0x49b4564c…6c52sent to0x868fe81c…f753·#23,913,746·view on Etherscan
# Proposal to Turn Off Default Detection of ETHplus Collateral Assets
[https://forum.reserve.org/t/rfc-modelling-how-ethplus-would-react-to-a-deep-and-sustained-steth-depeg-and-what-actions-we-can-take-via-governance-to-mitigate-loss/1238](https://forum.reserve.org/t/rfc-modelling-how-ethplus-would-react-to-a-deep-and-sustained-steth-depeg-and-what-actions-we-can-take-via-governance-to-mitigate-loss/1238)
ETHplus currently holds 50% of its collateral basket in stETH as it is considered a safe and liquid asset that dominates the LST category. However, over the last few months we have seen the withdrawal queue increase from less than a day to where it sits now at ~26 days. stETH holders looking to exit their position now have an option, exit via DEX liquidity at a slight discount or wait in the withdrawl queue where a 1:1 redemption is guarenteed. As the queue length increases more and more holders are chosing to exit via DEX LPs leading to a sustained 25-50bps depeg against ETH. This sustained depeg has led to some unwinding of the levered stETH trade extending the queue and the depeg even further.
Current Risk: The sustained 25-50bps depeg of stETH has raised concerns about a possible default which if triggered by the protocol at 0.975 would causing the collateral basket to sell off it's defaulting collateral and to flee to ETH, this sell-off by the protocol would likely incur significant slippage and leave ETHplus holders and RSR stakers with significant losses.
Protocol Mechanics: Currently, the protocol will programmatically sell off stETH if a 2.5% or greater depeg persists for 24 hours. The protocol will auction off the stETH to bidders but it’s likely the majority will be sold through on-chain liquidity. A previously moddeled worse case scenario, which sells stETH entirely through DEX liquidity led to a complete seizure of the RSR backing in an attempt to re-collateralise the basket but still left ETHplus holders with a ~10% haircut.
Likely Exit Dynamics: The worst case scenario modeled above is not likely to happen in practice as many ETHplus holders will exit their ETHplus positions and choose illiquidity via the withdrawal queue rather than choosing liquidity with the protocol seen as though this option allows for 1:1 redemption. The actions of these ETHplus holders reduces the amount of stETH that has to be sold via DEX liquidity, reducing loss for the remaining ETHplus holders first and then RSR stakers.
Mitigation Options: A number of options exist; accept current parameters as safe and do nothing, increase the default detection threshold, increase the default delay, a combination of both or turn off default detection on ETHplus collateral entirely.
Proposal: Forum discussion and an off chain poll saw most governors and ABC labs members to be in favour of turning off default detection for ETHplus. Given this majority the proposal to turn off the default detection, completed by setting the diversity factory of the emergency collateral to zero, has graduated to a onchain vote.