Approve the deployment of baoETH, an ETH pegged synthetic and various other supporting changes:
- collaterals bSTBL, ETH and bETH
- new wETH <> Ballast
- bETH/ETH gauge
- baoETH/ETH gauge
Ethereum stablecoins have less obvious use cases than dollar-pegged stables because ETH already exists by default on the Ethereum network but dollars do not.
A synthetic ETH allows users to borrow ETH at a lower interest rate than would otherwise be possible while directing all of the borrow interest to veBAO holders instead of sharing it with lenders like in traditional lending markets.
ETH is scarce, and it is possible to earn a very low-risk yield by staking it. This market dynamic will make borrowing ETH expensive because lending rates will naturally track the yield available by staking. After all, lenders can stake instead. Suppose borrowing rates become much lower than the yield available from liquid staking. In that case, the market should correct as lenders withdraw to stake or more borrowers take advantage by borrowing ETH and staking it for a profit.
This will be especially true when staking withdrawals are enabled because the perceived risk of using liquid-staked Ethereum products like rETH or stETH is much lower.
baoETH will solve this because its supply is limited only by the collateral that is deposited to mint it, making it possible to borrow at rates uncorrelated to the yield available on staked ETH.
This will allow powerful use cases like perfect loans (collateral always goes up in value vs. the borrowed asset), early access to your yield, and leveraging your yield.
It is worth noting that while some of these use cases are already possible by using lending protocols like Aave, this will become less so once staking withdrawals are enabled, and existing products built on top of Aave, like Indexcoop icETH may find synthetic ETH products like baoETH will provide far greater yield for their users.
The baoETH market could lead to an exciting yield-bearing ETH derivative where ETH maxis could provide ETH/baoETH liquidity with almost no impermanent loss. At the same time, they see their loan against their collateral lowered over time.
In addition, other protocols can apply for gauges to have their tokens paired with baoETH, helping them build low-cost liquidity.
- Deploy a new, separate baoETH market with an initial 1000ETH borrow limit and a similar interest rate model to baoUSD, which has a gradual increase in rates as utilization increases, with a “kink” at 80% utilization, increasing rates sharply beyond that point.
- Deploy a new ETH <> baoETH ballast contract with a 1% swap fee
- Approve ETH, bETH and bSTBL as collateral for borrowing baoETH with 0.04 IMF factor and 10% liquidation penalty
- bETH: 90% collateral factor
- ETH: 90% collateral factor
- bSTBL: 75% collateral factor
- Approve management of the mint limit for baoETH to be at the discretion of the council of guardians, with the primary goals of maintaining the baoETH peg and maximizing returns for veBAO holders.
- Approve gauges on balancer for bETH/ETH and baoETH/ETH, which will be deployed after a minimum of 1 week so that live contracts can have a short alpha testing period.
- Periodically collect and distribute 100% of interest paid by baoETh borrowers to veBAO holders as baoETH.
- baoETH loses its peg: Many mechanisms are used to help control the baoUSD peg, such as the ballast, variable interest rates, and a fixed value of 1 ETH on Bao Markets for borrowing and repaying baoETH. Despite these steps, the market price may deviate from 1ETH if demand is too high or too low for holding baoETH.
- Smart contract exploits: Several contracts are deployed by introducing a new market. While they are all similar to the baoUSD contracts, they have not been used for an ETH-pegged synthetic before and are being deployed by different developers. To mitigate these risks, we are consulting with freshpizza, who deployed baoUSD and is a project advisor.