[NIP-22] - List cbETH on Arbitrum as a Collateral Type and Tradable Currency on Notional V3

[NIP] Notional Improvement Proposal
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Title: List cbETH on Arbitrum as a Collateral Type and Tradable Currency on Notional V3
Author(s): Anthias.xyz Team
Submission Date: 10 October 2023

Summary

The following is a proposal to onboard Coinbase Wrapped Stacked ETH (cbETH) as a tradable currency and collateral option on Notional V3. The Anthias team thinks this market could prove valuable for the Notional community and thus would like the community to consider & discuss onboarding cbETH as a collateral type.

Resources

Minimum requirements for consideration checklist

1. The asset is an ERC-20 token

2. The asset has been traded for at least 3 months

3. A sufficiently robust chainlink oracle for the asset exists

4. At least two high-quality audits have been conducted

5. The token is held by more than 1,000 unique wallets

6. The current float (circulating supply/max supply) is above 25%

7. The token has more than $2m of on-chain DEX TVL (Mainnet) or more than $500K of on-chain DEX liquidity on a Layer 2 chain where a Notional deployment exists

  • Yes–cbETH has over $4.5M TVL on Balancer alone at time of publishing this proposal: Balancer

Application

1. Provide a brief overview of the proposed asset and its underlying project.

  • Coinbase Wrapped Staked ETH (cbETH) is Coinbase’s liquid staking token. The staked asset is Ether (ETH), and the staking provider and token issuer is Coinbase. cbETH follows the cToken model, which allows it to be ERC-20 compliant and easier to integrate with DeFi more broadly. cbETH can be unwrapped for staked ETH plus accrued rewards net of Coinbase staking fees and any network-imposed penalties. Rewards and penalties affecting Coinbase staked ETH change the conversion rate between cbETH and underlying staked ETH.

2. How is the asset currently used (staking, collateral on other lending protocols, etc.)? Provide relevant activity KPIs.

  • cbETH allows holders to gain staking rewards while maintaining the flexibility of a wrapped token. cbETH is currently a collateral asset on major DeFi lending platforms including Aave.
  • cbETH on Aave: Aave - Open Source Liquidity Protocol
  • $1.59M in cbETH borrowed on Aave V3’s Ethereum market as of time of publishing.
  • cbETH was also approved as a collateral type on Euler Finance before Euler’s hack in March of 2023.

3. Detail why you believe the project should be added to Notional either as a collateral asset or as a tradable asset and the potential benefits of doing so. Explain why you think the demand for this asset is sufficient to list it on Notional.

  • Integration of cbETH as a collateral asset on Notional V3 would allow holders of cbETH to gain functionality and borrowing power while continuing to earn yield via liquid staking. As outlined in this proposal, cbETH meets the criterias laid out in the asset onboarding framework to be a suitable collateral and tradable asset. cbETH is also a relatively new asset by a very established player in the space (Coinbase), so its adoption will likely continue to grow, especially as users look for alternative liquid staking providers.

4. Provide information regarding the organization behind the project.

  • cbETH was created by the team at Coinbase. As outlined in the cbETH whitepaper, the contracts are upgradable by the “admin.” Hildobby of Dragonfly recently found that Coinbase is behind 14.1% of staked ETH.

5. Provide information regarding past hacks or major bugs and how the team addressed them.

  • Coinbase is known as one of the most security-focused organizations in the blockchain space. The company was affected by an exploit in 2021, but the issue was patched quickly, and all exploit victims were reimbursed by Coinbase.

6. Provide an overview of the token’s market data.

  • Market Cap: $321,411,427

  • 24H Volume: $4,337,216

  • cbETH Volatility (cbETH price compared to ETH over past 12 months)

    1600Ă—919 183 KB

  • cbETH DEX Liquidity = cbETH has over $7.7M in DEX Liquidity via DEX Guru: DexGuru

  • cbETH DEX Slippage = On Mainnet, DEX Slippage can be expected to be ~0.5% for trades selling cbETH for ETH at $1,000,000 or less. On Arbitrum, a $500,000 trade would lead to roughly 2% slippage.

7. Provide an overview of the token emission schedule and major holders.

  • There is no emissions schedule. Users with staked ETH via Coinbase can wrap their staked ETH to obtain the cbETH token.

Conclusion

The Anthias team would like to gauge sentiment and hear thoughts from the Notional community with regards to onboarding cbETH as a collateral type to Notional V3. Please share thoughts/questions in the comments of this forum post, and feel free to reach out to 0xBroze (@0xBroze on Discord or @OxBroze on Telegram) with any questions.

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About Anthias

Anthias is a risk management organization that also builds tools for easily monitoring liquidation risk for DeFi borrowing/lending markets. The Anthias team has shipped multiple grants for Euler, Aave, Compound, and more.

4 Likes
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This one makes sense. cbETH will continue to grow in market share as the coinbase and LST ecosystems continue to develop. By listing cbETH as collateral, Notional ensures that those participating in the LST market and looking to leverage Notional’s lending and borrowing markets are able to do so with the flavor they hold. This plays especially well to more institutional types, DAO treasuries, and high net worth individuals.

2 Likes
3

We strongly support the proposal to onboard cbETH as collateral. Even though slippage is currently an issue, DEX liquidity for cbETH on Arbitrum is quickly growing. As the liquidity grows, slippage will be lower. Lower slippage will make it easier to profitably liquidate positions of substantial size and reduce the probability of accumulating bad debt.

cbETH → USDC Slippage on Arbitrum

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image1916Ă—1028 70.4 KB

2 Likes
4

Date: 2023-10-13

Summary

Following up on the @Anthias.xyz proposal, we assessed the risk implications of listing Prime cbETH and fcbETH markets on Notional’s Arbitrum deployment. If the DAO is in favor of listing cbETH, we propose listing the asset with an initial supply cap of $1M (~650 cbETH), a 7% liquidation discount, and an implied minimum collateral ratio of 140% against stablecoins. Our review highlighted no significant technical challenge to list the asset. We welcome community feedback before this proposal is formalized into a Notional Improvement Proposal (NIP) and goes to a formal governance vote.

Asset Overview

  • Asset symbol: cbETH
  • Underlying Protocol Name: Coinbase Wrapped Stacked ETH
  • Historical daily volume (avg. last 30 days): $2,600,000 (CEX and DEX)
  • DEX liquidity: $7,700,000 (Arb)
  • Market cap: $4,555,000 (Arb), $2,121,785,000 (Mainnet)
  • Circulating supply: 2,808 cbETH (Arb), 1,307,903 (Mainnet)

Economic Risk Assessment

Asset ownership & DeFi presence

cbETH is currently held by 42,105 wallets on Mainnet and 222 wallets on Arbitrum. The top 100 wallets own 96.5% of the cbETH supply on mainnet. cbETH ownership is highly diversified with the largest cbETH holder on Mainnet currently holds 2.5% of the supply.

99% of cbETH on Arbitrum is currently held in the cbETH/wstETH/rETH Balancer pool with 73% of that liquidity being deposited on Aura.

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cbETH is listed as a collateral asset on Aave V3 and Compound V3 Mainnet and Base deployments. cbETH is currently not listed on any major lending protocol on Arbitrum.

Historical volatility

cbETH historical price vs ETH

Chart1226Ă—556 28.2 KB

cbETH historical volatility analysis

Time period Volatility (last 90 days) Annualized vol. (last 90 days) Volatility (last year) Annualized vol. (last year) Source
1h 0.36% 33.76% 0.38% 35.63% Chainlink
1d 1.71% 32.71% 2.45% 46.88% Chainlink

cbETH historical maximum drawdown analysis

Time period Max drawdown (last 90 days) Max drawup (last 90 days)
1 hour -5.38% 4.96%
1 day -10.44% 6.88%

cbETH volatility and maximum drawdown metrics have been in line with ETH over the past year. Given the idiosyncratic risks of cbETH (illiquidity, smart contracts) we think it is appropriate to propose listing cbETH at a slightly higher minimum collateral ratio than ETH. We propose a 140% minimum cbETH/USDC collateral ratio. This would protect the protocol against the worst historical maximum drawdown over a 1 day period. This implies that the protocol would have still been overcollateralized if risky accounts had not been liquidated for a period of 24 hours historically.

Asset liquidity

cbETH to USDC slippage analysis (Arb):

Expected slippage Trade size
0.5% $350,000
1.0% $1,000,000
2.0% $1,170,000
3.0% $1,200,000
4.0% $1,225,000
5.0% $1,250,000
6.0% $1,260,000

Slippage increases very rapidly past a $1M trade from cbETH to USDC on Arbitrum. This is due to cbETH being listed on only one DEX with relatively limited liquidity.

On-chain liquidity breakdown (on Arbitrum):

DEX cbETH liquidity (Arb) Non cbETH liquidity (Arb)
Balancer $4,500,000 $3,185,000
Total $4,500,000 $3,185,000

Let’s note that cbETH’s liquidity is more significant on Mainnet. cbETH is also traded on centralized venues. In the event that cbETH’s price diverges between Mainnet and Arbitrum, it is likely that some market participants will trade to keep the price in line across different chains. This mitigates the risk of relatively low cbETH liquidity on Arbitrum.

Based on Arbitrum’s liquidity for cbETH we recommend initially setting cbETH’s supply cap at $1M.

Other notable risks

cbETH is also subject to Coinbase custodial risks and is dependent on Coinbase honoring cbETH to ETH redemptions. As a publicly traded company, Coinbase is under strict reporting obligations thereby mitigating that risk.

Security Assessment

As mentioned by @Anthias.xyz in the initial post, Coinbase is known as one of the most security-focused organizations in the space. cbETH has never been subject to smart contract issues in the past. As mentioned by @Anthias.xyz, cbETH also underwent an audit with OpenZeppelin a leading security auditor.

Implementation Review

No integration challenges have been identified.

Proposed Risk Parameters

Based on the different analyses presented above, we propose listing cbETH with the parameters presented in this spreadsheet. Based on cbETH’s historical volatility profile, we propose to list the asset with exchange rate haircut and buffer parameters that imply a minimum collateral ratio of 140% for USDC borrowers. Based on current on-chain liquidity we propose to list the asset with a 7% liquidation discount. We think a 7% discount is sufficient to allow liquidators to liquidate cbETH profitably under historical market conditions. Finally, we propose to list the asset with an initial supply cap of $1M (~650 cbETH).

We propose to set the cbETH interest rate curves in line with other liquid staking derivatives markets. We present the proposed interest rate curves here. The proposed interest rate models imply a 1.67% borrow interest rate and 0.82% supply interest rate at the target utilization rate. These interest rate models take into consideration the fact that cbETH borrowers have to pay both the Notional borrow rate and the underlying cbETH yield. Therefore, a relatively flat interest rate curve below kink2 utilization is likely preferable.

Risk Parameters Benchmarking

Parameter Aave V3 Compound V3 Notional
Liquidation Discount 7.5% 7.0% 7.0%
Minimum Collateral Ratio (vs USDC) 130% 133% 140%
Supply Cap (USD) N/A N/A 1,000,000

The proposed liquidation discount is in line with the discount used by other lending protocols where cbETH is listed. We propose a slightly more conservative minimum collateral ratio than Aave and Compound.

The proposed parameters should be reviewed by DAO voters before moving to the governance vote.

Resources

1 Like
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Our team is aligned with this risk assessment. We look forwarding to hopefully proposing a raise to the $1M supply cap as the protocol achieves further maturity.

1 Like