This is an archive of our post on Aave governance forum. Read the full thread here.

Summary

LlamaRisk is supportive of @ChaosLabs’s recommendation to onboard ETHx on AAVE V3 Ethereum. Our recommendation is based on an updated report referencing our initial assessment of ETHx published under PrismaRisk on December 10th, 2023. The proposed parameter settings, including the ETH-Correlated E-Mode, are consistent with our analysis. Furthermore, the suggested CAPO recommendation is conservative and aligns with a staged onboarding approach.

Asset rating

In updating our assessment of ETHx, we are revising our risk rating. Based on the risks identified for each category, the following chart summarizes a risk rating for ETHx as collateral. The rating for each category is ranked from excellent, good, ok, and poor.

• We rank ETHx ok in liquidity, as liquidity has not materially improved since the initial analysis but has become more concentrated in a single venue. Its recent history should still be a discounting factor, but considering the rapid user growth and expanded utility, you would expect liquidity to have seen a greater increase.

• We rank ETHx good in volatility, as there has been no significant depeg event, and daily returns have mirrored ETH daily returns. Although direct withdrawals may be staggered and may take varying times, this design is intended to manage demand.

• We rank ETHx ok in smart contracts. There has been no update from our original report.

• We rank ETHx good in dependencies, as a Chainlink price feed has been introduced but can’t yet be considered as a reliable price feed relative to other more established LSDs. There has been a reduction in the number of Oracle committee members required for consensus, which should be noted.

• We rank ETHx ok in decentralization. There has been no update from our original report. However, the team is still performing critical processes, and there needs to be more participation from the wider community.

• We rank ETHx ok in legal. There has been no update from our original report.

In less than a year of operating, ETHx has grown its market share to 0.9% - 1% of the LSD market. During late 2023 and early 2024, it experienced significant user growth. Since the initial analysis, DeFi utility has been added, for example, with adoption as a restaking asset, which could explain recent growth.

Liquidity remains a pain point, with concentration primarily in Curve pools. The addition of an ETH/ETHx Chainlink price feed is positive. However, it is currently not as optimal as Chainlink price feeds due to the early stage of the protocol and unknown market resilience. A notable factor is the influence of EigenLayer in ETHx growth trends, which is associated with recent exuberant speculation and may expose ETHx to the risk of sudden and dramatic drawdowns. Such scenarios may expose ETHx to market pressures that test its capacity to process withdrawal demand. Additional data on the asset’s behavior in various market conditions and the maturity of its market overall will help create more confidence in its resilience.

Concerns mentioned previously related to low TVL and short market history should be considered less significant, given that ETHx has made positive strides in establishing itself in the market while remaining relatively stable in its yield and peg. A conservative onboarding approach should still be taken due to liquidity and price feed oracle concerns, with less exposure afforded than more established LSDs.