Summary
We propose listing a ETH Aura leveraged vault on Notional V3 Mainnet. The vault would allow users to borrow ETH from Notional’s Mainnet deployment at a fixed or variable rate and LP the proceeds in the Aura boosted Balancer osETH/WETH pool to earn pool rewards.
Proposal & parameters
We propose listing a ETH leveraged vault using the Aura boosted Balancer osETH/WETH pool as a strategy. We propose listing that leveraged vault strategy with the following parameters:
| Vault Parameters | Proposed Value |
|---|---|
| LiquidationRate | 1.03 (3%) |
| MinCollateralRatioBPS | 0.14 |
| MaxDevelerageCollateralRatioBPS | 0.26 |
| MaxRequiredAccountCollateralRatioBPS | 1.00 |
| Maximum vault capacity | 4,000 ETH |
| Minimum borrow size | 30 ETH |
| feeRate5BPS | 15 (75 BPS) |
| ReserveFeeShare | 80% |
| Strategy Parameters | Proposed Value |
|---|---|
| maxPoolShare | 20% |
| oraclePriceDeviationLimitPercent | 1.50% |
By adding this leveraged vault strategy to Notional, the protocol will effectively accept Balancer osETH/WETH pool tokens as collateral. We propose setting the maximum vault capacity up to 4,000 ETH to cap the maximum amount of ETH that can be borrowed from Notional to enter that specific strategy. In practice, Notional governors will increase the maximum capacity of the vault in line with demand and ETH liquidity up to the 4,000 ETH maximum vault capacity threshold. We propose setting the maximum pool share at 20% such that users won’t be able to enter the vault if the protocol already holds more than 20% of Balancer osETH/WETH pool tokens.
We propose setting the maximum leverage at 8.1X such that if a user deposits 100 ETH, he can at a maximum borrow 714 ETH from Notional to LP in the Balancer osETH/WETH pool. This maximum leverage ratio (minimum collateral ratio) aims to protect the protocol against a large decrease in the pool’s token value. Setting the strategy’s maximum leverage ratio at 8.1X ensures the protocol would be protected against a decrease of -9.7% in the pool’s token value (osETH/WETH BPTs) relative to the vault’s borrow currency (ETH). It’s important to note that the vault’s maximum leverage ratio is set as a precautionary buffer to protect the protocol against a decrease in the value of pool tokens relative to users’ debts.
We propose setting the MaxDeleverageCollateralRatio at 0.26, this implies that a liquidator can lower an account’s leverage ratio to 4.8X if it ever breaches the max leverage ratio of 8.1X. 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 in a short period of time.
We propose setting the minimum borrow size at 30 ETH and the vault liquidation discount at 3%. These parameters aim to maximize the likelihood of successful liquidations under stressed market conditions (ex: high gas environment). To do so, a liquidator’s revenue 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 30 ETH and the liquidation discount at 3%, liquidators will likely receive at a minimum 0.9 ETH. Based on historical market conditions such a liquidation discount is likely cover a liquidator’s expenses under most scenarios.
We propose setting the leveraged vault fee at 0.75% such that borrowers will pay a 0.75% 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 and 20% are paid to nETH holders.
We propose setting the oraclePriceDeviationLimitPercent to 1.50%. The oraclePriceDeviationLimitPercent prevents users from entering or exiting the vault if the implied pool prices deviate from the oracle prices by more than 1.5%. This parameter mitigates oracle attack vectors while being flexible enough to ensure user can enter and exit the vault even if oracle prices slightly deviate from on-chain prices in between updates.
Risks
Oracle
We propose using the Redstone osETH/ETH oracle to check that the implied balancer osETH/ETH pool price is in line with the overall market. We propose to implement an additional check to validate that the osETH/ETH oracle price returned by Redstone is within a given fixed range of values (ex: 0.98 to 1.02).
Liquidity
osETH redemptions are not currently enabled such that only osETH minters are able to redeem osETH and natively unstake. It is currently not possible for a user to purchase osETH from the secondary market and redeem it. This could lead to a situation where the Balancer osETH/WETH pool composition is made mostly of osETH. In such a situation, it would be impossible to flash liquidate an account breaching the Notional’s maximum leverage ratio. By listing this leverage vault Notional implicitly accepts osETH as a collateral asset with its liquidity profile.
The osETH liquidity risk can be somewhat mitigated by capping the protocol’s exposure at 20% of the pool and by setting the maximum vault capacity in line with Notional’s ETH liquidity. Let’s also note that the vault parameters could be updated when Stakewise implements osETH redemptions.