MIP-0029 - Introduce Liquid Staking Derivative (LSD) Tokens as collateral for ARTH

Proposals
1

Special thanks to @CryptoMedic for the initial proposal and intent for the DAO to persue LSD tokens.

Abstract

This proposal suggests that we look at accepting Liquid Staking Derivative tokens (LSD) as collateral for our protocol.

By accepting LSD tokens as collateral, borrowers will automatically see a portion of their ARTH debt getting repaid by the yield ETH 2.0 offers.

LSD tokens also have an active userbase of users looking to spend their tokens at various protocols.

Using staked ETH helps secure the Ethereum network, thus reinforcing our DAO’s commitment to the stability and future success of the ecosystem. It also contributes to the overall decentralization of the Ethereum.

Risks

There are risks involved in using these LSD tokens as collateral. Notably the biggest one being the centralization of their power.

In the past few months in the crypto space we have seen projects and infrastrcuture that have become too big to fail, actually fail. UST collapse, FTX collapse, USDC depeg and the list goes on. It means under no circumstance should we consider a LSD token as “too-big-to-fail”.

Keeping this in mind there are 3-4 candidates for collateral that we can use for ARTH. Candidates for LSD include:

Given that no LSD token is perfect, it is best we accept these tokens as collateral keeping limits on how much ARTH can get minted with each token.

Other notable risks to consider is the diversification of our collateral pool to other 3rd party tokens and projects. Each LSD token comes with it’s own risks (centralized/decentralized, oracles etc etc…) which mean that those risks get carried onto ARTH as well.

This post elaborates a bit how the LSD ecosystem is still slightly centralized and can be prone to cartels. Headache we don’t really want to deal with.
https://notes.ethereum.org/@djrtwo/risks-of-lsd

Other Salient Points

The Ethereum ecosystem is an ever evolving and ever upgrading ecosystem. Whilst it might seem interesting for the DAO to develop it’s own LSD, it’s a mammoth task to accomplish.

Developing our own LSD would require us to build the staking/unstaking infrastructure, running validator nodes, maintaining the MEV software etc… The list goes on. It’d be much more advisable to use an existing LSD token and their infrastructure.

It also becomes a lot easier to interact with their respective communities for use cases with their LSD token and hence attract more liquidity/TVL.

Actionables

With this proposal, we can look to accept any of the above LSD tokens (whichever the community and the core contributors feel most apt after studying the pros and cons) as collateral for ARTH.

Once it is ready, we can pass a vote on tally that will implement changes to the ARTH token that will then go through a 30 day timelock, before it goes live.

Conclusion

This initiative aligns with the DAO’s commitment to technological advancement and provides us with a competitive edge in the DeFi ecosystem.

Original proposer and contributor: CryptoMedic

  • Ye
  • Nay
0 voters
7 Likes
2

What could the risk minimization parameters look like?

Can we discuss parameters that we can then include in the governance vote?

So that we can, for example, immediately determine with the vote how much LSD we accept (e.g. x% of total collateral), from which providers, etc., and not simply “do we want LSD” or “do we not want it”.

3

Yes so the risk parameters are updatable and we can look at numbers that are manageable.

For now coding it to be a % of the supply might not be sufficient because ARTH is still very much early stage. But it makes a lot of sense to cap it initially at the 10mn$ mark I’d say. If our TVL gets closer to this region, we can run another governance vote to increase this cap even higher.

My only worry here is that while LSD token infrastructure has evolved through a lot (I have been following their most recent updates), it is still not yet 100% decentralized (Cartels, Centralization of nodes etc…).

Unlike ETH which is at the moment 100% decentralized.

4

Using your knowledge to weigh the current risks, is the acceptance of LSD right now justifiable and reasonable?

Would it be possible to somehow minimize the risk via insurance or other solutions?

5

It would make the most sense if we are able to attract the communities of these projects, do cross collabs etc

Insurance in crypto is quite hard to get. The most amount of insurance I’m aware of is Sherlock protocol which provides a coverage of around 2mn$ at a cost of 75k$ (which includes an audit as well).

So to summarise we should focus on attracting communities with their LSD tokens

12

I voted Nay, but not because it’s a very bad idea, it’d be really great to see LSD taking part in mahalend and all and I really love the idea behind it. However one can’t use funds and stake them at the same time without any risk, and this is my one big concern, it’s new and not battle-tested.

If we are going to agree with this then I’d vote that LSD has overall ~10% of ARTH market cap meaning that only 1 out of 10 ARTH will be open to LSD risks that we’re not yet fully aware of, and that is for certain. It always is.

2 Likes
13

10% of ARTH market cap sounds like a good measure to put in terms of risk.

And yes, we should start to look at listing more assets on MahaLend.

2 Likes
15

10% of the ARTH MC sounds good to me, too. We can always increase this.

1 Like
16

I also think it’s a great suggestion to probably keep the collateral in MahaLend instead. It allows us to have better risk control with these assets and probably keep ARTH’s backing untouched.

1 Like
17

We are closing this proposal and starting a new one considering the changes mentioned above. MIP.C2.0026 Introduce Liquid Staking Tokens into MahaLend