0x9ca72f03…71a3sent to0x868fe81c…f753·#20,462,793·view on Etherscan
# [IP] Collateral Basket Change Proposal: Adjusting ETH+ Collateral Basket To Address Liquidity Constraints
[https://forum.reserve.org/t/rfc-collateral-basket-change-proposal-adjusting-eth-collateral-basket-to-address-liquidity-constraints/841](https://forum.reserve.org/t/rfc-collateral-basket-change-proposal-adjusting-eth-collateral-basket-to-address-liquidity-constraints/841)
## Summary
ETH Plus (ETH+) has seen significant growth in the past year, with market growing from $15 million to $116 million since March 1st. As ETH+ grows, rETH is experiencing liquidity constraints, making it difficult for minters to access the token without higher slippage. Currently, rETH makes up 33% of the ETH+ basket, so limited rETH liquidity may hinder ETH+’s further growth. This RFC proposes two potential solutions: (a) adding cbETH to the collateral basket, and/or (b) increasing the percentage of stETH in the basket. By implementing a solution, ETH+‘s collateral basket will become more liquid, allowing it to easily be minted without liquidity constraints. New solutions introduced will be included as proposed in the reply section of the forum.
## Abstract
This RFC explores the liquidity challenges faced by rETH as ETH+ continues to expand. To mitigate these constraints, this proposal offers two potential solutions: (a) incorporating cbETH into the basket, and/or (b) increasing the allocation of stETH. Each option is evaluated based on its potential impact on liquidity, risk, and overall performance of the basket.
## Problem statement
rETH’s current backing collateral for ETH+ is over $42 Million, but the largest rETH liquidity pool holds only $51 million in liquidity. It’s time to consider adjusting the collateral basket to handle ETH+’s growth. Without adjusting the collateral basket, ETH+ growth will be limited due to liquidity constraints. If this is not addressed soon, it will create significant issues for the user experience of large users, as their ability to mint large amounts of ETH+ will be deterred.
## Rationale
Solutions 1 & 2 of the RFC will be combined to create an optimal community solution. cbETH will be added to the ETH+ collateral basket and wrapped stETH exposure will be increased as well.
| Token| Allocation| APY= 3.02% |
|--------|--------|--------|
| rETH | 15%| 2.77%|
| Wrapped stETH | 40%| 3.03%|
|sfrxETH| 22.5%| 3.26% |
| cbETH | 22.5% | 3.00% |
#### Diversification:
Adding cbETH further diversifies the ETH+ collateral basket, furthering the original mandate. By diversifying, ETH+’s exposure to the risks of any particular LST (e.g., slashings or depeg) is reduced.
#### cbETH plugin is already available:
The plugin for cbETH has already been created which means no time will be needed to be set aside to build and audit the plugin as it already has been completed.
#### Liquidity:
stETH (wstETH) has over $300 million in liquidity on the Ethereum blockchain paired against other ETH-pegged stable pairs. By increasing % exposure to stETH, ETH+ will gain higher exposure to the most liquid LST within its collateral basket, allowing it to scale more easily with fewer liquidity constraints. Limited Basket Adjustment:
## Risks
When considering the risks of these two LSTs, risk reports from Llama Risk will be utilized to establish key considerations for the community. The risk factors pulled from the report will be Liquidity, Smart Contract, Dependency, and Decentralization. By using a standard and reputable research group for both, the community can more easily evaluate this decision. Both reports are linked in the RFC.
### Adding cbETH to the ETH+ Collateral Basket
#### Liquidity
“cbETH is okay on liquidity because although it ranks 2nd by LSD market share after stETH, >97% of liquidity is on Coinbase and an $18.1m on-chain swap produces a similar slippage as a $300m stETH swap.”
Additional Notes on Liquidity Risk: Since this report, cbETH has even less on-chain liquidity. At current liquidity, a swap of 1,000 ETH for cbETH could create significant slippage. For ETH+, minters can obtain cbETH directly from Coinbase at a 1:1 ratio, but the on-chain liquidity of cbETH should be noted as a potential risk to the underlying basket.
#### Smart Contract Risk
“cbETH is ranked excellent in smart contracts because the contract architecture is straightforward, managed by permissioned Coinbase addresses, based on battle-tested contracts, is audited, and the contracts themselves do not handle user funds.”
Additional Thoughts on Smart Contract Risk: Though rated well on smart contract risk, it’s important to note that adding another layer of smart contract risk increases total exposure. This must always be considered when adding another LST to the basket.
#### Dependencies
“cbETH is ranked good in dependencies for having a reliable price feed available. A centralized service can be an advantage when managing system accounting, withdrawal processing, and unforeseen network issues (high withdrawal demand, Ethereum network issues, etc.).”
#### Decentralization
“cbETH is ranked poor in decentralization because it is a centralized service operated by Coinbase and users are thus exposed to counterparty risk. The User Agreement does offer assurances that users retain legal ownership of their staked ETH. Coinbase does make an effort to reduce centralization of its validators by diversifying across several software clients.”
### Solution 2: Increase Exposure to stETH (wstETH) in the Collateral Basket
stETH (wstETH) Risk Rating by Prisma Risk
#### Liquidity
“stETH is rated excellent on liquidity for being the clear market leader with the deepest liquidity.”
#### Smart Contract Risk
“stETH is rated good in smart contracts for being heavily audited, having a bug bounty program, and having a long history of securing billions in TVL without major incident. The recent upgrade to V2 increases smart contract uncertainty.”
#### Dependencies
“stETH is rated good in dependencies for having a reliable price feed available. Dependency on Lido oracle daemons can result in disruptions that can cause incorrect reward distribution or liquidity mismanagement.”
#### Decentralization
“stETH is rated good in centralization for having core system controls with a DAO that has reasonable backstop measures. Multiple multisigs are employed with limited privileges for specific precautionary functions.”