Summary
We propose listing a ETH Aura leveraged vault on Notional V3 Arbitrum. The vault would allow users to borrow ETH from Notional’s Arbitrum deployment at a fixed or variable rate and LP the proceeds in the Aura boosted Balancer wstETH/WETH pool to earn yield.
Context and objectives
As part of growing Notional V3, it is important that the DAO explores how it can offer attractive yield opportunities to Notional’s non-US users. Such opportunities will likely increase borrowing activity on Notional and therefore increase rates at which lenders can lend. The wstETH/WETH Aura boosted Balancer pool on Arbitrum has been yielding on average 6% over the past 30 days. The Balancer pool currently holds $4.7M in TVL.
Proposal
We propose listing a ETH leveraged vault using the Aura boosted Balancer wstETH/WETH pool as a strategy. We propose listing that leveraged vault strategy with the following parameters:
| Vault Parameters | Proposed Value |
|---|---|
| LiquidationRate | 1.02 (2% discount) |
| MinCollateralRatioBPS | 0.10 |
| MaxDevelerageCollateralRatioBPS | 0.17 |
| MaxRequiredAccountCollateralRatioBPS | 1.00 |
| Maximum vault capacity | 100 ETH |
| Minimum borrow size | 2 ETH |
| feeRate5BPS | 10 (50 BPS) |
| ReserveFeeShare | 80% |
| Strategy Parameters | Proposed Value |
|---|---|
| maxPoolShare | 30% |
| oraclePriceDeviationLimitPercent | 1.00% |
By adding this leveraged vault strategy to Notional, the protocol will effectively accept Balancer wstETH/WETH pool tokens as collateral. We propose setting the maximum vault capacity at 100 ETH to cap the maximum amount of ETH that can be borrowed from Notional to enter that specific strategy. Additionally, we propose setting the maximum pool share at 30% such that users won’t be able to enter the vault if the protocol already holds more than 30% of the balancer pool tokens.
We propose setting the maximum leverage at 11X such that if a user deposits 2 ETH, he can at a maximum borrow 20 ETH from Notional to LP in the Balancer token pool. This maximum leverage ratio (minimum collateral ratio) aims to protect the protocol against a large decrease in wstETH/WETH pool token value. Setting the strategy’s maximum leverage ratio at 11X ensures the protocol would be protected against a decrease of -7.3% in pool token value (wstETH/WETH BPTs) relative to the vault’s borrow currency (ETH). Historically the wstETH/WETH market exchange rate has varied by a maximum of 2.4% over a 24H period and 0.7% over a 24H period after the merge. It’s important to note that the vault’s maximum leverage ratio is set as a precautionary buffer to protect the protocol and that it is unlikely that the value of pool tokens will decline by such a magnitude relative to users’ debts.
We propose setting the MaxDeleverageCollateralRatio at 0.17, this implies that a liquidator can lower an account’s leverage ratio to 6.9X if it ever breaches the max leverage ratio of 11X. This ratio is set such that an account that gets liquidated will subsequently be able to withstand another large decrease in the strategy token price before becoming eligible for liquidation again thereby lowering the risk of an account being liquidated multiple times over a short time period.
We propose setting the minimum borrow size at 2 ETH and the vault liquidation discount at 2%. These parameters aim to maximize the likelihood of successful liquidations under stressed market conditions. To do so, a liquidator’s revenues from the liquidation discount must be sufficient to cover liquidation expenses (gas cost, slippage, Dex fee, price basis). By setting the minimum borrow size at 2 ETH and the liquidation discount at 2%, liquidators will likely receive at a minimum 0.04 ETH. Based on historical market conditions such a liquidation discount will likely cover a liquidator’s expenses under most scenarios.
We propose setting the leveraged vault fee at 0.50% such that borrowers will pay a 0.50% premium on their borrow rate when entering the vault. We propose setting the reserve fee share at 80% such that 80% of the borrow premiums will go to Notional reserves.
We propose setting the oraclePriceDeviationLimitPercent to 1.00%. The oraclePriceDeviationLimitPercent prevents users from entering or exiting the vault if the implied pool price deviates from the oracle price by more than 1%. This parameter mitigates oracle attack vectors while being flexible enough to ensure users can enter and exit the vault even if oracle prices slightly deviate from on-chain prices in between updates.