (in the form of wETH dividends which directly increase the share price of your fund)

  4. No reason to create multiple investment funds for different strategies. One garden can house a plethora of strategies, including Maple Finance Allocations & StakeWise stETH.

  5. Whitelist depositors & strategists (fund managers). Customize your parameters to fit the Mutual’s needs. Babylon enables detailed control of each investment; slippage tolerance, max gas fees, capital allocation limits, strategy duration and more fine tuning. Babylon’s core team is willing to direct this StakeWise staked ETH strategy on behalf of the Mutual for no extra cost/management fees.

  6. 8 Security audits and strong dev security practices.

  7. 15 different integrations throughout DeFi with 4 currently in development.

Example #1:

Babylon has an investment club called The Fountain of ETH, which is performing the exact strategy proposed in this discussion. It simply deposits wETH into the SETH2 Vault on Stakewise. The fund uses wETH as its reserve asset to denominate profits/losses because it is attempting to accumulate ETH, not speculate on it’s value vs. USD. Rewards come in the form of ~4% ETH Staking APY + SWISE mining emissions + BABL mining emissions.

We deployed this strategy 21 days ago with 750 ETH and it has so far returned 8.4% Annualized, although these numbers will certainly fluctuate and are subject to market values for farmed tokens. I’ve included a screenshot of the strategy modal, but please check it out yourself by scrolling to the bottom of the Fountain of ETH page and clicking on the “StakeWise + SWISE strategy”:

*Chart shows USD value of strategy, though profits/losses are denominated in wETH.

Example #2:

In the same fund, The Fountain of ETH, we have a strategy that is a little more complex but has higher yield because of it. The “stETH + CVX compounded” strategy in the fund began just 6 days ago so the annualized return needs more data to reach a realistic number.

This strategy takes wETH and deposits it into the Lido stETH Curve farming pool on Curve. The Curve ETH/stETH “stethCRV” tokens are then deposited into Aladdin DAO’s Concentrator “steth” vault. Aladdin DAO’s Concentrator then deposits everything onto Convex and automatically compounds the rewards back into cvxCRV which are paid out with aCRV tokens, representing your share over the total cvxCRV asset pool. The rewards from this strategy come in the form of $CRV, $CVX, $LDO, and $BABL rewards all autocompounding except BABL which must be claimed manually. When a strategy finalizes on Babylon, it simply performs all the steps in reverse order, selling all the reward tokens back into wETH before calculating profits/losses.

Babylon already has a symbiotic relationship with Nexus Mutual through their token staking mechanics. Every week 5% of Babylon’s protocol fees are allocated towards a protection pool we call the “Shield.” This shield periodically tops up smart contract cover on Nexus Mutual for Babylon’s contracts to insure our members from exploits. The initiative started just last week and we currently own ~$2M in cover from Nexus Mutual and will continuously add more.

(I’ve included some links to the Fountain of ETH and Babylon for DAO’s in the #investment-earnings channel in Nexus Mutual’s Discord.)

2 Likes

Rocket Pool, while promising, is being held up by an oracle issue

Can you kindly elaborate what kind of oracle issue you’re referring to, and how it affects nexusmutual as a staker?

If the main priority of nexusmutual is to protect the principle amount, it seems folly to overlook rETH, which is arguably the safest liquid staking token available.

  1. Due to its permissionless nature, Rocket Pool has the largest pool of node operators (>1300, as opposed to ~20 in Lido). A diversified set of node operators who run different infra configurations and client software is essential to reduce the likelihood of mass slashing events.
  2. rETH is >200% (~266% now) backed in value - offering the highest protection of the staker’s ETH out of all liquid staking tokens.
  • 100% liquid staker’s ETH
  • 100% Node Operator’s ETH (which will be used in case the node operator gets slashed. Validator ejection is set at 50% (16 ETH) which makes it even less likely that the protocol will lose any rETH staker’s ETH even in the face of slashing incidents).
  • 10-150% (66% as of writing) Node Operators RPL to be used as insurance in case of outsized slashing events.

Risk assessments used by MakerDAO here:

1 Like

Ideally you want a Chainlink oracle for the price of rETH so we know with certainty what our NAV is at all times. rETH does not qualify for a Chainlink oracle due to lack of volume and low number of pools. We’re trying to move away from having fixed 1:1 oracles for obvious reasons and we dislike solutions like a TWAP oracle.

This same problem will exist for Stakewise due to some factors that aren’t public yet. So, we’ll need to use a 1:1 oracle for now but Chainlink is aware and we’ll be able to have a solution. The same is not true for rETH so far, from what I know.

I’ve personally messaged the Rocket Pool leadership about this multiple times and have had no response. It’s not like there is no drive to get something done there, on our side.

2 Likes

Hey @Dopeee,

Apologies for the lack of response. I can only say that Telegram is not my friend and that it was not intentional rather more like user error.

We have been following up with Chainlink for months but still have not had a direct confirmation that we do not meet the liquidity/volume requirements. Although I have heard indirectly that it is the case. We are renewing our push for a Chainlink oracle and requesting what our positions would have to be, to qualify, so that we can put a plan in place.

We will at some point qualify for a Chainlink oracle. Is it worth discussing a risk-adjusted approach that factors in the use of a 1:1 oracle? Particularly as our Oracle DAO provides a robust on-chain exchange rate.

3 Likes

The Maker risk assessments mentioned here are some of the most in depth analysis on the subject. I really do recommend @Dopeee and community to take a look. I have held NXM (wNXM) for over two years and hope the DAO supports decentralization with actionable investments. Addtionally, take a look at how ROOK DAO’s approach and analysis - with rETH receiving 34% of the DAO’s Treasury ETH allocation (link)

Full disclosure I run a number of validators via Rocket Pool.

2 Likes

I like the general proposal of staking more ETH via different legitimate options rather than staking more with Lido. I would potentially wait for a successful merge though (given the expected yield til than is not worth the risk), and then ideally go for multiple decentralized staking solutions, I like StakeWise but think Rocketpool and others are also worth considering to diversify.

Another worthwhile exploration could be to deposit some stETH, sETH etc. into balancer, curve or other pools to earn additional rewards through fees, and liquidity mining rewards.

3 Likes