[RFC] - Stake idle ETH on Enzyme Vault to Chorus One through Stakewise V3

Dear all, this is @moss and @elisafly, posting from Avantgarde Treasury.

PREMISE
This new RFC marks a new significant step after NMPIP-196 was successfully passed in the summer of 2023 and staking through Kiln subsequently activated on 30 Aug 2023.

Having gathered feedback from members of the Nexus Mutual Investment Committee, and after taking into consideration the latest RFC [Divestment Framework] recently published by @Rei, we are excited to present this new RFC to Nexus Mutual DAO members.

We believe this aligns with the specific needs and requirements of Nexus Mutual and follows the guidelines stemming from the investment philosophy 2023 review and investment proposal template.

WHY ENZYME<>STAKEWISE V3<>CHORUS ONE
Nexus Mutual has a longstanding relationship with Stakewise, who were the first buyers of ETH Staking Cover. StakeWise was the first non-custodial liquid staking solution to launch on Ethereum back in early 2021. Its smart contract infrastructure is trusted by many entities in the space, from DAOs such as Aave to leading commercial operators.

Discussions between Nexus Mutual and Stakewise have taken place since the investment proposal back in May '22, which showed some early traction. However, it was then put on hold as Nexus Mutual awaited the release of Stakewise V3, which was audited and launched in Q4 2023. Since the initial proposal, StakeWise has upgraded its protocol to enable DAOs like Nexus Mutual much more control over their capital deployment. For example, DAOs can now cherry-pick their preferred node operators and negotiate bespoke commercial terms with such operators. After a period of consultation with multiple node operators, Chorus One has emerged as the operator of choice. More details on Chorus One can be found in the next paragraphs.

Finally, given the difficulty for Nexus Mutual to allocate engineering effort (bandwidth & costs) to enable direct Capital Pool deposits into Stakewise v3, the choice of the Enzyme route is deemed to be the most accessible and convenient. On the Enzyme side, the specific protocol engineering work was carried out and the protocol adapter Enzyme <> Stakewise V3 was successfully shipped + audited.

SUMMARY
The strategy focuses on maintaining a consistent long exposure to ETH, earning rewards through ETH native staking. The proposal involves staking the idle ETH (currently 6,585.02 ETH) on Chorus One via Stakewise V3. To be noted that in this case the full amount (and not only multiple of 32 ETH) can be staked at the same time.

RATIONALE
Staking has evolved into a vital pillar of the Ethereum ecosystem. Failing to embrace diversified staking practices would result in the DAO diluting its potential and neglecting its contribution to overall network security and decentralisation. The importance of diversifying Ethereum staking providers cannot be overstated, as it serves to mitigate risks associated with staking. Relying solely on a limited set of staking providers exposes one to potential economic penalties, operational disruptions or regulatory crackdowns.

To illustrate, consider the scenario where you rely on a solitary staking provider utilising a hosted service that receives a directive to cease its services to crypto companies. Such an event would lead to severe penalties for both Nexus Mutual and the network. It is imperative to thoroughly assess and evaluate these types of risks, implementing specific mitigation measures programmatically to ensure the ongoing stability of treasury management.

By adopting a diversified approach to staking providers, Nexus Mutual can proactively safeguard against contingencies, thereby fortifying the continuity of its Capital Pool in the long run.

Regarding infrastructure, this proposal aims to establish direct connectivity with the staking provider via the existing Enzyme vault while leveraging the audited smart contract integrations of Stakewise V3.

Another key aspect of this proposal is the utilisation of the Proof of Reserve Chainlink Oracle, a custom development effort that our team carried out for Nexus Mutual in 2022, which allows Nexus Mutual smart contracts to retrieve the exact value of the investment in real time.

PROPOSAL SPECIFICATIONS
The proposed approach is to proceed with the remaining WETH balance in the vault which currently sits at 6,585.02 WETH. Note, usually ETH is staked in multiple of 32, however because StakeWise is a pooled staking solution, this enables staking in any size and will allow Nexus to earn rewards on all of its capital from day 1.

TECHNICAL REQUIREMENTS
In terms of engineering efforts, the most efficient path to achieving the stated goal for Nexus Mutual is through the integrated and audited Enzyme’s adapter with Stakewise V3. The flow of funds to go from idle WETH in the Enzyme vault (as-is) to being staked via Chrous (to-be) is rather simple: thanks to the native smart contract adapter Enzyme<>Stakewise v3, with one approved transaction from the Enzyme UI, the capital is deposited into the selected Stakewise vault and sent directly to the Beacon Chain via Chorus One. Upon validator withdrawals funds flow back into the Stakewise Vault ready to be claimed by the Nexus Vault contracts. The smart contracts involved in the process are Enzyme, Stakewise v3. This integration will grant Nexus Mutual a permissionless approach to engage directly with the node operator Chorus One. Importantly, the involvement of the Mutual’s Engineering Team is not anticipated, ensuring their undivided focus on current priorities at hand.


Source: https://app.enzyme.finance/

IN DEPTH: STAKEWISE V3
Some key insights about the proposed smart contract connector Stakewise v3.

StakeWise was the first non-custodial staking solution to launch on Ethereum in early 2021. The staking pool accepted any amount of ETH and used StakeWise DAO approved commercial operators to run the validators, removing all economic and technical barriers to entry for staking. As a liquid staking solution, all stakers received sETH2 to represent their staked capital and allow the use of staked capital in DeFi. Staking rewards accrued in a separate receipt token, rETH2, forming the dual token model seen in StakeWise V1 and V2.

StakeWise V3 went live in 2023, white labelling the protocol’s smart contract infrastructure and introducing a new primary LST, osETH. Using StakeWise V3, any entity can launch their own staking pool (known as a Vault) to offer trustless, non-custodial, and pooled ETH staking. Node operators are still required to stake ETH for these pools, but the smart contracts fully automate the rest of the staking processes, including the spinning up and winding down of validators, and the distribution of the staking fees to the pool’s node operators.

The StakeWise smart contracts are fast becoming the foundational staking infrastructure for any entity that is looking to offer pooled and/or liquid staking. Many leading commercial operators, like Chorus One, have embedded the StakeWise infrastructure as part of their core product offering, enabling wallets, exchanges and custodians to leverage the solution for their own staking offerings. Each staking pool is fully isolated and unique, isolating all the risks and rewards of staking to the validators running in each pool.

More information about the StakeWise protocol can be found here.

IN DEPTH: CHORUS ONE
Some key insights about the proposed Node Operator

Name: Chorus One
Pool: Chorus One Opus Pool - MEV Max
Software Client:

  • Consensus: Teku & Lighthouse
  • Execution: Geth, Besu & Nethermind

Geographical exposure: Chorus One operates globally, with enterprise grade, redundant infrastructure diversified across geographic regions, physical data centres and multiple providers. This geographic and datacenter diversity helps to maintain decentralised and robust infrastructure support for their staking services​ while minimising risks pertaining to any specific jurisdictions such as having operations ceased due to adversarial regulatory enforcement. Chorus One’s engineers are also geographically distributed across the globe, ensuring 24/7 monitoring and standby support via a follow-the-sun approach

Service Fees: Chorus One has agreed to run nodes for Nexus Mutual at a cost of 5% of the staking rewards. Note, StakeWise DAO does not charge a fee unless Nexus Mutual decides to mint its liquid staking token, osETH, to start deploying staked capital into DeFi. Thus, Nexus Mutual would pay a total of 5% fees for this capital deployment. Comparing this to the fees Nexus Mutual pays for staking with Lido (10% fee) and Rocket Pool (~15% fee), it showcases the benefits of a more bespoke staking configuration.

Rewards: Chorus has also shown a strong performance since joining the StakeWise protocol, with an average of 3.67% returns over the last 6 months (ref), compared to the current staking rates of 3.2% for Lido and 2.86% for Rocket Pool.

Tech: Chorus One is deep into MEV research and has its own proprietary MEV relay called Adagio, an MEV-Boost client designed to enhance MEV and consistently outperforms the market. Combined with the low fees charged by Chorus, their ISO 27001 compliance, and doublesigning & slashing protections, the overall package is a fantastic deal for the Nexus Mutual DAO.

FEES & ONGOING EXPENSES
As clearly outlined in this recent update on the Avantgarde side the fees associated with the vaut are as follows:

  • Maintaining an aggregate fee of 15bps on all Assets Under Technology
  • Charging a minimum fee of $5k/ month, evaluated at the end of each Quarter at the prevailing ETH/USD rate and settled - if necessary - annually.
  • Ethereum gas fees to be absorbed by the vault.
  • Enzyme bearing the contract with Chainlink which was previously priced at $2k/month but has now been successfully reduced to $1k/month.

The services and infrastructure that will be provided by Enzyme (or its subcontractors) are as follows:

  • Access to Enzyme infrastructure “as is” (protocol and application)
  • Execution: farming and compounding of rewards.
  • Working closely with Chainlink to make improvements to the vault oracle (in particular, it does not currently track unclaimed ETH rewards)
  • Customer support

EXPECTED REWARDS
Expected Annual Rewards


Source: Stake Ethereum | Chorus One — Opus Pool

Validator rewards are automatically harvested every 12 hours and flow back into the Vault smart contract. Whenever a new set of 32 ETH is accrued in the Vault, a new validator will register, this automatically compounding rewards. All this automation is provided by the StakeWise solution.

APY% Fluctuations last 12 months


Source: StakeWise | Vault

RISKS
A specific elaboration of the template provided, here are some additional details around the specific risks of this particular investment:




Based on the list of risks laid out in the investment philosophy, and the fact that the capital allocated on the Enzyme vault is less than 10% of the capital pool, we believe this strategy qualifies for the lower risk category.

CLOSING REMARK
In conclusion, this proposal outlines a strategic move for Nexus Mutual to harness the benefits of Stakewise V3 and Enzyme in its treasury management. By adopting a more diversified approach to ETH native staking, Nexus Mutual stands to benefit by enhancing the security, stability, and yield potential of the Mutual’s assets. We appreciate your consideration and look forward to further strengthening Nexus Mutual’s financial position through this innovative initiative.

6 Likes

List of clickable links from the Risk table:

Enzyme
Audits
Bug bounty
Vault upgrades

Stakewise v3
Audits
Bug bounty

Chorus One
Historical data from Rated Network

4 Likes

Chorus One is proud to be a Nexus DAO member and has partnered with Nexus Mutual since 2023 as the very first enterprise validator provider to offer on-chain slashing insurance via Nexus’ innovative tokenized cover. At Chorus One, security holds the utmost importance as we deeply value the trust and peace of mind it brings to our delegators. As responsible node operators, we prioritize establishing a solid foundation of trust with our investors, ensuring the safety of their assets. Through our partnership with Nexus Mutual, we’ve been able to offer comprehensive protection against potential asset loss arising from staking penalties.

We relish the opportunity to further support Nexus by offering them access to our enterprise-grade staking infrastructure and industry-leading MEV yields via OPUS Pool, Chorus One’s vault on Stakewise V3. Stakewise’s audited smart contracts nullify liquidity risks and have a simple design that is preferable to composable strategies through complex smart contracts. It is for these reasons that Chorus elected to make Stakewise V3 the backbone of our Ethereum staking suite and is currently running the largest V3 vault by TVL.

5 Likes

Thanks for putting together the proposal.

As we have two proposals targetting the same pot of funds, I’ve put up a suggested governance process for the next stages to be considered alongside the two individual proposals.

Looking forward to the discussions!

4 Likes

Thank you for this proposal!

Nice work on the extensive description of the various risks.

There are many aspects I like in this proposal:

  • the use of the battle-tested infra from Enzyme, which Nexus has been familiar with, as well as the ancillary services around price feeds
  • the benefit of the Stakewise v3 integration and its innovations, enabling delegation of the ETH to a vault operated by a dedicated staking provider, as well as the compounding of rewards
  • having Chorus One, a trusted and experienced operator with a strong track record of above average APR, in charge of running ETH validators for the mutual at a competitive fee level.

I support this.

1 Like

For this investment my priority is to minimize net losses, given that I still think that we are too overweight ETH and carrying that currency risk.

My perception is that while both proposals probably aren’t miles apart in risk, I’d give the edge to this strategy because of our current cover exposures, my knowledge of the Chorus One infrastructure and the differences in protocol and counterparty risk.

Overall, I’m supportive of the Stakewise proposal and plan to vote for it.

2 Likes

Thanks to the @Avantgarde team for this detailed proposal. I’ve shared some thoughts below, as well as a link to my broader thoughts on both investment allocations on @Rei’s post about how we manage the Snapshot signalling votes for these two RFCs.

Comments on the Stakewise RFC

  • It’s worth noting that AaveDAO has proposed an allocation to Stakewise, as well, so other large protocols are making allocations to Stakewise. The flexibility that Stakewise offers is a definite plus, imo, and the lower fees will be beneficial for the Mutual in the long run.
  • A lot has changed since 2022, though Stakewise does offer a flexible infrastructure of the Mutual to manage our staked ETH with preferred node operators and negotiate rates. As with any investment, members have always preferred waiting to deploy investment assets until a protocol has been live for at least six months AND where the Mutual wouldn’t represents an outsized share of a protocol’s TVL. Stakewise has grown to the point where this isn’t a concern anymore, so the current discussion is happening at just the right time.
  • Any allocation of the idle ETH held in the Mutual’s Enzyme vault will ultimately be deployed via Enzyme. This allows the Foundation Engineering team to focus on work that can contribute to cover sale growth. It’s been a pleasure to work with the Enzyme team to date.

Overall, I’m supportive of this investment allocation. While the potential yield is less, there’s less stacked risk here and the Mutual has greater flexibility and lower fees with Stakewise via the Chorus One staking pool.

For my broad thoughts on potential allocation as it relates to the upcoming signaling vote, see my comment on Rei’s Suggested Governance Approach for June ‘24 Investment Proposals post :point_down:

2 Likes

Thanks @Avantgarde @ChorusOne and the Stakewise for putting together a comprehensive proposal for the mutual to assess.

Given the Ether Fi proposal is also being put up at the same time I’ll consolidate my views on both here (and copy them in the EtherFi thread as well).

Risks
Overall, allocating to EtherFi is slightly riskier for the mutual than for Stakewise, mainly due to the correlation effect of Nexus already covering users that include EtherFi and Eigenlayer smart contracts.

On the AVS side, as slashing isn’t live yet and won’t be for some time (as far as I know) I don’t see any material additional risk here. If things do change the mutual can reassess at that time.

Returns
The base staking return on Stakewise is a bit better, but I believe this is materially outweighed by the more uncertain and variable restaking points etc that the EtherFi position offers. It is quite hard to put a solid number on the return uplift which means we should be somewhat cautious with how much credit is given but overall I would expect it to be material in the comparison.

Overall
The mutual needs to be cautious on the correlation aspects and therefore I would split the allocation roughly 50:50 between the two options. On a pure risk vs return assessment (before allowing for correlation) I would place EtherFi at an advantage, but the mutual must manage it’s overall exposure position prudently and therefore allocating to both makes sense.

I would also recommend revisiting existing allocations between the various ETH re/staking positions (Lido, RocketPool, Kiln, and possible future allocations to EtherFi/Stakewise) 6 months after this proposal, especially in consideration with the divestment framework.

Thanks @Avantgarde @ChorusOne and the Stakewise team for putting this together. I know a lot of effort has gone into both putting forward the proposal and the technical effort behind the scenes to make this possible.

Will copy the comments I make here to EtherFi’s thread targetting the same pool of assets.

I see the two proposals as being pretty similar from a risk perspective, with similar slashing risk and EtherFi having probably the slightly higher smart contract exposure due to the Eigenlayer integration.

The base staking yield is higher and fees are lower on Stakewise/Chorus One. This is balanced by the likely ETHFI and EIGEN rewards that will generate uncertain extra yield with EtherFi, both of which are uncertain in terms of size/duration and I get the sense we’ve likely missed the largest component of rewards here.

Another key decision component, as Hugh and BND have pointed out already, is that we actually have a reasonable amount of exposure against EtherFi on the liability side, which makes me reluctant to over-expose ourselves on the investment side.

Considering the above, I’ll likely be allocating 70% of my vote to Stakewise/Chorus One and the remaining 30% to EtherFi.

Signaling Vote: How to Allocate the 6,585 ETH Between the Chorus One Stakewise V3 Vault and Etherfi weETH Proposed Investment Strategies

I’ve posted the signaling vote on Snapshot for the investment proposals. Members will be able to signal their support start on Wednesday (19 June) at 11:58pm UTC until Monday (24 June) at 11:58pm UTC.

This Snapshot signalling vote uses the weighted voting option, so members can split their voting power (if they choose to do so) across each strategy.

The outcome of this vote will be used to create the final NMPIP ahead of an onchain vote in July.