Liquid staking has taken off since Ethereum staking became live, and while exciting at first - it has become clear that the proliferation of LSTs is not only confusing users due to the many unique token models and reward accumulation, but also making it increasingly harder for protocols to communicate their value. Now that the Shanghai upgrade is upon us - the staying power of various LSTs will be heavily disputed and only those that have the best APRs and utility will achieve long-term success.
To compound this issue as time goes on, “late” entrants have an increasingly challenging time to gain traction and adoption through meaningful integrations and partnerships. As has happened in the past with BTC derivatives, the novelty of fresh ways to wrap a native asset soon loses steam - and while it can be argued that Ethereum’s LSTs have inherently longer staying-power, it’ll be inevitable that history repeats due to the minimal differentiation between product offerings. Application builders inherently want to prioritise the category leaders due to the availability of liquidity, with marginal improvements in value, and this creates a “long-tail” of protocols which see minimal traction and TVL.
Another issue that is becoming apparent is that pricing stability between LSTs, as well as against native ETH, is a persistent issue - and seemingly isn’t being resolved despite liquidity at an all time high. A clear and recent example of this is the constant mispricing, or depegging that has occured time and time again with the ETH-stETH pool on Curve Finance - with one of the more significant and extended events receiving mainstream media coverage. Due to the lack of utility for the LP token of this pool (with the exception of staking it within CRV gauges for token emission-fueled APR), the pegging of stETH is reliant on individuals deliberately taking advantage of the natural discount upon one of the assets, with minimal benefits for liquidity providers.
On the other hand is an LST like sETH2, which as shown in the chart above - doesn’t suffer from the same issues as stETH - due to the use of UniswapV3’s “concentrated liquidity” feature. This effectively removes the ability for a user to purchase ETH or sETH2 at any price other than 1:1, resulting in minimal volatility. While great for maintaining a peg, the benefits end there - as due to low volatility, there is little reason to trade on the pool, resulting in low fees for LPs, and because the LP token of this pool has no usecases, there is no way to compound your yield as a user/LP - negating the value of “Liquid” Staking.
It’s these issues that have inspired us to bring the concept of the Stable Asset technology to the Ethereum ecosystem - introducing tETH, a synthetic designed to standardize the countless ETH LSTs into a single asset, for increased utility, yield, and capital efficiency.
tETH can be minted by depositing LSTs and native ETH into individual liquidity pools, which also back it and serve as it’s collateralization. The reason this is important, is unlike other regular LP tokens, tETH serves as a stable peg against native ETH, and also standardizes the method of yield accumulation and reward distribution of different formats of LSTs for tETH holders.
In other words, you’re able to maintain the stability of holding native ETH, and simultaneously maintain exposure to the underlying staking yield.
The tETH pool will then become the backbone of various DeFi applications, allowing for low slippage and high efficiency swaps between not only LSTs and native either; but also directly with other LSTs without needing to go across various pools or multiple applications. As a user, you’d be able to either go to the Tapio Protocol dApp and utilize the native swap functionality, or as we integrate more partners, swaps on other protocols will be facilitated by tETH’s liquidity pool.
This is especially beneficial to maintain price stability as traders who wish to benefit from mispricing, can still purchases assets at a discount - however this volatility can now be directly converted into yield for tETH holders. Furthermore, LSTs which have largely had to be compared against ETH, can also now be priced against other LSTs, lowering the odds of a dramatic mispricing due to liquidity being suddenly withdrawn.
tETH holders will then of course, not only earn fees from the aforementioned swaps, but also from redemptions of tETH, fees from facilitating the instant unstake features of various LSTs (much like how we’ve done with LDOT on Polkadot), and even more novel processes as features and integrations are made live.
Finally, tETH, despite fundamentally being an LP token, will be able to be used in various DeFi primitives such as lending it to other users, being used as collateral to borrow or mint other assets, put into yield generators, among other things, just like any other token - allowing holders of ETH, LSTs or LP providers alike, to dramatically compound the level of yield they’re able to generate
tETH is powered by what the Stable Asset mechanism, and has been live in some form since 2019, whether it be on Ethereum, the Binance Smart Chain, or most recently and significantly - built upon Substrate on Polkadot.
Stable Asset consists of 2 core components:
Stable Swap Engine:
Stable Asset Mechanism:
Both of these functions then work closely together - each LST-ETH liquidity pool serves as a trading pair between LST and native ETH which utilizes the Stable Swap engine. This enables a dynamic trading range between ETH and the LST, but also enables the Stable Asset mechanism to ensure that the value of the pooled assets are able to back tETH and hence, maintain the peg.
Each LST of course represents a different form of 1 ETH within the Ethereum ecosystem, and when the exchange rate between the LST and ETH trades at 1:1, the Stable Asset mechanism will determine tETH to be 100% collateralized and backed by ETH (whether in it’s native form, or as an LST).
When this exchange rate shifts however, tETH becomes overcollateralized, with the collateral ratio increasing as the exchange rate also changes e.g. the more the LST is unpegged with ETH, more of the tETH composition will be native ETH, while the total supply of tETH remains the same. This ability to dynamically adjust the collateral ratio is key for tETH to maintain it’s peg with native ETH.
Each individual LST-ETH pool can control how quickly, and to what extent this happens using a number of parameters, laid out within the StableSwap invariant below and can be read in more detail on our Gitbook.
A basic example of this put into practice would be the following:
By doing this, it has encouraged users to remove stETH from the pool, and also simultaneously incentivised the deposit or swapping of ETH into the tETH pool, resulting in the re-pegging of stETH to happen extremely quickly. Having this dual-approach is far more effective than just placing a discount on the oversupplied asset - as is the case with conventional LP pools.
Our Polkadot deployment - tDOT, has actually gone through intense market volatility due to the aUSD issue on Acala, whereby bad actors drained the tDOT pool of native DOT to realise their erroneously acquired gains. During the entire ordeal, tDOT and the Stable Asset architecture worked exactly as designed, without breaking or behaving incorrectly, and maintaining it’s stable peg with native DOT the entire time. More can be read into this on our blog here.
Tapio has received investment from key Web3 VCs such as Polychain Capital, Hypersphere and Arrington Capital, among many others.
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