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.
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
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.