Jan 24 | 7 min read
In this post, we'll cover frequently asked questions regarding the Diversified Staked ETH Index (dsETH). Feel free to reach out to us on Discord with any outstanding questions.
My DAO/protocol is interested in purchasing dsETH for our treasury; who can I contact to learn more?
dsETH provides holders with the following benefits:
Sustainable yield - A diversified source of ETH staking yield
Easy access - dsETH can be easily purchased on a decentralized exchange (DEX) or through a process called Flash Mint. This eliminates the need for users to individually buy all of the components to mint dsETH themselves, resulting in significant gas savings.
Passive holding - dsETH allows users to buy the token and allow rewards to accrue over time without requiring additional effort or involvement.
Rebalancing - adjusting the proportions of different assets within dsETH maintains a desired balance and optimizes returns. Users do not pay any gas fees when a rebalance is performed.
Evergreen index - the exact constituents of dsETH will evolve to include other liquid staking tokens. This allows dsETH to adapt to changing market conditions and continue to offer long-term value to holders as the liquid staking market changes.
Enable broader and easier access to liquid staking while contributing to decentralization. dsETH incentivizes staking protocols to focus on their core product by rewarding decentralized node operators & lower fees with higher allocations in the index.
dsETH is not a rebasing token. The staking rewards collected and yield generated will be reflected in the increasing price of dsETH.
Purchasing and holding a single liquid staking token can lead to concentration for the network. For anyone looking to access the liquid staking market, dsETH is an opportunity to diversify your holdings, subsequently increasing the diversification and security of the network.
Compared to holding a single liquid staking token, dsETH holders receive a more stable yield and experience less price volatility.
LP positions pose more significant risks than a static, collateralized token like dsETH. These risks are primarily around peg deviations and the multiplicative pool calculations used in LP positions like Curve and Balancer.
In those situations, if one asset goes to zero, the entire pool goes to zero. In addition, as we've seen with stETH, market demand can impact pool weighting, which makes keeping allocation percentages true to the methodology extremely difficult. Even a pool split evenly at 33% would likely deviate over time based on the market dynamics.
While trading fees can boost overall yield, it is insignificant compared to overall staking yield. For most customers, the simplicity and accessibility of passively holding a collateralized token outweigh the added complexity and risk of LPing.
For a token to be considered, it must meet all of the following Token Inclusion Criteria:
Liquid staking tokens must be available on the Ethereum blockchain
Liquid staking tokens must have a minimum of $25m secondary market liquidity on Ethereum mainnet
Liquid staking tokens must have a 30d Net APR that is not 10% below the mean Net APR for the largest liquid staking tokens
Staking protocols must be audited and reviewed by security professionals to determine that security best practices have been followed
Staking protocols must also be in operation long enough for the decentralized finance community to arrive at a consensus regarding its safety
Staking protocols must be open source
Staking protocols must have a bug bounty program
No single client can account for two-thirds (2/3) of a liquid staking protocol’s client distribution
Over time, other liquid staking tokens that meet these criteria can be added to the index.
No one liquid staking token can exceed 50% of the index, and the minimum allocation for a liquid staking token is 5%.
Once redemptions of staked ETH are enabled after Shanghai, liquid staking tokens are expected to trade on secondary markets closer to their Net Asset Value (NAV) because effective arbitrage will finally be enabled. This should lead to less frequent premiums and discounts for the underlying liquid staking tokens in dsETH and more price stability for dsETH overall.
Additionally, after Shanghai, the Index Coop will explore direct integrations with liquid staking protocols to make flash minting, flash redeeming, and rebalancing more efficient for token holders. Currently, the secondary market is the primary source of liquidity for dsETH, which involves swap fees, slippage, price impact, and pricing considerations. With the right design, liquid staking protocols can eliminate most of these concerns and offer more capital efficiency, which is why the Index Coop is prioritizing this post-launch upgrade.
After Shanghai, the DAO may also decide to increase rebalancing frequency if it proves to be advantageous for dsETH token holders. This change (if any) will be subject to the standard Index Coop governance process.
All of the core contracts supporting dsETH have been audited by security professionals and made available in the Index Coop documentation. There is also an active Bug Bounty program for anyone who wishes to contribute to the security of dsETH and Index Protocol.
Token holders assume the external smart contract risks associated with liquid staking tokens and their issuing protocols.
Frax's sfrxETH has 1) not been in operation long enough for the decentralized finance community to arrive at a consensus regarding its safety and 2) needs to have adequate client diversity (99.3% Lighthouse). Frax has yet to publish enough documentation to satisfy general due diligence, but that could change!
Coinbase’s cbETH has not been included due to the noncompetitive fee of 25% of staking yield (versus 10-15% for other liquid staking protocols) and the fact that it has not been in operation long enough for the decentralized finance community to arrive at a consensus regarding its safety.
Constituents are equally weighted before adding a Node Operator Factor, which benefits staking protocols with more active node operators.
An HHI (or Herfindahl-Hirschman Index) Factor is added, which measures the concentration of stake and broader competition amongst active node operators within each protocol.
Email us at [email protected]
There are no current dsETH staking options.
No, there are no liquidity mining programs currently.
Yes, dsETH is available on zkSync via ZigZag Exchange & Argent (currently found in the Swap crypto section)
Yes, you can add liquidity via dsETH / ETH or dsETH / USDC pools on Uniswap v3.
Rebalancing will be performed semi-annually or every 6 months to minimize exposure to secondary market pricing for liquid staking tokens before staking redemptions are enabled by the Shanghai update. Rebalancing parameters may be revisited after the Shanghai update.
If you are buying > 35 dsETH, it’s best to Flash Mint via the Index Coop app. For orders smaller than 35 dsETH, Uniswap, Index Coop App, or DEX aggregator -CoW Swap.
Index Coop is a decentralized autonomous organization (DAO) that powers structured product and strategy tokens on the Ethereum blockchain. We aim to create decentralized finance (DeFi) products that are simple to use, accessible to everyone, and secure. Our token products are built on Set Protocol v2 and Index Protocol (a good-faith fork of Set Protocol v2). Both protocols are open-source, audited, and battle-tested.
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