Summary
We propose updating Notional’s Arbitrum rETH price feed from the Chainlink rETH/ETH exchange rate oracle to the Chainlink rETH/ETH market price oracle. Additionally we propose increasing the Prime rETH supply cap from 300 Prime rETH to 1,000 Prime rETH.
Proposal
We propose updating rETH’s oracle address from the Chainlink rETH/ETH exchange rate oracle to the Chainlink rETH/ETH market price oracle. Note that this update will also be applied to the rETH/WETH Aura leveraged vault. We think that using the rETH/ETH market price is more appropriate than looking at the rETH/ETH contract exchange rate in a liquidation context as the market price of rETH could be lower or higher than the rETH/ETH exchange rate. By updating the rETH oracle to look at its actual market price vs a static exchange rate the Notional protocol will be able to better respond to potential changes in the rETH/ETH market price. Updating the oracle price for the rETH’s market price will also increase the likelihood of successful liquidations by making the oracle prices more likely to be in line with on-chain prices.
We also propose increasing the Prime rETH supply cap from 300 Prime rETH to 1,000 Prime rETH. This will allow more rETH depositors to supply rETH to the protocol. The Prime rETH supply cap was initially set lower than for other liquid staking derivatives because the rETH oracle was not capturing the asset’s market price. The current Prime rETH supply is currently 223.6 Prime rETH and is at 75% utilization. Increasing the supply cap will make the protocol more usable to end users.
Resources
1 Like
Is there any concern about Chainlink oracles and liquid staked tokens on Arbitrum and have the potential risks of changing to the market oracle been evaluated somewhere for review?
For example, there was a recent issue with the wstETH Chainlink oracle that lead to it reporting incorrect prices on Arbitrum, which lead to some liquidations on Silo. As far as we know, there hasn’t been a post-mortem from Chainlink on this issue, and in response Silo moved to a similar oracle to what Notional currently uses (wstETH exchange rate combined with ETH/USD oracle).
This is a difficult one because rETH does have meaningful price swings around the exchange rate, but the lower liquidity on Layer 2 networks could lead to worse oracle reporting and higher risk than the exchange rate.
In favor of the supply cap increase, but it would be good to get further information on the risks of the oracle change before we cast a vote.
That’s a fair point. We haven’t written up a formal review on these risks, but we should. Here’s a few points to consider for now:
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Chainlink’s market rate oracles are not exclusive to a single chain or liquidity venue. The rate that this oracle reports will reflect the entire aggregate market, not just venues on Arbitrum. So lower liquidity on Arbitrum should not impact the performance of this oracle.
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Chainlink’s market rate oracles are volume weighted. The reason that the recent issue occurred was that the oracle referred specifically to wstETH/ETH and there is very little volume in that pair. The majority of the volume is in stETH/ETH and the wstETH/ETH oracle ignores any stETH/ETH trade volume. Notional uses the calculated wstETH/stETH exchange rate + the stETH/ETH Chainlink market rate oracle. As it relates to this situation, rETH/ETH is the primary trading pair so there is a lower likelihood of a similar issue occurring. However, we should do more analysis to better quantify that risk.
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Ultimately, Chainlink’s market rate oracle design will always have some amount of this risk because of its exclusive reliance on traded volume. I think that the best solution in the longer-term will be to accept that no oracle is 100% reliable and to add secondary oracle checks into the protocol such that transactions will revert if the secondary price oracle deviates too much from the primary price oracle. In my opinion, this would significantly increase Notional’s resilience and should be a high priority in the 2024 development roadmap.