Summary
We propose listing an ETH Balancer 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 rsETH/WETH pool to earn pool rewards and points.
Proposal & parameters
We propose listing a ETH leveraged vault using the Balancer rsETH/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 | 0.27 |
| MaxRequiredAccountCollateralRatioBPS | 1.00 |
| Maximum vault capacity | 750 ETH |
| Minimum borrow size | 30 ETH |
| feeRate5BPS | 20 (100 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 rsETH/ETH pool tokens as collateral. We propose setting the maximum vault capacity up to 750 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 750 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 rsETH/ETH pool tokens.
We propose setting the maximum leverage at 8.1X such that if a user deposits 10 ETH, he can at a maximum borrow 71 ETH from Notional to LP in the Balancer rsETH/ETH 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 (rsETH/ETH 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 0.27, this implies that a liquidator can lower an account’s leverage ratio to 4.7X 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 to cover a liquidator’s expenses under most scenarios.
We propose setting the leveraged vault fee at 1.0% such that borrowers will pay a 1.0% 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 Chainlink rsETH/ETH oracle and chainlink ETH oracle to check that the implied balancer rsETH/ETH pool price is in line with the overall market.
Liquidity
rsETH is moderately liquid on DEXes. The asset has roughly $50M in liquidity across Balancer and Uniswap. However, this liquidity is primarily denominated in rsETH and there is only $10M - $15M in ETH in these pools. This presents potential risks for liquidations.
We should note though that Kelp DAO has enabled redemptions for rsETH, so this redeemability should largely mitigate the risks of an rsETH depeg due to a lack of market liquidity. It’s still possible that rsETH is temporarily illiquid and unable to be liquidated, but given that this vault borrows ETH from Notional, the protocol can withstand holding the collateral against ETH debt for some period of time while redemptions are processed and rsETH returns to peg.