We are submitting the below proposal asking for LEGO to support.
Proposal Summary
We propose a research project providing a comprehensive paper analyzing the risks and opportunities of stETH-based Ethereum Staking Rate Swaps for the Lido ecosystem. The Lido Staked Ether (stETH) APR represents the annualized rewards rate on ETH staked through Lido, offering a measure of staking performance that can be used as a daily floating rate benchmark. This research aims to provide valuable and actionable insights into the potential impact of ERC-6123 based stETH swaps on its ecosystem, including effects to validator strategies. Laying groundwork for a potential future ERC-6123 based infrastructure within the Lido ecosystem, and understanding the advantages and/or disadvantages of ERC-6123 in managing smart derivatives in the Ethereum staking market. For more information about ERC-6123, please see our paper “ERC-6123: Rethinking Financial Derivatives” (August 2024).
How will it aid the Lido ecosystem?
The project will aim to validate or invalidate the working hypothesis that stETH-based Ethereum Staking Rate Swaps can provide significant value to the Lido ecosystem, benefiting stakeholders staking with Lido.
For validators, the hypothesis is that it can provide crucial risk management tools, allowing them to hedge against yield volatility and secure predictable and reliable rewards. This stability could help make Lido staking more attractive to a broader range of participants.
Benefits to the Lido ecosystem include:
- Enhanced Stability: Such swaps can attract more risk-averse participants to the Lido ecosystem.
- Increased Liquidity: The ability to hedge can encourage larger stakes, improving overall liquidity.
- Market Efficiency: Swaps help in price discovery for Lido staking rewards, potentially leading to more efficient markets.
Simplified illustrative example:
Scenario: Alice operates a validator business with significant ETH staked through Lido. She receives stETH in return for her staked ETH. While Alice appreciates the potential rewards, she also needs to manage her cash flow to cover operational costs and make business plans.
Problem: The Lido Staking User APR is volatile due to various factors such as network activity, validator participation rates, and overall market conditions. This volatility makes it difficult for Alice to predict her income and plan her business expenses.
Need: Alice wants to stabilize a portion of her rewards for the next 3 months to ensure she can cover her operational costs regardless of Lido APR fluctuations.
Solution: Alice enters into a 3-month stETH-based swap with a counterparty Bob.
Benefits for Alice:
- Predictable Rewards: Alice now knows she will effectively earn a fixed (annualized) rewards rate on the notional amount, regardless of Lido APR fluctuations.
- Risk Management: She is protected against downside risk if Lido APR falls below the fixed rate.
- Operational Stability: With a known rewards stream, Alice can confidently plan her business expenses and investments.
- Retained Upside on Unswapped Portion: Alice can still benefit from rewards increases on any stETH not involved in the swap.
- Flexibility: Alice remains liquid in stETH and can participate in other DeFi activities.
Why is it important?
The successful execution of at least three publicized CESR-based Ethereum Staking Rate Swaps suggests precedent and growing demand for using those new financial instruments. In March 2024, FalconX, a digital asset prime brokerage and derivatives service provider completed the first fixed-floating swap using CESR. The two participating firms in the swap are Multicoin Capital, a thesis-driven investment firm, and Parataxis Capital, a multi-strategy investment firm. In May 2024, Nonco, a digital assets trading firm specializing in institutional and professional investors, has completed its first fixed-floating swap. Bastion Trading, a systematic trading firm, structured and priced the transaction. Twinstake announced another industry milestone with the “first swap transaction by a staking provider on the CESR".
However, as the native rate within the Lido ecosystem, the Lido Staked Ether (stETH) APR should be the de-facto rate for structuring financial products like swaps and would offer clarity and consistency for ecosystem participants. The Lido APR directly reflects the specific annualized rewards rate from ETH staked through Lido, providing a more accurate and relevant measure of rewards for Lido users compared to the broader and less tailored rate such as CESR.
In addition, the development of new derivative markets, such as dated futures, is paving the way for the creation of comprehensive reward curves in the digital asset space. These emerging markets provide critical benchmarks for pricing and risk management. Participants leveraging ERC-6123 for executing and settling stETH swaps on-chain will be well-positioned to engage with an expanded suite of financial products and to capitalize on these advancements - including outright futures, outright swaps, and swaps vs. futures spreads.
Timeline
| Deliverable | Brief Description | How to measure completion | Estimate date of completion |
|---|---|---|---|
| Research paper: stETH Swaps for the Lido Ecosystem | A comprehensive evaluation of the hypothesis that stETH-based Ethereum Staking Rate Swaps can offer significant value to users. The research will assess the potential benefits and risks associated with integrating stETH-based swaps. | 1) Paper provide evidence to validate or invalidate the working hypothesis that stETH-based Ethereum Staking Rate Swaps can provide significant value to users. 2)PDF version of the paper delivered 3)Paper reviewed by two appropriate reviewers. | 2 months from project start date |
| First Draft | 2 weeks | 25% |
|---|---|---|
| Second Draft - including contribution and contributor review | 3 weeks | 37.5% |
| Final Draft Review - official reviewers only | 2 weeks | 25% |
| Production, Publication and presentation of the findings | 1 week | 12.5% |
Team
Anaïs Ofranc, Samuel Edoumou, Stefan Haupt on behalf of QualitaX.
QualitaX, a technology company focused on DLT-based digital transformation in the financial sector.
Anaïs Ofranc brings over 15 years of experience in technology and fintech having previously founded and led Consianimis Consulting for almost 10 years. Consianimis was focused on post merger and acquisition IT integrations and its clients included Yahoo, the New Scientist, Informa, UBM, Dopay, Ascential and others. Her work in the blockchain space, started in 2020 with the Baseline Protocol and included collaborations with startups and major firms like EY, Microsoft, and Consensys. Anaïs holds MSc in Computer Science and a MSc in International Strategic Management from Oxford Brookes University. She is fluent in English and French.
Samuel Edoumou is a blockchain researcher and developer with a three-year background in smart contract design and development. He previously made significant contributions at Debond Protocol, where he was instrumental in building a decentralized derivative standard and market. Samuel authored two Ethereum Request for Comments (ERC) standards: ERC-7092, which facilitates the tokenization and management of financial bonds on EVM-based blockchains, and ERC-7586, which enables the tokenization of interest rate swaps. He pursued a PhD in Atomic Physics at Sorbonne University, and although he did not defend his dissertation, he holds a Master of Science in Physics, specializing in Magnetic Confined Fusion, from Pierre et Marie Curie University. He is fluent in English and French.
Stefan Haupt is a finance professional with over 15 years of extensive experience in the banking sector, specializing in interest rate structuring and hybrid structuring. He served as Director and Interest Rate Structuring Lead for IR Option Trading at Commerzbank AG. Stefan has also held the position of Global Head of Financial Institutions Cross Asset Structuring, where he leveraged his expertise to lead cross-asset structuring initiatives and drive open banking solutions. His previous role include Director at Dresdner Kleinwort Wasserstein, an investment bank and others.
Total costs
36,000 USD. Payable as USDC.
| Deliverable | Budget (in USD) |
|---|---|
| Research Paper + recorded and/or live meeting to discuss the findings. | 36,000 USD |
Payment schedule
- 30% in advance: USD 10,800
- 70% upon publication of the research report : USD 25,200.
Multisig Address for payment: 0x9959252E93915A713eF3570f2C973E74b95eA095