Introducing the Ethereum Liquid Staking Index Protocol and Token - ixETH

General
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We’re excited to introduce our Ethereum Liquid Staking Index Protocol to the stake.link community to share our vision for the product and get your feedback! We’re a few short weeks from launch, and already have our audit in hand from Cyfrin and are implementing the necessary changes.

Our Ethereum Liquid Staking Index Protocol brings a blended yield of the leading Ethereum Liquid Staking Derivative tokens (ETH LSD Tokens) to users, allowing them to reap the benefits of each of these protocols while reducing their exposure to the risk of any one. The protocol’s rebasing index token ixETH will enable further DeFi integrations, which we’ll actively pursue after launch. Our initial target will be launching a Curve pool pairing ixETH/ETH, and we’ll incentivize liquidity providers with ~50,000 SDL in liquidity mining rewards during the first three months.

The Ethereum LSD Index Protocol works by accepting a deposit of a given ETH LSD, and returning the user ixETH, a rebasing token that offers a blended return of all the deposited ETH LSDs. Leveraging configurable composition targets allows the protocol to receive deposits flexibly and issue withdrawals of a given ETH LSD within a target range. For example, upon the launch of stake.link’s Ethereum Liquid Staking protocol and addition of its ETH LSD sdlETH to the Ethereum Index, with a target composition of 20% of the overall liquidity and a composition tolerance of 50%, users will be able to deposit sdlETH until it reaches a 30% of the composition of the overall deposits, and withdraw sdlSETH until it reaches 10% of the overall composition. Beyond this threshold, users will need to deposit or withdraw a different ETH LSD.

There will be no fee to mint ixETH using one of the component LSDs, but there will be a streaming fee assessed on the earned rewards directed to SDL stakers (excluding Node Operators and CLL), and a withdrawal fee directed back to ixETH holders. Our early discussions brought us to conclude the streaming fee should be an annual rate of 0.25%, and the withdrawal fee should be 0.25% of the total balance withdrawn.

Our initial plan is to launch our Ethereum Liquid Staking Index Protocol with support for LIDO’s stETH and RocketPool’s rETH, with a weighting roughly representative of their market cap and a 50% composition tolerance. That said, we want to solicit your feedback to see which additional Ethereum Staking LSD tokens we should include!

We’re proud to introduce this product to you all and look forward to hearing what you think!

Note: we’re working on the required criteria for including an LSD into the index, and are considering factors like the presence of security audits, time on the market, secondary liquidity, validator client diversity, etc. and welcome your feedback here as well.

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Ok, well this is an interesting new development. It certainly has a lot of potential. Can we elaborate on the “early discussions” that led to the .25٪ fee structure to be distributed to SDL stakers? Not saying it should be more or less… just interested in knowing why we think that is the sweet spot.

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I am against any liquidity incentive based on the SDL token.

There is simply not enough buy pressure to support ANY sort of liquidity mining. It would crash the token even further.

What makes it even worse is that liquidity providers in a ixETH/ETH pool have absolutely no incentive to not dump the SDL.

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The fee is to be inline with other ETH LSD Indexes that charge .25%, eg Index Coop dsETH.

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To expand on @LinkedEric’s original post with some more detail, the main reasoning for launching an staked index offering is as follows:

  1. With the ETH staking market becoming more competitive, it opens up the opportunity for indexes that spread risk and blend the reward rate between all offerings.
  2. Serve as a marketing exercise to raise awareness of stake.link outside the LINK ecosystem ahead of the launch of ETH staking.

Index Composition

What we’ve built is substantially different from existing indexes even outside of Ethereum staking as it allows the token to be minted directly by providing one of the included tokens, rather than taking fresh inflows of ETH or stablecoins which are then used to purchase the underlying tokens.

The main reason for developing the index this way is rather than the TVL of the index only being able to increase through fresh token inflows, it is exposed to the entire LSD token supply resulting in a substantially larger TVL potential.

As described in the OP, this works by setting composition targets for each token within the LSD with a certain percentage threshold. There’s also the enforcement threshold point, a total number of equivalent-ETH to which the composition targets are enforced. For example, if this is set at 10,000 ETH then the composition targets will only begin to be enforced once there’s a minimum of 10,000 equivalent ETH in the index token pool.

Withdrawal Fee

There’s also the withdrawal fee that provides an extra reward opportunity for ixETH holders. Withdrawal fee is a flat percentage that on withdrawal, distributes the fee to the existing ixETH holders. In normal circumstances and with smaller withdrawals, this promotes the use of secondary markets. Although in circumstances where ixETH is trading at a discount greater than the withdrawal fee, the token can be withdrawn from the platform and then swapped back into ixETH within secondary markets. If this was done in great volumes, then it would provide a higher reward rate for ixETH holders in both the ixETH token and in trading fees on secondary markets.

Liquidity Incentives

Even though there’s a potential for a higher reward rate than blended with the addition of the withdrawal fee, ultimately for the platform to see TVL and users to be incentivised to provide liquidity there needs to be some form of incentive. Considering the current low awareness of the platform due to low LINK staking limits and its confides to just the LINK community, with the uniqueness of this index token and proposed liquidity incentives it will garner enough natural attention to increase TVL and raise awareness prior to ETH staking go-live.

Proposed Inclusion Criteria

For a new tokens to be included into the index, it would require a council vote and to meet the follow criteria:

  • Must be audited and reviewed
  • Must be available on ETH staking and either be a LSD or an ETH index token
  • Must have a 30d APR that is similar to the mean APR for liquid staking tokens
  • Must be open source
  • Must have transparency towards participating validators/token composition if index
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Am I correct in understanding that the streaming fee is 0.25% of any rewards the ETH staked in ixETH earns? e.g. if the yearly apr is 5% for ETH staking then the streaming rewards paid to SDL holders are 0.25% of the 5% ETH rewards earnt and not 0.25% fee charged yearly on the total ETH staked, correct?

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Correct. Worth noting that ixETH is meant to serve as a flywheel for ETH staking rather than providing significant rewards to the SDL pool.

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On discussions of reward distribution from the ixETH token, it was thought that rather than doing distributions of ixETH to SDL holders it’d be more beneficial for the treasury to receive the rewards and do periodic SDL buybacks from ixETH.

Any general thoughts on that from the community?

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I think that would be the most gas-efficient solution. However, rather than democratizing the rewards, the main beneficiary of a buyback would be the next person to sell. What would happen to the bought SDL?

Since rewards will likely be immaterial in the beginning, maybe we should just hold the ETH in the treasury, earmarked to become sdlETH when that’s ready. It could be distributed later, or used for some other community initiative that would benefit everyone. It could also be much easier and more efficient to distribute it post-CCIP, post EIP-4844.

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Happy to say ixETH is now live!

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