Summary
We propose listing an ETH Balancer 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 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 | 250 ETH |
| Minimum borrow size | 2 ETH |
| feeRate5BPS | 20 (100 BPS) |
| ReserveFeeShare | 80% |
| Strategy Parameters | Proposed Value |
|---|---|
| maxPoolShare | 30% |
| 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 250 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 250 ETH maximum vault capacity threshold. 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 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 2 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 2 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 not very liquid on Arbitrum. The asset has roughly $8M in liquidity across Balancer, Uniswap, Camelot, and Ramses. These low levels of liquidity are mitigated by three facts:
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rsETH is redeemable on Mainnet.
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rsETH is significantly more liquid on Mainnet and has liquidity on other L2s.
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rsETH has fast bridging set up from Arbitrum to Mainnet.
Fast bridging means that the rsETH price on Arbitrum should remain very close to the price on Mainnet and should not significantly deviate for more than very short periods of time. The price on Mainnet should remain close to peg given that redemptions are enabled and that rsETH is relatively liquid on Mainnet. This all means that rsETH should remain tradable close to peg on Arbitrum.