icETH & Index Coop: Addressing Market Volatility

Over the course of the last 36 hours, there was a significant divergence between the prices of icETH and stETH compared to ETH. While there is no reward without risk, Index Coop and our partners have been working in concert to ensure the health of icETH and stETH while managing long-tail risks.

This article provides an overview of how risk is being monitored, the automated safeguards in place, and how Index Coop’s smart contracts are performing during this evolving situation.

• Background

• Lido and Index Coop take Action

• icETH Performs as Designed

• What's Next

Background

Just for a refresher, icETH provides amplified exposure to staking yield on Ethereum. This yield comes from Lido’s stETH which tokenizes the value of the initial ETH deposit + staking rewards. In the future, 1 stETH will be redeemable for 1 ETH.

The temporarily depressed price of stETH relative to ETH was caused by the withdrawal of ETH from Curve’s stETH:ETH pool. This resulted in a significant price drop for icETH because stETH is its primary constituent. Price fluctuations are not an uncommon occurrence, as other staking derivatives often trade at a discount for long periods. But the growing price difference between these assets required action from most products and protocols executing a similar leverage liquid staking strategy.  

Lido and Index Coop take Action

Index Coop and our partners have been collaborating to confront this situation head-on. On Thursday, Lido deployed an additional Curve pool to improve the liquidity around the stETH:ETH peg and help restore the appropriate price for icETH.

There have been temporary issues experienced on our Index Coop app on mainnet and Argent wallet/ZigZag on zkSync. We are in direct communication with those teams and will continue to work together to improve the icETH liquidity, transaction flow and provide assistance in a timely manner.

icETH Performs as Designed

In the midst of a volatile market, the risk automation in place with icETH has adapted as intended. The smart contracts managing the collateralized debt position in Aave are performing exactly as designed. Since launching our first Flexible Leverage Indices (FLI) over 12 months ago, an Index Coop product has never been liquidated and we’re doing everything in our power to keep it that way.

icETH accomplishes this with the same battle-tested leverage token infrastructure that mitigates liquidation risk for our FLI products. icETH’s keeper systems constantly monitor the real leverage ratio of the index and will trigger a hard rebalance if the leverage ratio moves outside the safe range of 3.0x - 3.2x. There have been several successful rebalance events over the last 36 hours in response to the stETH de-peg, effectively resetting the leverage ratio with each iteration.

In addition to the primary keeper system, there is a secondary safety mechanism in place called a ripcord. If the real leverage ratio were to exceed 3.3x and the primary keeper systems were to fail, the ripcord function could be called to aggressively recenter the index back to the target leverage ratio. Thursday’s events did not trigger the ripcord mechanism. As a safety measure during these turbulent markets, a few rebalances were triggered by the primary keeper system and successfully executed.

What’s Next

The Index Coop team will continue closely monitoring leverage ratios and stETH liquidity conditions, and reduce leverage ranges if needed. Index Coop, icETH smart contracts, and partners in the ecosystem will continue to adapt to future market challenges.

If you’re looking to buy/sell/redeem icETH, visit our Index Coop app or the Tokensets website.

Have questions,  just want a better understanding of icETH or recent market conditions? Reach out to us in our #ic-eth Discord channel.

Disclaimer: This content is for informational purposes only and should not be construed as legal, tax, investment, financial, or other advice.

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