Support RocketPool by using additional rETH in Gnosis Treasury: Proposal

General Gnosis Chain
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Hi Folks – This is my first forum discussion and potential GIP, so happy to take feedback from any of the Gnosis team on style/substance.

As of last notice, the Gnosis Treasury (managed by Karpatkey) holds 64,124 wstETH (~$130mm) and 5,725 stETH (~$10mm), 712 rETH (~$1.4mm), and 18,622 ETH. Full report here: 20230424 - karpatkey's Weekly Report on GnosisDAO Farms.pdf - Google Drive

I should note that the majority of the wstETH is being used as collateral in the Gnosis Maker vault, where we have loan drawings of ~$22mm. 550 of the ETH are in Agave for loans as well.

This leaves sizeable unused ETH, stETH, and wstETH. Given that Gnosis Chain is all about decentralization, I am wondering if it makes sense to move some of our LSDs or ETH into RocketPool. Looking at the RocketPool validator Queue, the protocol has room for a deposit of up to ~60k ETH, so more than enough room for our supplied ETH to immediately be staked with hundreds of decentralized validators. Current minipool queue here: Rocket Pool Explorer.

I think there are two ways here to show support for Rocketpool’s mission to decentralize the validator set while also benefiting the Gnosis DAO Treasury. (Find RocketPool’s mission statement here: Rocket Pool - Decentralised Ethereum Staking Protocol)

1 (easiest) – supply ETH for rETH to RocketPool Protocol
2 (more meaningful, harder) – once Lido enables withdrawals, unstake some stETH and deposit ETH to RocketPool. This would reduce Lido’s dominance in the LSD market, spread ETH to a large validator set, and increase the decentralization of Ethereum’s validator set

1 is the easiest for Gnosis DAO as it requires only one transaction (depositing ETH to RocketPool) but i do think that withdrawing stETH for ETH and depositing to Rocketpool sends a stronger message that we vote with our dollars for decentralization. I dont recommend we sell stETH to deposit in Rocketpool as the slight stETH discount pre-unlock would be a waste of Treasury funds. Better we wait for withdrawals.

Im hoping to get guidance/help from the Karpatkey team on this one as I dont have a perfect handle on where/how all of our LSDs and ETH is being used. Would love an opinion on what amount we can move without breaking loan positions etc.

Any/all feedback welcome!! Hoping to move this to Phase 2 at some point once this proposal is in good form.

Disclaimer: I hold GNO, RPL, ETH

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As both someone who has built stuff on gnosis and as a Rocket Pool user, I think this is a no-brainer. Rocket Pool is well aligned with Ethereum values and Lido (with whom I have no issue) is just too dominant in the market. We need to support the future we want.

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I am in support of this proposal as both a Gnosis user and Rocket Pool node operator.

Over 500,000 ETH is currently staked with Rocket Pool, making it the third-largest TVL after Lido and Coinbase among liquid staking providers.

Diversification into rETH is wise for a number of reasons:

Insurance

rETH has best-in-class resistance to black swan events, such as a massive slashing resulting from client bugs.

If a slashing event were to occur, funds are first deducted from the following sources before impacting rETH holders:

  1. Node operators’ ETH Share(~185k ETH)
  2. Node operators’ RPL Bonds(~200k ETH)

In contrast, Lido’s insurance fund only has around 6k stETH total, which (A) is stETH-denominated itself and (B) services 25 times more TVL.

Peg Performance

rETH has shown more resistance to negative de-peg than stETH.

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Source: Dune Analytics

Both stETH and rETH are expected to be better able to maintain their respective pegs via significantly different methods. Lido will request their NOs to exit as needed to restore supply/demand balance. Rocket Pool will primarily balance using deep liquidity and market arbitrage opportunities for rETH holders. If needed, arbitrage opportunities for NOs that create/exit validators serve as guardrails for the peg.

Tail Risks

Every liquid staking protocol has some level of risk.

Rocket Pool’s decentralized and on-chain nature means that protocol-related bugs are the primary concern. Comprehensive and continuous audits, bug bounties, and an engaged community of node operators are the primary methods of mitigation.

Lido’s group of trusted node operators with no personal bond currently means that a node operator could keep all execution layer rewards for themselves and refuse to exit validators. This risk is mitigated through legal contracts and by specifically choosing operators that are trusted members of the Ethereum community.

While one can argue which tail risks are larger, a key practice in risk management is diversification.

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I am much in favor of using part or all of stETH to acquire rETH and participate as a validator on Rocketpool.

Converting 50% of all stETH & wstETH to rETH would diversify protocol risk. A full swap would trade one protocol’s risk for the other, but have a greater impact on decentralization.

I like the idea of doing half, at least to start.

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I will approve this proposal, as it sets GNOSIS on the road to diversifying risk and having a significant presence in other protocols.

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Thanks, @viszla, for raising this topic. Decentralization should always be a driving factor in the DAO decisions.
There is probably less ETH available to be supplied in LSDs than what it may appear at first sight. With 93% of capital utilized, most ETH and corresponding LSDs are already used as collateral, farming, or Gnosis Chain development.
Given the arguments in this thread, it is probably good to keep Rocket Pool in mind whenever there are opportunities to diversify the ETH LSD portfolio without disrupting current holdings. E.g., when a portion of the CDP debt is repaid. Maybe, this diversification could include looking at indexes. I would love to hear your opinion on that as well.

Some additional information on the DAO’s ETH and LSD funds.

  • As you pointed out, most of the wstETH is used in a Maker CDP position: above 80% of the stETH + wstETH is allocated to a Maker vault.
  • An additional 15% of the wstETH and stETH is allocated as liquidity in mainnet DEXes as a risk management measure, intended to have extra collateral at hand. Hence, at least 95% of the (w)stETH funds are either directly used as CDP or readily available while generating farming revenue.
  • In terms of ETH, approx 55% is paired with (w)stETH in the LP positions mentioned before.
  • An additional 13% is paired with GNO in mainnet, providing the required market for the GNO vault in MakerDAO.
  • Finally, 15-18% is deployed in Gnosis Chain, adding up to almost 85% of the DAO’s ETH.
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This all makes sense. I think the question for us is – where can rETH replace stETH? At the moment, we have near 100% exposure to one protocol that is split among ~16 centralized staking providers. A piece meal approach targeting a reduction in that likely makes sense.

  • wstETH in the maker vault: Is there a requirement that this collateral be stETH, or can a mix of stETH and rETH do the job? Post Lido unlock, it would be simple redeem some stETH and deposit for rETH
  • 15% liquidity: This one could be 100% replaced by rETH quite easily and then held also on mainnet dexes provising liquidity
  • ETH pairing: we would leave this as ETH for the rETH / ETH liquidity providing
  • GNO vault liquidity: Any reason why rETH cant function here? There is liquid depth in rETH markets on Balancer, a Gnosis partner
  • Gnosis Chain ETH: This should likely be unchanged, unless the community is in favor of adding rETH to Gnosis chain which i assume would be significantly easier than adding stETH as there is no need to account for reward payouts – the rewards simply accrue to the token. This would be a longer term project though

Given the above facts, it looks like the 15% stETH liquidity pair is immediately available for exchange once unlocks are activated at Lido. If the maker vault accepts rETH as collateral (it looks like that wouldnt be an issue MakerDAO heralds deployment of Rocket Pool’s ETH (rETH) as collateral.) then the vast majority is available. Am I missing anything?

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One other thing to note here as well – rETH has the lowest stability fee on Maker, below stETH. So moving to rETH for a Maker vault will save Gnosis on fees. https://twitter.com/MakerDAO/status/1654833430260252672?s=20

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good point, and even if sf might change, to me it seems appropriate to diversify once some funds can be moved without too much hassle (haven’t gone through the balance sheets, but karpatkey will know).

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That is true, with the caveat that there is a low limit for the available DAI to take debt.

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I like the idea, but at the same time, isn’t the DAO already paying Karpatkey a fee to manage the treasury funds? Isn’t this effectively micromanagement of the professional money manager that Gnosis has already hired? Perhaps Karpatkey can opine on why they have not elected to diversify into Rocket Pool.

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