Thoughts on Allocation to Stakewise and Ether.fi
I appreciate the detailed proposals posted by both the @Avantgarde and Ether.fi teams ( @rok ). I will share my thoughts on both proposals but given we’ll be using a Snapshot signalling vote to gauge sentiment on where to allocate the idle WETH from the Enzyme vault, I wanted to share my thoughts on how to best split the allocation.
Allocation to Stakewise
- Projected Base Yield: 3.99% APR
- Chorus One Fees: 5% of Yield (1)
- Avantgarde’s Proposed Allocation: 6,585.02 ETH
- BraveNewDeFi’s Preferred Allocation: 4,938.765 ETH (75% of idle WETH)
- Annual Yield Before Enzyme Fees w/ Brave’s Proposed Allocation: 249.60 ETH
(1) Any potential investment would be through Enzyme, so I’ll exclude the Enzyme vault fees from these reviews.
Rationale
Of the two investment strategies, the Stakewise allocation results in less stacked smart contract risk (i.e., Enzyme v4 and Stakewise smart contracts). While the overall yield is less, the base staking rewards are higher for Stakewise and the fees are lower, as well. From a risk point of view, I’d be in favor of allocating 75% of the idle WETH to Stakewise.
We’re not currently underwriting any risk for the Stakewise v3 protocol, so there’s no correlation risk here. Because we have the Chainlink Proof of Reserve oracle in the Enzyme vault, this allocation is possible. If we were required to make an allocation directly from the Capital Pool, there wouldn’t be an oracle we could use to track this allocation.
As the Investment Committee works through the Divestment Framework, the Mutual’s exposure to stETH and rETH will likely be scaled down over time to ensure there’s enough RAMM liquidity and capital on hand for claims, so having other investment assets that earn a reliable yield over time will be beneficial. If we can reduce correlation risk and stacked protocol risk, that also limits the Mutual’s exposure to smart contract risk on an ongoing basis as well.
Allocation to Ether.fi
- Projected Base Yield: 3.5% APR (2)
- Potential (Speculative) Reward Yield: 20% APY (assuming rewards taper in the longer term)
- Ether.fi/ Node Operator Fees: 10% of Yield Total (3)
- Ether.fi’s Proposed Allocation: 6,585.02 ETH
- BraveNewDeFi’s Preferred Allocation: 1,646.255 ETH (25% of idle WETH)
- Annual Yield Before Enzyme Fees w/ Brave’s Proposed Allocation: 348.18 ETH
(2) I’m not including expected rewards because I’d rather see what the current APY is vs. an expected yield in this decision.
(3) Any potential investment would be through Enzyme, so I’ll exclude the Enzyme vault fees from these reviews.
Rationale
It’s been impressive to see Ether.fi’s growth in the last several months, as they’ve scaled TVL and added an incredible amount of integrations across DeFi. The Mutual currently underwrites a variety of Bundled Protocol Cover products for Ether.fi yield strategies, including the Ether.fi Liquid Vaults. In total, the Mutual has ~$15M in active cover across the various Ether.fi cover products. This creates a certain amount of correlation risk between the Mutual’s investments and the cover we’re underwriting. However, this doesn’t disqualify eETH or weETH as an investment asset. This would need to be adequately managed.
However, Ether.fi does add more stacked protocol risk than Stakewise does, given Ether.fi includes their own smart contracts, EigenLayer smart contracts, and then the Enzyme v4 smart contracts. The added layer of risk is justified by the higher reward incentives, but it’s uncertain how long these incentives will last. It’s also worth noting that any EIGEN rewards won’t be transferable until a future date.
The yield will be higher when EigenLayer begins securing AVSs and yield starts flowing to restakers through Ether.fi’s AVS allocations. Because this isn’t live, the yield is still hypothetical and I can’t factor this into an investment allocation at this time. Ignoring the rewards, this higher yield does compensate for the added smart contract risk but it does also carry added slashing risk, which isn’t present in the Stakewise allocation.
In the past, the Mutual has shied away from allocate to new protocols. While Ether.fi isn’t “new” so to speak, EigenLayer isn’t fully live and the yield/risks are hard to gauge until we see AVSs go live.
Using the 40.6k ETH figure for withdrawal liquidity from the Chaos Labs report that was linked, this represents 2%+ of the total ETH staked in Ether.fi. While that’s a good amount plus the liquidity across DEXes, withdrawals in absence of this liquidity would take 7 days pending a withdrawal from EigenLayer. I do appreciate that Ether.fi was the first LRT protocol to provide users with direct withdrawals, but I am factoring this in, given the unlikely situation where sufficient withdrawal liquidity isn’t available.
I do think Ether.fi would be a worthwhile allocation for the Capital Pool, but I’d prefer to limit the allocation to 25% of the total idle WETH in the Enzyme vault. The Mutual can still earn yield and allocate to Ether.fi, while we continue to grow cover sales for Ether.fi products and manage our correlation risk.
In the future, I’d be open to a discussion about a weETH allocation for the DAO Treasury once we establish a treasury management strategy, but that’s a conversation for another day.
How I’ll Be Voting on the Snapshot Proposal
As I shared above, I’ll be voting for an allocation split across the two proposed strategies of:
- 4,938.765 ETH (75% of idle WETH) to Stakewise v3
- 1,646.255 ETH (25% of idle WETH) to Ether.fi
As the manager of Pool 22, I’ll be voting with the NXM in my pool in addition to my personal NXM holdings based on the above views in the Snapshot signaling vote.
If any members who have delegated to me have conflicting views on this vote, feel free to comment on this post or send me a DM on the forum, Discord, or Twitter to share your thoughts.