[Swell Network]
Summary
Provide a brief summary of the proposal, including the name of the liquid staking protocol, the token to be added to the unshETH index, and the main objectives of the proposal.
Swell Network’s mission is to deliver the world’s best liquid staking experience and simplify access to DeFi, whilst securing the future of Ethereum as a credibly-neutral settlement layer. We’re proud to be the first LST to submit a formal UWP here on the inaugural launch of the unshETH governance forums. Swell Network is a new and quickly growing permissionless, non-custodial, liquid staking protocol. We’re backed by tier 1 investors and angels in the space including Framework, Maven 11, IOSG, Apollo Capital, Kain Warwick from Synthetix, Fernando Martinelli from Balancer, Anthony Sassano, the founders of Bankless, Mark Cuban, and others. Our deposit pool consists of 8 institutional node operators, all of which have exhibited excellent historical performance and gold-standard geographic, client, and infrastructure diversity. Our most recent audit was conducted by Sigma Prime, a leading auditor in the space, particularly for LSTs as they’ve audited both Lido & RocketPool as well as built and maintained the Ethereum Lighthouse client. We also have an ongoing bug bounty of $100k on Immunefi and a very enthusiastic community across Discord, Twitter, and other socials. Since launching 3 weeks ago we’ve achieved in excess of 10K ETH, nearly $10M in liquidity, and 3000+ unique depositors. Swell is growing quickly and eager to support and collaborate with innovative products like unshETH.
Abstract
Provide a high-level overview of the liquid staking protocol, its features, and its role in the Ethereum Liquid Staking DeFi ecosystem.
Swell is a relatively new entrant to the space, and as such has had the opportunity to observe what has and hasn’t worked well within liquid staking. The architecture with which the DAO recently launched is a mix of prior successful design decisions combined with some novel implementations in accordance with our own goals and philosophies. Our mission is to bring as much innovation and utility to swETH as an asset, whilst maintaining tier 1 security and bringing diversity to the staking market to further support the health of the broader Ethereum ecosystem. Supporting index products like unshETH is a key feature of that agenda. Staking on Swell Network has been live for ~4 weeks and, at time of writing, has amassed more than 12.5K ETH deposited and 3700+ unique depositors. We’re quickly approaching $10M in aggregate liquidity for swETH with $7M on Balancer, $1.7M on Maverick, and $150k on UniV3.
With the successful launch of core staking functionality, Swell DAO has an aggressive roadmap for the rest of the year which includes, unstaking functionality, more integrations for swETH across DeFi, Vaults for efficient allocation of swETH into DeFi, adding permissionless node operators to the deposit via DVT and organizations such as Obol and SSV, moving to L2s, governance, and a revamped token economic model which will drive value to SWELL holders and continue to promote utility for swETH.
Motivation Statement
Explain the reasons for submitting this proposal, including the potential benefits to the liquid staking protocol and the unshETH community. Describe how the proposal aligns with unshETH’s mission of decentralization through incentivization.
Swell and unshETH have been actively collaborating on ways to effectively bring value to our respective communities. After some dialogue it’s evident that there is clear alignment between the two protocols – as a result, Swell has opted to include USH holders in Swell’s early bootstrapping campaign dubbed “The Voyage” which is slated to launch in the coming week. This means that unshETH community members will get a material boost to their staking deposits and–should this governance proposal pass–be able to then deposit their swETH into unshETH. Swell is pleased to be working with unshETH in their ecosystem grants program to help support governance in the protocol as well as further driving value to USH holders through such things as bribe markets. Swell has worked tirelessly on establishing itself as a tier 1 liquid staking solution in the market – both on the business value side and on the security side. We have strong and sweeping relationships with countless protocols in the space and, by leveraging them, are well-positioned to bring immense value to swETH holders.
Benefit to the unshETH Protocol
Detail how the inclusion of the liquid staking token in the unshETH index will benefit the unshETH protocol and its community. This may include aspects such as increased diversification, enhanced network safety, or improved decentralization.
Onboarding swETH as a whitelisted asset on unshETH is a small first step in further decentralising the asset mix within unshETH and Swell is eager to support such an effort as it drives real utility for swETH as well as provides market participants with additional liquidity via unshETH’s internal AMM. As swETH market cap and liquidity continue to grow, and the protocol proves itself in the market – unshETH will benefit from the asset’s persistent presence in the index. Furthermore, Swell is very secure. Swell has been audited by Sigma Prime, a tier 1 auditor in the space which has spent considerable time on LSTs (auditing both Lido & RocketPool) as well as developing and maintaining the Lighthouse Ethereum consensus client. In short, swETH is highly secure and very effective as a novel liquid staking solution in the market, with plans to deliver on further strengthening the broader Ethereum ecosystem, as well as the Index’s like unshETH that onboard the asset.
Risk and liquidity characteristics
unshETH protocol will be accepting LST deposits on a 1:1 basis with the staked ETH underlying the LST and help grow LST liquidity. Therefore, it’s important that each LST has either a proven withdrawals process or reasonable on-chain liquidity before inclusion into the basket. unshETH also requires a reliable on-chain method to query the underlying staked ETH in the consensus layer.
Since unshETH accepts LST deposits on a 1:1 basis with the underlying staked ETH, it’s important that swETH be either 1) redeemable for the underlying ETH via withdrawals or the “primary market”, or 2) high liquid relative to it’s total market capitalization. At ~2:1 swETH boasts the deepest liquidity in the space from a liquidity:tvl perspective.
Swell Network has also partnered with Chainlink to implement their Proof of Reserves (PoR) product which enables real-time, reliable, immutable, and verifiable proof of the underlying ETH which backs swETH. This mitigates risk significantly by providing much more transparency and preventing systematic failures and contagion or quasi-fractional reserve activity – to our knowledge we are the first LST to incorporate PoR. This has the added benefit of offering unshETH a reliable method to query the underlying ETH on the consensus layer deposited via Swell Network.
swETH has held peg exceedingly well in the past 3 weeks since launch. The asset has sustained multiple swaps of greater than $200k with minimal slippage just in the Balancer pool. Included in the appendix are some screenshots of historical swaps in that pool and the result to peg. In addition to that we also have significant amounts of volume flowing through Maverick which is also sustaining significant swaps.
Centralization Vectors / Tail Risk:
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Smart contract upgrades. Our contracts can be upgraded at any time, but this requires a protocol DAO multisig to execute.
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Repricing risk. While there are guardrails, changing the rate incorrectly or excess fee minting would dilute existing holders rights to transfer swETH into ETH in the future.
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No withdrawals and no (current) mechanism to allow withdrawals means that the ETH in the validators cannot be retrieved and sent back to users
Supporting Documents
Website – (https://www.swellnetwork.io/)
Docs – (What is Swell - Swell)
Dune dashboard – (https://dune.com/Juan_X/swell-network)
Audit by Sigma Prime – (https://github.com/SwellNetwork/v3-core-public/raw/master/Audit%20Reports/Sigma_Prime_Swell_Network_Security_Assessment_Report_v2_0.pdf)
Bug Bounty, up to $100k – (Swell Bug Bounties | Immunefi)
V3 Core Contracts Index – (v3-core-public/index.md at master · SwellNetwork/v3-core-public · GitHub)
The most reliable and secure means of assessing the conversion rate between swETH and ETH is via the swETH contract which serves as an oracle, updated by our bot on each repricing event. Chainlink provides an onchain proof of reserves of our new validator set, while the swETH contract will show the full reserves of the protocol which includes the old validator set (8 validators), ETH pending to be deposit on the beacon chain and any ETH balances in our deposit contract and old validator set withdrawal address. The conversion rate is the total reserves divided by the swETH supply.
Initial Target Weight
Propose target weight for the liquid staking token in the unshETH index. Overall philosophy is unshETH is quick to add but conservative to ramp up, and while we want to grow together, as a risk management measure only a portion of a LST’s TVL should come from unshETH.
Target weight calculation guidelines are:
** No more than 10% target weight for new additions*
** No more than 10% of LST’s TVL can be in unshETH*
** For smaller LST’s, up to 20% of LST’s TVL can be in unshETH at a 2% target weight*
At time of writing Swell’s TVL sits at 10,200 ETH and just under half of that is sitting in liquidity pools across our 3 primary venues (Balancer, Maverick, UniV3). unshETH’s TVL sits at 16,825 ETH. We propose a target weight of 5% of unshETH TVL, or 840 ETH, which represents only 8.2% of swETH market cap. With $1.7M in concentrated liquidity in a Maverick boosted pool and $7M in liquidity on Balancer, we feel this is well within the bounds of conservative risk management for unshETH. swETH has sustained several large sell orders in the order of hundreds of thousands in dollar-denominated swaps with minimal impact to the peg, which can be found in the appendix below.
Assuming the full 840 swETH were to be swapped for ETH in a single transaction, current aggregators show 857.6 ETH would be returned. At the current exchange rate of 1:1.026937, that means that if the swap were to execute at par it should return 862.62708 ETH. Thus if unshETH were to liquidate the entirety of the suggested swETH target weight in a single swap, it would incur approximately .6% slippage (1-(857.6/862.62708)). Source: https://app.1inch.io/#/1/simple/swap/swETH/ETH. In item C in the appendix, you can see swETH is swappable up to ~$1.5M in a single transaction before a swap would incur in excess of .25% slippage.
Maximum Weight
Following the general guidelines of unshETH, Swell proposes a maximum weight of 7.5% for swETH – 50% above the initial target weight.
Co-Incentives for unshETH ecosystem and vdUSH Stakers
Swell Network currently has no token and will not have one for some time. However, we are launching a bootstrapping campaign dubbed the “Swell Voyage” to incentivize active and DeFi-savvy users to engage with the protocol and we also have substantial positions in the Aura ecosystem. Working closely with the unshETH team, Swell has decided to direct our vlAURA emissions to the 80/20 USH/unshETH gauge for 3 months, and to include the USH community in the “The Voyage” – this means that the USH community may stake ETH within Swell for a material boost in incentives during this bootstrapping campaign.
Swell is willing to direct BAL and AURA emissions to the 80/20 USH/unshETH gauge–which we enthusiastically voted to onboard in Aura’s snapshot–via the protocol’s vlAURA position over the next 3 months. The value of this emissions direction is on the order of $10k+ / month. Following the conclusion of the Voyage and Swell’s token generation event (TGE), Swell Network will implement token-based snapshot voting. At that time it will be up to the community whether to direct further emissions to the 80/20 USH/unshETH gauge on top of Voyage incentives. The team at Swell Labs shares the view there may well be a legitimate business case to do so, but we’ll have to coordinate with our community to assess the feasibility of extending the incentive program. It’s worth noting that at this time–due to the Voyage–a sizable portion of our community will be made up of unshETH community members.
At the conclusion of the Voyage – and presuming this proposal passes – the unshETH community will be able to claim their rewards and deposit their swETH into unshETH. Swell has dedicated a material portion of the supply to the Voyage and though there are benchmarks which must be hit in order to achieve increasing levels of distribution, the rough calculation is far in excess of unshETH’s recommended 1-2% / month of expected swETH TVL deposited within unshETH. This provides a unique opportunity to merge our two communities to our mutual benefit as well as provide the unshETH community with access to what is currently the fastest growing LST in the market. This is also a unique opportunity for the unshETH community to become a sizable voting block within Swell governance, which may help support the decision to continue the vlAURA incentives program.
Swell Network has spent a considerable amount of time establishing itself as the gold standard for new LST deployments. This can be seen clearly through our rate of growth in TVL, liquidity, unique depositors, and the rate of cross-protocol integrations. Swell’s Voyage has been designed to have a meaningful impact for the communities included and the token has been designed with two singular purposes in mind: use SWELL to drive value to swETH, use the Swell staking economic apparatus to drive value to SWELL.
Swell is very excited to be working with the unshETH ecosystem grants program. We look forward to continuing to work closely with the unshETH community, and to discuss the themes of this proposal openly here on the unshETH governance forum, and to continue to support unshETH in it’s growth trajectory regardless – wagmi.
By submitting this proposal, we hope to demonstrate the value that our liquid staking protocol can bring to the unshETH Index and the Ethereum Liquid Staking DeFi ecosystem as a whole. We look forward to working with the unshETH DAO community to advance the mission of decentralization and contribute to a more secure and resilient network.
For: Approve this UWP and empower the unshETH Core Team to undertake the necessary changes to the unshETH Protocol parameters.
Against: Do not approve this UWP. No changes made.
(Appendix to be appended shortly)