[PRFC] - Add OETH as collateral to mint mkUSD

DAO Proposals
1 
Title: Add OETH as collateral to mint mkUSD
Author: @pete from Origin Protocol 
Type: PRFC
Date: 30-10-2023

References

Summary

I am Peter, a member of the core Origin Protocol team. Currently there are a handful of markets for borrowing against LSTs on Prisma - this is a proposal for a new market, Origin Ether (OETH), to be added alongside the existing markets for Lido, Rocketpool, Coinbase, and Frax.

Abstract

Background on Origin Protocol

Origin was founded by Web3 veterans Josh Fraser and Matthew Liu in 2017 and is one of the most venerable projects in the space. Josh and Matthew are joined by the fully doxxed Origin team and community, which includes hundreds of thousands of members and open-source contributors. Origin has raised $38.1M from top investors including Pantera, Spartan Group, Foundation Capital, BlockTower Capital, Steve Chen, Garry Tan, and Alexis Ohanian, and currently maintains a multimillion dollar treasury. As a technology partner, Origin Story has helped launch some of the largest NFT projects to-date. Origin Story was followed up with Origin Dollar, a yield-generating stablecoin that reached a TVL of $300m in 2022. Origin Ether is Origin’s 3rd and latest launch.

Origin Ether

Origin Ether was launched in May 2023 and is an ERC20 LST aggregator that generates yield while sitting in your wallet by tapping into blue-chip protocols. OETH is backed 1:1 by stETH, rETH, frxETH, ETH, and WETH at all times; holders can go in and out of OETH as they please. Similar to stETH, OETH yield is paid out daily and automatically (sometimes multiple times per day) through a positive rebase in the form of additional OETH, proportional to the amount of OETH held.

OETH yield comes from a combination of:

  1. Deploying ETH/WETH across Curve, Convex, Balancer, Aura, and Morpho
  2. LST validator rewards
  3. A 50bp exit fee is charged to those who choose to exit OETH via the dapp (completely avoidable if using a DEX), this fee goes back to OETH holders
  4. OETH sitting in non-upgradable contracts does not rebase, instead the interest generated from those tokens is provided to those that can rebase

These 4 yield generating functions combined enable OETH to generate higher yields than holding any single LST or farming ETH manually. The current collateral allocation and yield strategies can be seen on-chain at all times via the OETH analytics page. Future OETH collateral and yield strategies are governed by OGV stakers. More information on OETH and its mechanics can be found in the OETH docs.

There are no lockups with OETH, users can move in and out of OETH at all times. OETH remains completely liquid at all times, and can be spent in the same way as its backing collateral, if unexpected expenses were to arise.

Purchasing OETH

There is deep on-chain liquidity, therefore obtaining OETH is seamless. Users can convert into OETH via any of the following methods:

OETH Usage

OETH is currently used differently by different verticals of users. Retail users are treating OETH like a bank account or high-yield savings account for ETH within their wallet. Yield farmers are using OETH to save on gas fees by replacing active farming with passive farming. DAOs are swapping their idle treasury ETH or LSTs into OETH to extend their project runway and boost yields. Funds and asset managers are incorporating OETH into their portfolios to hedge against centralization risk and obtain superior DeFi APYs.

Performance & Growth

The OETH TVL, now over $77m (42,632 ETH), has been trending upwards and has been well received by users with the yield OETH is generating. OETH yield is currently at 5.45% APY, whereas native staking yield on ethereum has ranged from 3.03% - 4.03% APY over the last few months.

Other OETH Stats

Number of holders: 509
Number of transfers: 4,970
TVL: 42.653k ETH
Market Cap: $77.243m

Screenshot 2023-10-30 at 5.02.45 PM
Screenshot 2023-10-30 at 5.02.45 PM1103×521 57.4 KB

Motivation & Benefits to Prisma

Origin has been following Prisma since it was mentioned in the Bankless article earlier this year. Adding an OETH market for mkUSD collateral will be mutually beneficial for both Prisma and Origin Protocol, as it will increase the utility for OETH, while also increasing the TVL for mkUSD and the Prisma protocol. Any TVL created from OETH lending to Prisma creates additional revenue for the Prisma Protocol and DAO from active loans and liquidations. With the current APY, OETH would also be the highest earning asset on Prisma, which many Prisma users will find beneficial. OETH holders have been asking for opportunities to borrow against OETH since the launch this past May; at the time of writing there is no other platform to use OETH as collateral - Prisma has the opportunity to be the first and only platform for borrowing against OETH.

Specification

As OETH is an ERC-20 token, adding support for OETH should be fairly straightforward. The OETH contract can be confirmed through Etherscan, CoinGecko, and CoinMarketCap. All collateral LSTs backing OETH are all currently supported on the Prisma platform.

Oracles & Price Feeds

Since OETH is designed to remain pegged to ETH, some projects are using standard ETH oracles for OETH. However, direct OETH oracles are available currently through Tellor and Dia Data.

Oracle Methodology

  • Volume Weighted Average Price with Interquartile Range (VWAPIR) is used to calculate price
  • 2% deviation threshold for updates trigger will be applied
  • 120s trades aggregation window size will be applied
  • The feed will be updated every 24 hour period if there are no deviation based updates

Discussions are currently taking place for building additional price feed oracles with Redstone and Pyth.

ERC-4626 Compatibility

OETH yield is paid out daily and automatically through a positive rebase in the form of additional OETH, proportional to the amount of OETH held. In the event that it would not be possible to launch an OETH market due to needing to opt-in to OETH yield generation within smart contracts, an alternate solution would be using Wrapped OETH (wOETH). Similar to Frax’s sfrxETH, wOETH is a ERC-4626 tokenized vault designed to accrue yield in price rather than in quantity. When you wrap OETH, you get back a fixed number of wOETH tokens. This number will not go up - you will have the same number of wOETH tokens tomorrow as you have today. However, the number of OETH tokens that you can unwrap to will go up over time, as wOETH earns yield at the same rate as standard OETH. The wOETH to OETH exchange rate can be read from the contract (function number 16), or via the OETH dapp. More information on wOETH and the wrapping/unwrapping process can be found within the OETH docs.

wOETH contract address: 0xDcEe70654261AF21C44c093C300eD3Bb97b78192

Current exchange rate as of 10/30/23: 1 wOETH = 1.062847 OETH

Potential Risks and Mitigation

The introduction of OETH provides an opportunity for diversification and broadening the collateral base while mitigating concentration risks. However, Origin does acknowledge the concerns around the potential risks associated with OETH too. There are six possible risks when using OETH, and Origin is making sure to reduce each risk as much as possible:

New token risk - Given OETH is a relatively new token, some may be worried that OETH is prone to new attack surfaces. While this may be true for other new tokens, OETH was built reusing 95% of the OUSD code, of which 10+ audits have been done since 2020. Not that long ago, OUSD reached a market cap of $300m without breaking, and without diminishing the APY it was capable of generating. Origin continues to work on OUSD, despite the lower market cap.

Counterparty risk - OETH is governed by OGV stakeholders around the world. Everything from yield generation to fee collection and distribution is managed by a set of smart contracts on the Ethereum blockchain. These contracts are upgradeable with a timelock and are controlled by hundreds of governance token holders. While the initial contracts and yield-earning strategies were developed by the Origin team, anyone can shape the future of OETH by creating or voting on proposals, submitting new strategies, or contributing code improvements. We intend for all important decisions to be made through community governance and limited powers to be delegated to trusted contributors who are more actively involved in the day-to-day management of the protocol.

Smart contract risk of the yield strategies - Origin is only using platforms for yield generation that have a proven track record, have been audited, have billions in TVL, maintain a bug bounty program, and provide over-collateralized loans. Over-collateralization in itself, combined with liquidations, provides a reasonable level of security for lenders.

Collateral risk - Origin has chosen 3 of the largest LSTs to ever exist to back OETH, and they have maintained their peg quite well since launch. They have also demonstrated significant growth in circulating supply, so the Origin team is confident that the 3 LSTs will maintain their peg and that OETH will remain stable to ETH. To ensure accurate pricing at all times, OETH is using Chainlink oracles for pricing data for rETH and stETH, and a dual oracle for frxETH that combines two sources: the Curve frxETH/ETH EMA oracle and the Uniswap frxETH/FRAX TWAP oracle. In situations where any OETH collateral falls below peg, OIP-4 disables minting of additional OETH tokens using the de-pegged asset.

Slashing risk - Since OETH is collateralized by multiple LSTs at the same time, OETH is protected from slashing from any individual collateral LST. If there is a small slash, the OETH yield will simply decrease, as income will likely exceed the size of the slash. During a major slashing event, both the slashed LST and OETH will experience a drop in value relative to ETH, but OETH should not fall as low and for as long as the slashed LST, as the remaining un-slashed OETH collateral LSTs will soften the blow. There will never be a negative OETH rebase.

Smart contract risk of OETH - Origin is taking every step possible to be proactive and lessen the chance of losing funds. Security reviews are prioritized over new feature development, with regular audits being done, and multiple engineers are required to review each code change with a detailed checklist. There are timelocks before protocol upgrades are launched, and deep dives into the exploits of other protocols are constantly being done to make sure the same exploits don’t exist on Origin contracts. Security is extremely important to the Origin team. OETH was built reusing 95% of the OUSD code, of which 10+ audits have been done since 2020. All audits can be seen on Audits - OUSD , and OpenZeppelin is now on retainer. On-chain insurance protocol InsurAce awarded OETH and OUSD the highest possible security rating of AAA, of which only 3 other projects on the InsurAce platform have received. Optional OETH cover is currently available for both OETH and OUSD on InsurAce. Origin Defi also maintains a $1m bug bounty through Immunefi, with a resolution time of 7 hours.

Peter is a core member of Origin Protocol and is joined by the fully doxxed Origin team and community, which includes hundreds of thousands of members and open-source contributors. Many members of the Origin team, including both founders, are holding a significant portion of their personal wealth in OETH. Origin Protocol’s corporate treasury is also holding millions of dollars in OETH. We have skin in the game and are willing to put our own money at risk with the code we have written.

External OETH analysis:

Llama Risk - Asset Risk Assessment: Origin Ether (OETH)
Auxo - OETH - Protocol Analysis

OETH in the news:

Coindesk - Origin Protocol Enters Competitive Ether Yield Market With OETH Offering
TokenInsight - Origin Protocol Launches Yield Aggregating $ETH Derivative Called $OETH
Blockster - Maximize ETH Staking Yields with OETH: A Yield-Bearing, Ether-Pegged Token by Origin Protocol

Suggested Parameters

Mint Cap: 10m mkUSD
MCR: 120%
Mint Fee: 1.60%
Borrow Interest Rate: 0.00%

Pros

  • All OETH collateral LSTs are all currently supported on Prisma
  • Prisma can be one of the first CDP use case for OETH
  • High OETH TVL compared to competing aggregators
  • Increased TVL and utilization for mkUSD
  • Increased profit for the Prisma DAO from mint fees and liquidations
  • Higher OETH APR than other supported LSTs
  • No centralized or blacklistable collateral is backing OETH
  • Increased utility for OETH
  • Heavily audited, battle-tested OETH code

Cons

  • Smart contract risk from being exposed to DeFi strategies
  • Lower market cap compared to other supported LSTs

Voting

  • If you agree with this proposal, a [YES] vote would lead to the following:

    • Add OETH/wOETH as collateral to mint mkUSD with the above parameters

  • If you disagree with this proposal, a [NO] vote would result in the continuation of Prisma operations as is.

We would be happy to adjust the proposal and/or the above parameters based on feedback from the community, DAO, and core Prisma team and would be happy to answer any questions on Origin Protocol, OETH, or the proposal itself. The Origin team can be reached at any time via the Origin Discord server.

2 Likes
3

The risk report is encouraging.

Does oETH have plans to add further LSTs? I believe this could be problematic from a risk perspective.

Prisma could suffer from onboarding assets and the prospect of onboarding an index which could vote any LST is problematic in my view.

2 Likes
4

Hi @wunder_bar,

I see you deleted the comment, but I’ll drop my response here anyway in case others had the same question. Adding an OETH market to Prisma would only make sense if it is capable of rebasing while being used as collateral. If supporting the rebasing version of OETH is not possible, which appears may be the case as wstETH is supported instead of stETH, then the wrapped version wOETH would solve this issue.

1 Like
5

Hi @Sidn3yGottlieb, this is a great question. We are always on the lookout for other LSTs to consider, but in order for a future LST to be added to OETH, it must go through the full governance process, starting with a forum post, then a Snapshot vote, and finally an on-chain vote. Since launching OETH there have been several other LSTs who have started this process, but none of them have made it to the Snapshot vote. It will be hard for a new LST to pass this governance process if its TVL is less than $100m USD, and if its validator rewards are less than those currently supported by OETH.

2 Likes
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Wanted to ask if @PrismaRisk could comment on whether to add OETH or wOETH as OETH is a rebasing asset which could complicate borrowing.

1 Like
7

wOETH (non-rebasing value accrual) is the one to use with Prisma

3 Likes
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We are ok with proceeding with this proposal using Wrapped OETH (wOETH) instead of standard rebasing OETH !

1 Like
9

We have a collateral risk report for wOETH here:

The main consideration is a suitable pricefeed oracle for OETH. Liquidity for OETH is almost exclusively in the Curve OETH/ETH pool which has an EMA oracle available. Given the AMO strategy uses that pool and it is the primary liquidity venue, this may be a suitable price source. Origin has been developing a custom oracle contract that uses the curve EMA, unless that price is below direct redemption from the OETH vault, in which case it totals up the prices of what could be withdrawn from the vault for an OETH. If Prisma considers this a suitable oracle, it might be worth having a Snapshot sentiment on adding a wOETH vault, and if approved, Origin finish development and have an audit on the custom oracle.

OETH oracle here:

1 Like
10

There are some updates to share on OETH! As of this morning (7/15/24), following a proposal to convert OETH from an aggregator into a true LST, OETH no longer has exposure to other LSTs or yield strategies, as all OETH collateral LSTs have been divested back to ETH. That ETH will very soon be staked natively through SSV/P2p, so OETH can now be officially considered an LST. An additional OpenZeppelin audit for this new version of OETH was completed several weeks ago. Redemptions back to ETH are currently available at a 1:0.999 rate, and the addition of an OETH ARM will soon enable instant exit liquidity at a 1:1 rate. OETH/ETH price oracles are currently available from Dia Data, Tellor, and Chainlink.

11

@PrismaRisk has released an addendum to the report from November 2023: x.com

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Summary:

This proposal is to onboard a wOETH vault for minting mkUSD. The suggested vault parameters are conservative and commensurate with wOETH’s risk profile.

Abstract:

Original PrismaRisk wOETH Report | 11/6/23
PrismaRisk wOETH Addendum 1 | 8/12/24

PrismaRisk has previously reviewed wOETH for onboarding to Prisma with a report published on November 6, 2023. At the time, there were reservations about the LST-index design and assurances about strategies underlying the vault. Since the original report, wOETH has transitioned to a native staking LST with the strategies having been minimized to native staking and AMO in the Curve pool. This prompted a renewed look at the protocol developments and market developments. The Prisma Risk team has recently published an addendum to the original report with updated adoption and performance metrics, current as of August 12, 2024. Both reports are linked above.

Prisma Risk now considers wOETH suitable for onboarding to Prisma, while bearing in mind it is a relatively fresh protocol compared to previously onboarded collateral types, and merits a cautious onboarding approach.

Addendum Summary

Overall we consider the transition of wOETH from an ETH-index token to a pure liquid staking token to materially improve its risk profile. The previous inclusion of arbitrary yield strategies harbored additional composability risks and the potential for governance to introduce high risk strategies. There is now a stronger assurance that the underlying strategies are reasonably contained to native staking, in addition to AMO activities, which OETH maintains from its previous iteration.

The AMO does present an element of centralization, since most liquidity is focused on Curve. Risks associated with the venue or the specific pool may impact liquidation processing or expose the oracle price feed to the risk of manipulation. However, the recent addition of async withdrawals and anticipated introduction of the Automated Redemption Manager for instant 1:1 redemptions both contribute to a lessened dependence on the AMO and secondary market liquidity. There is now a Chainlink price feed, which had previously been a blocker for our recommendation to onboard to Prisma. We now believe that wOETH satisfies reasonable requirements to be considered for onboarding to Prisma.

Specification:

Suggested Parameters
Mint Cap: 10m mkUSD
MCR: 150%
Mint Fee: 0%
Borrow Interest Rate: 8%
OETH/ETH oracle

1 Like