[NIP-30] Onboard LDO as a Collateral Asset on Notional V3

[NIP] Notional Improvement Proposal
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Title: [NIP-30] Onboard LDO as a Collateral Asset on Notional V3
Author(s): Anthias.xyz Team
Submission Date: 30 October 2023

Summary

The following is a proposal to onboard LDO as a collateral currency option on Notional V3. The Anthias team thinks LDO would prove valuable for the Notional community as a collateral asset and thus would like the community to consider & discuss onboarding it as a collateral type.

Resources

Minimum requirements for consideration checklist

Application

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

  • LDO, or the Lido DAO Token, is the governance token for Lido, a liquid staking solution for POS blockchains. Lido has been live since December of 2020 and has since taken a large share of the liquid staking market on Ethereum and has since been expanding to other chains.

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

  • LDO is currently a collateral asset on Aave V3’s Ethereum market.

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.

  • Lido is the most prominent liquid staking solution by TVL, and its governance token, LDO, meets the criteria outlined in the Collateral Asset Onboarding framework by the Notional Core team to be considered a suitable collateral asset on Notional V3. With a conservative supply cap to start, this should prove a safe and beneficial asset to onboard to Notional V3.

4. Provide information regarding the organization behind the project.

  • Lido launched in December of 2020. It currently has a TVL of over $15B at the time of writing this proposal. It currently leads the liquid staking providers, with the next closest competitor having $2B TVL.

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

  • In September of 2023, Lido acknowledged a vulnerability with the token contracts of LDO and stETH, which they state they have since addressed. Read more here.

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

  1. Market Cap: $1,623,610,909

  2. 24H Volume: $63,293,788

  3. LDO DEX Liquidity (DEX Guru):

  • LDO has over $12M of DEX liquidity on Uniswap alone at the time of posting this proposal according to Uniswap: Uniswap Interface

4. LDO Volatility (LDO price compared to ETH over past 12 months)

  • LDO volatility is 5.77% in the past 24 hours.

5. LDO DEX Slippage

  • Slippage for LDO on Arbitrum for a $1M USDC swap is currently too high to be suitable as a collateral type. For this reason, a supply cap should be put in place to make sure liquidations are feasible. As the liquidity for LDO on Arbitrum increases, this cap can be increased / removed.

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

  • According to Lido Documentation, there is currently no concrete emission/release schedule for LDO tokens residing in the treasury fund, with emissions voted on by the Lido DAO.

Conclusion

The Anthias team would like to gauge sentiment and hear thoughts from the Notional community with regards to onboarding LDO 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. We also recently posted the collateral asset onboarding proposals for cbETH, GMX, ARB, RDNT, UNI, and LINK on Notional V3.

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Date of analysis: 2023-11-03

Summary

Following up on @Anthias.xyz’s proposal, we assessed the risk implications of listing a Prime LDO market on Notional’s Arbitrum deployment. If the DAO is in favor of listing LDO then we suggest listing the asset with an initial supply cap of $100K (~55,000 LDO), a liquidation discount of 9%, and an implied minimum collateral ratio of 170% vs stablecoins. Our asset onboarding review highlighted no significant technical issues 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: LDO
  • Underlying Protocol Name: Lido DAO
  • Historical daily volume (avg. last 30 days): (CEX and DEX)
  • DEX liquidity (Arbitrum): $536K
  • Market cap: $1.88B
  • Total supply: 1,000,000,000 LDO Tokens

Economic Risk Assessment

Asset ownership & DeFi presence

LDO is currently held by 5,912 wallets on Arbitrum. The top 100 wallets own 76.2% of the supply. 8.45% of the supply is held in the Uniswap V3 ETH/LDO pool. 2.8% of the LDO supply on Arbitrum is held in Kyberswap.

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Underlying protocol KPIs

Lido is Ethereum’s largest liquid staking protocol with $16B of TVL. Lido’s stETH token is held by more than 280K individual wallets on Ethereum mainnet.

Token

LDO is the governance token of the Lido DAO. LDO token holders can vote on governance proposals and also benefit from the protocol’s 10% fee on ETH staking rewards.

Historical volatility

LDO historical price vs ETH

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Historical volatility analysis

LDO

Time period Volatility (last 90 days) Annualized Volatility (last year) Annualized vol. (last year) Source
1h 0.72% 67.02% 0.75% 69.84% Chainlink
1d 3.60% 68.73% 6.29% 120.13% Chainlink

ETH

Time period Volatility (last 90 days) Annualized Volatility (last year) Annualized vol. (last year) Source
1h 0.37% 34.53% 0.56% 52.18% Chainlink
1d 1.72% 32.87% 2.92% 55.80% Chainlink

Historical maximum drawdown analysis

LDO

Time period Max drawdown (last 90 days) Max drawdown (last year) Max drawup (last 90 days) Max drawup (last year)
1 hour -6.39% -6.39% 8.30% 8.30%
1 day -12.37% -30.71% 20.00% 35.24%

ETH

Time period Max drawdown (last 90 days) Max drawdown (last year) Max drawup (last 90 days) Max drawup (last year)
1 hour -5.38% -7.20% 4.96% 7.36%
1 day -10.44% -24.99% 7.07% 17.86%

LDO has historically been more volatile than ETH. It also had more pronounced drawdowns than ETH’s over the last 90 days making the asset more risky. LDO is also subject to smart contract and governance risks.

Therefore, we propose a 170% minimum LDO/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 were not being liquidated for a period of 24 hours.

Asset liquidity

GMX to USDC slippage analysis:

Expected slippage Trade size
0.5% $1,000
1.0% $8,000
2.0% $28,000
3.0% $47,000
4.0% $65,000
5.0% $85,000

LDO (Arbitrum) is only listed on Uniswap V3 and liquidity is relatively thin to execute a trade larger than $100k.

On-chain liquidity breakdown (on Arbitrum):

DEX LDO liquidity (Arb) Non LDO liquidity (Arb)
Uniswap V3 $303,620 $160,950
Kyberswap $47,940 $23,640
Total $351,560 $184,590

LDO’s liquidity on Arbitrum is relatively thin and is concentrated on Uniswap V3 with some of liquidity on Kyberswap. We propose setting the initial LDO supply cap at $100K in order to mitigate liquidity concerns.

Other notable risks

LDO is also subject to smart contract risks. A potential vulnerability in the protocol’s contracts could lead to a rapid price decline in the value of LDO.

Security Assessment

As mentioned by @anthias in the initial post, LDO underwent multiple security audits.

Implementation Review

No specific integration challenges have been identified.

Proposed Risk Parameters

Based on the different analyses presented above, we propose listing LDO with the parameters presented in this spreadsheet. Based on LDO’s historical volatility profile, we propose to list the asset with exchange rate haircut and buffer parameters that imply a minimum collateral ratio of 170% for USDC borrowers. Based on current on-chain liquidity we propose to list the asset with a 9% liquidation discount. We think a 9% discount is sufficient to allow liquidators to liquidate LDO profitably under historical market conditions. Finally, we propose to list the asset with an initial supply cap of $100K (55,000 ARB).

We propose listing LDO with the following Prime LDO interest rate curve. The proposed interest rate models imply a 2.26% borrow interest rate and 1.23% supply interest rate at the target utilization rate.

Risk Parameters Benchmarking

Parameter Aave V3 (Mainnet) Notional (Arbitrum)
Liquidation Discount 9% 9%
Minimum Collateral Ratio (vs USDC) 200% 170%
Supply Cap (USD) N/A 100,000

The proposed liquidation discount is in line with the discount used by Aave V3 on mainnet. We propose a slightly more aggressive minimum collateral ratio than Aave but with a substantially lower supply cap due to LDO’s liquidity profile on Arbitrum.

Resources

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[Test Comment] RFC for wSOL under progress.