Proposal Title: Ethos Reserve V2 Implementation
Proposal Chain: Optimism
Proposal Type: Ecosystem Sentiment Vote
Proposal Author: Justin Bebis / A S
Date: 10/20/2023
Executive Summary:
The OATH Foundation proposes the implementation of Ethos Reserve Version 2 (Ethos V2), which aims to enhance the existing Ethos Reserve protocol with a range of improvements and updates. Ethos V2 seeks to address key challenges in the DeFi ecosystem and provide a more efficient, secure, and versatile CDP platform that will push the boundary of decentralized stablecoins.
Proposal Motivation:
The team’s motivation for submitting this proposal is rooted in the rapidly evolving DeFi landscape. We have identified critical issues in decentralized stablecoins, including the challenge of maintaining a stable peg ($ERN currently sits at $1.04 at the time of writing this proposal). Ethos V2 aims to tackle these issues by leveraging its unique mechanisms to drive further protocol adoption and maintain a peg around $1.00.
Proposal Specifics:
Our team proposes a migration of the Ethos Reserve platform to a V2 implementation.
Ethos V2 builds upon the foundation of the current protocol. It includes the following updates and features:
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Robust Support for Interest-Bearing Collateral: Ethos V2 will enhance support for interest-bearing collateral, including tokens like $wstETH, $swETH, and $frxETH. Asset types will be determined by governance. This update will provide added debt ceilings and reward hooks for improved incentive alignment alongside enhanced configurability to handle exotic collateral types.
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One-Click Leverage Tools: Users will be able to leverage their debt positions with a single click, and have the ability to easily unwind and repay in the same manner.
We will outline features in more detail in the Risk section of this proposal.
Team Experience:
Our team, colloquially known as Byte Masons, is an engineering firm with extensive experience in Ethereum Security and financial engineering. We built Ethos Reserve V2, and our team has worked for months engaging with hedge funds and institutions to better understand their mandates and needs as they pertain to the Ethos Reserve platform.
Key Objectives & Success Metrics:
The primary objectives of Ethos V2 include improving accessibility and performance of $ERN for DeFi funds and users, growing the addressable market, and scaling the Ethos Reserve platform. Success will be measured by the growth in adoption, improved peg stability, and user satisfaction.
Length of Engagement & Budget Breakdown:
The deployment of Ethos Reserve V2 will be a comprehensive and ongoing process. So far, months have been spent designing and implementing changes by an OATH Foundation core engineer, with multiple code and security reviews throughout the process by secondary engineers and 3rd party auditors.
Maintenance of the platform primarily involves monitoring, adding new assets, and funding the stability pool. These are minor tasks, and will be performed in conjunction with the implementation of updated periphery including $OATH tokenomics and maintenance of the Digit platform.
Community Support:
We seek the support and engagement of the OATH community in upgrading the Ethos Reserve protocol. Community feedback and collaboration are vital for the success of Ethos V2, and we are committed to actively involving the community throughout the implementation process.
We specifically ask for feedback about asset support for Ethos Reserve V2, and will be shipping a proposal gauging user interest in a list of assets curated by our team. Please use this post as a vehicle to voice opinions and concerns about various collateral types.
Partnerships:
With Ethos V2, we seek to enhance our existing partnerships by re-pegging $ERN to $1 and adding support for new collateral types. Not only will this allow us to support the mandates of delta-neutral stablecoin funds and risk-sensitive asset managers, but the strategic addition of new collateral types will allow us to unlock new markets.
Risk Assessment:
Ethos Reserve V2 was designed to be minimally invasive, making small updates to interfaces and changing no core business logic. Below, we highlight each new feature and its associated risks.
Ethos Hooks
This feature adds an external function call to a parent delegator contract for each collateral type, allowing us to extend functionality of the Ethos Reserve system without altering business logic.
This pattern is especially useful because it allows execution of arbitrary business logic with no risk to the core platform. The purpose of this system is to enable our team to add functionality to Ethos and external platforms over time without need for migration.
https://github.com/Byte-Masons/liquity-dev/pull/40/files
BorrowerOperations Interface Update
We added openTroveFor and adjustTroveFor functions to the BorrowerOperations interface in Ethos Reserve that allow permissioned, delegated management of positions on Ethos Reserve. Typically, securing functions like this would require implementation of an approval mechanism or similar, but we have opted instead to allow only the Leverager contract to use the interface.
This inhibits future extensibility but is a more secure approach overall and any extensibility issues can be navigated through proxy patterns and other abstraction methods.
Collateral Configuration
These functions enhance the CollateralConfig contract with a permissioned function that allows an administrator to add new collateral types and make updates to existing collateral types. This is controlled by a 4/7 multisig composed of OATH Foundation members, who are all contracted and vetted by the Byte Masons engineering firm.
The risks associated with this change are the possibility of unauthorized administrative actions. Overall, however, the risk profile of the platform does not change as similar actions are already possible.
Any administrative actions that alter the risk profile of Ethos Reserve will go through governance before execution.
Addition of Debt Ceilings
Because we seek to add interest-bearing collateral to the platform, there will be an influx in short interest in $ERN from users leveraging wstETH or similar collaterals. To manage these new collateral types and ensure healthy, balanced growth of the ecosystem, we have introduced limits to the amount of $ERN that can be issued per collateral type.
In practice, these debt ceilings will primarily be applied to interest-bearing or exotic collateral types to limit Ethos Reserve’s exposure. These debt ceilings will be increased alongside yield and liquidity depth.
Keep in mind, these efforts are designed to limit the amount of collateral redeemed on Ethos, as we see it as a fairly miserable UX. There will always be a hard peg at 99.5 cents for $ERN.
Leverager
The Leverager’s primary risk stems from its ability to use the adjustTroveFor and openTroveFor functions. This is a tight integration designed to allow users to manage positions directly from their EOA. Because of the strict requirements when opening a position on Ethos Reserve, however, the risk is fairly minimal as the Leverager must abide by both system invariants and user token approvals and balances. Combined with extensive code review and an audit, we believe the risks of this integration are suitable for production release.
The economic risk to the system stems from the ability to open leveraged short trade on $ERN with extreme efficiency. This of course means users can also leverage long on their collateral assets, and we believe this speed and efficiency is necessary to realize the full economic benefit of Ethos Reserve.
With careful management of debt ceilings along with the mint fee to prevent toxic arbitrage, our team has the tools to manage the peg successfully with few redemptions.
Additional Details:
Counter Asset for bOATH
We are considering a move to 80% OATH and 20% ERN for the new counter asset, but can also keep OATH/ETH. Input here before this proposal is shipped would be much appreciated.
Starting Collateral Types
Despite the competitive LTV, we see little utilization of OP tokens on the platform. It may be worth deprecating this collateral type.
For interest-bearing collateral, what should we add? wstETH seems obvious, but are there any others we should consider?
Exotic Collateral LTV
We can set low collateral ratios for interest bearing collateral, but it won’t be necessary to be the most competitive lender because users are already getting an amazing deal. Using wstETH as an example, I propose a low Minimum Collateral Ratio - between 110% and 115% with a higher Critical Collateral Ratio - closer to 130-150%.
This would ensure users taking on leverage in size would need to respect the higher CCR requirements, but smaller users who may benefit more from the leverage can sneak in closer to the MCR.
