https://forum.reserve.org/t/rfc-collateral-basket-change-proposal-adding-staked-frxeth-sfrxeth-to-the-eth-collateral-basket/685/1

Summary

This proposal recommends integrating staked frxETH (sfrxETH) into the ETH+ collateral basket to enhance the diversification of our index LST following the mandate to add value to ETH+ holders through diversification.

Abstract

Staked frxETH (sfrxETH) represents a staked version of frxETH that accrues yields from Frax Ether validators. All profits generated are passed to sfrxETH holders, making it an attractive option for staking. This proposal suggests allocating 33.3% of the ETH+ collateral to sfrxETH, evenly distributing staking diversification across Lido ETH, Rocket ETH, and Frax ETH.

Problem Statement

The ETH+ collateral basket currently comprises only two types of diversified staking collaterals, limiting the risk spread and potential yield enhancement. There is a clear opportunity to broaden this spectrum by incorporating trusted, high-performance tokens like sfrxETH, further aligning with our diversification mandate.

Rationale

Frax.Finance is a pillar within the DeFi ecosystem. All their products are audited and have stood the test of time against exploit risk. The current APY for sfrxETH stands at 4.81%, which is higher than ETH+'s existing components (rETH at 2.66% and Wrapped stETH at 3.10%).It seems to be a logical next step to integrate a product such as this into the ETH+ collateral basket.

Enhanced Diversification: Adding sfrxETH diversifies the sources of yield within the basket and mitigates risks associated with the concentration in fewer staking platforms.

Yield Improvement: frxETH is designed to be loosely pegged to ETH, capitalizing on Frax’s proven strategies in the synthetic asset market to potentially offer higher yields.

New ETH+ Collateral Basket

Token Allocation APY = 3.52% rETH 33% 2.66% Wrapped stETH 34% 3.10% sfrxETH 33% 4.81% Defillama

Risks

Adding another asset as collateral adds additional counterparty risk. However, frxETH has gone through rigorous smart contract audits and has existed for a long time with no exploit occurring.

It’s important to understand the staking and yield dynamics between staked frxETH (sfrxETH) and frxETH. The documentation to frxETH is linked here for the community to explore further.

Conclusion

Please provide any questions or feedback in the comments to enhance the discussion and help the DAO in making this decision.