Proposal: Onboard wstETH as collateral on Base deployment

Proposal: Onboard wstETH as collateral on Base deployment


We propose onboarding wstETH as collateral on Moonwell Base deployment conditional to the token being available on Base and significant liquidity being onboarded subsequently on DEXes.


We propose using the same collateral factor and interest rate model as cbETH. We will provide further recommendations in regards to supply and borrow caps once liquidity is available on Base chain.

Market parameters

Symbol Price oracle CF Borrow Cap Supply Cap
wstETH Chainlink (wstETH / ETH + ETH / USD) 0.75 0.05 0.1

Interest rate model

Parameter Base rate Multiplier Kink Jump Multiplier Reserve factor
Value 0.00 0.07 0.45 3.15 0.25
Key utilization rate Base (0%) Kink (45%) Max (100%)
Supply rate 0% 1.06% 132.30%
Borrow rate 0% 3.15% 176.40%

As part of our role of managing Base liquidity incentives, we will also allocate supply-side rewards once wstETH market is deployed to help bootstrap initial liquidity. We will provide further details regarding rewards once more liquidity is available for wstETH on Base.


LST Market Overview

Lido is by far the most dominant LST solution available. It is the most liquid option available on-chain.

Protocol stETH
Rocket Pool
Binance staked ETH frxETH
TVL 8.86m ($15.95b) 997k ($1.8b) 767k ($1.38b) 284k ($513m) 192k ($364m)
Market share 77.3% 8.69% 6.67% 2.48% 1.67%
Operators Centralized
36 entities approved by Lido
2204 deposit addresses
Ran by Binance
Ran by Frax
Ran by Coinbase
LSD Over-collateralization Slashing insurance fund
6.2k stETH ($11.2M)
Staked RPL
No Slashing insurance fund No
Fee 10% 5-20% 10% 10% 25%
Correlation penalty risk profile High Low High Medium High
Quadratic leaking risk profile High Low High Medium High

Past Performance

Protocol stETH
Rocket Pool
Binance staked ETH frxETH
Launch date Dec 18 2020
(1049d ago)
Nov 9 2021
(723d ago)
Apr 27 2023
(189d ago)
Oct 7 2022
(391d ago)
May 3 2021
(913d ago)
Slashing Events 31
(2.99 / 100 days)
(1.11 / 100 days)
0 0 0
Consensus Rewards Earned 394k ETH 25k ETH 119k ETH 4.4k ETH 221k ETH
Total Penalties Accrued -1.3k ETH -300 ETH 502 ETH -7 ETH -858 ETH
Percent Loss from Penalties 0.37% 1.20% 0.42% 0.16% 0.39%

Source: | Date: 3/11/2023

LST-specific Risk

Validators are rewarded for contributing to the chain’s security, and penalized for failing to contribute. Upgrading Ethereum | 2.8.5 Penalties

Correlation penalty risk

Correlation penalty is incurred when a validator is slashed. The penalty amount is determined based on the amount of validators that also get slashed at the same moment.

Lido is subject to incurring increased correlation penalty due to the relatively large number of validators managed by individual operators.

Quadratic leaking risk profile

Quadratic leak is a penalty that is imposed upon validators for being offline and missing a slot. The more often a validator is offline, the steeper the penalty rate is.

Quadratic leak is also a risk factor for stETH due to the lack of diversity in operators.

Insurance fund

In July 2021, the Lido DAO voted to take on self-insurance by allocating a proportion of funds - in the form of protocol fees - for insurance purposes.

The insurance fund could be used, as an example, to compensate stakers in the case of slashings (or other risk scenarios outlined here).

Volatility Risk

Volatility can be described as a measure of the amplitude of price changes for an asset over time. Overcollateralized lending protocols like Moonwell are subject to volatility risks. As collateral and debt asset prices change, the collateralization of accounts changes.

In order to assess robustness of the suggested parameters, we’ll assume a worst case scenario where wstETH asset price drops down as much as the worst 1-hour price drawdown observed for ETH during the last year.

Max drawdown over the last year for ETH is 9.01%.

Liquidity Risk

wstETH is not yet launched on Base. We will provide more information once data is available.

Oracle Risk

Oracle risk is the probability of the oracle price feed not accurately tracking the actual market price.

Given the lack of historical data for the proposed oracle price feed on Base (Chainlink wstETH/ETH + ETH/USD), we’ll assume that skew between oracle and spot price should be similar to wstETH on Optimism given an equivalent oracle setup.

During the last 90d, for a similar oracle price feed on Optimism, 99.7% of observed oracle price skew data points are within [-0.689%, 0.817%].

As a conservative measure, we’ll assume 1% skew in a worst case scenario for wstETH on Base.

Robustness Test

In order to validate the robustness of the liquidation incentive, collateral factor and caps our methodology relies on backtesting the profitability of simulated liquidations given historical market conditions. More information about our methodology is available on Warden’s documentation.

Assuming the following historical market conditions:

Liquidation cost % of seized collateral
Max drawdown 60min 9.05%
Slippage TBD depending on liquidity and caps
Protocol reserve fee 3%
Oracle / spot price skew 1%
Gas fees 0%

The buffers necessary for the liquidation to execute profitably can then be determined:

  • Collateral factor needs to provide sufficient buffer to cover for
    • 9.05% drawdown
    • 10% liquidation incentive.
  • Liquidation incentive need to provide sufficient buffer to cover for
    • 3% reserve fee
    • 1% oracle / spot price skew
    • TBD slippage

Given above assumptions and liquidation incentive for Moonwell Base deployment set to 10%:

  • Collateral factor must be less than 0.81
  • Liquidation incentive offers tolerance for up to 6% slippage cost in a worst case scenario.
  • Borrow and supply caps must be set low enough to prevent users from holding collateral or debt positions that increase the risk for the protocol of accumulating bad debt (>6% slippage when liquidated).

The suggested collateral factor (0.75) and current liquidation incentive (10%) pass the above robustness test. We will follow up with borrow and supply caps once we have sufficient data to provide recommendations.

Interest Rate Model

The suggested interest rate model aims to

  • Facilitate borrowing wstETH considering additional borrowing cost due to staking yield (~3.8%)
  • Attract more suppliers when liquidity risk is high. Higher borrow rates above the kink incentivize borrowers to repay their loans and can attract new lenders in order to maximize liquidity at all times.



Gauntlet’s stETH Risk Recommendation

Gauntlet has conducted a market risk analysis for wstETH initial asset listing

Risk Parameter Recommendations

Parameters Values
CF 0.75
Supply Cap 0.1
Borrow Cap 0 .1
Protocol Seize Share 0.3

IR Recommendations

IR Parameters Recommended
Base 0
Kink 0.45
Multiplier 0.07
Jump Multiplier 3.15
Reserve Factor 0.25

We recommend to utilize the cbETH IR curve parameters for wstETH.

Supporting Data

IR Parameter Specifications

wstETH IR Curves

Utilization Borrow APR Supply APR
0% 0.00% 0.00%
45% 3.15% 1.06%
100% 176.40% 132.30%

Lido’s 30-day stETH annual percentage yield (APY) has consistently averaged 3.65%. The staking yield APY exceeds the kink rate, but the Jump Multiplier’s gradient will sustain pressure to keep utilization at the kink.

Risk Parameter Specifications

Token Liquidity and Market Stats

Metrics wstETH
TVL $16.87B
Trading Volume $81M
2% Depth (DEX/CEX) $2.5M
Unique Depositors 196k
30D Volatility 0.2721
120D Volatility 0.2412

wstETH DEX liquidity and on-chain circulating supply (<1 wstETH) is in flux with wstETH in process to be added to the BASE bridge.

Lido TVL

Lido’s stETH is the largest LST within the ecosystem with a TVL of $16.8B.

Collateral Factor

To ensure a secure listing of wstETH, Gauntlet recommends setting the collateral factor at 75%. Our recommendation is grounded in an assessment of stETH’s volatility and maximum drawdown, as well as a comparison to the collateral factor used for a similar staking asset, cbETH, which aligns with this suggested value.

wstETH Price Hourly Price Change

30D Volatility

stETH/ETH Price

Since to the ETH Merge 2.0, there has not been any large depegging of stETH from ETH. The primary mechanism that ties an LST to its base asset is its creation/redemption mechanism. Any abnormal dislocation between market price and redemption price will be arbitraged away if there is confidence in the redemption mechanism.

In typical circumstances, the process of redeeming stETH may span anywhere from 1 to 5 days. This delay underscores the critical role of on-chain decentralized exchange (DEX) liquidity in maintaining healthy liquidation of wstETH collateral.

Supply and Borrow Caps

Borrow and supply caps are the primary parameter recommendations we can make to mitigate protocol risk when listing new assets. Gauntlet recommends setting the borrow and supply caps strategically at 0 until wstETH is added to the BASE bridge and on-chain circulating supply begins to ramp up.

Asset Cap Recommendation
Supply Cap 0.1
Borrow Cap 0.1

Utilizing the Supply and Borrow Cap Guardian, Moonwell gains the ability to swiftly adjust the caps to capture the stETH market. This contrasts with the previous method of setting the CF to 0 and subsequently making adjustments after the listing, which would have be delayed via the governance process.


  • If the community opts to initiate a lending pool with collateral factors greater than 0, Gauntlet strongly advises the protocol to establish reserves within the pools as a precautionary measure against a Hundred Finance attack.

Gauntlet has adjusted our supply and borrow caps recommendations, increasing them from 0 to 0.1. This adjustment will provide a limited supply and borrow capacity, facilitating the governance proposal’s ability to mint a minimal amount as a preventive measure against a Hundred Finance attack.

Asset Cap Recommendation
Supply Cap 0.1
Borrow Cap 0.1
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Proposal to onboard wstETH as collateral on Moonwell Base deployment (MIP-B08) has been sent on-chain for voting.

We also have executed a set of on-chain simulations to ensure the proposal is safe to apply for the protocol and users.

Summary of simulation execution results:

MIP-B08 was successfully executed on a Hardhat fork of Base at block #6295939 (Nov-07-2023 06:20:25 PM +UTC)

  • :white_check_mark: No regression detected on already existing markets (USDC, USDbC, DAI, ETH, cbETH)

  • :white_check_mark: No difference in liquidity for all existing accounts

  • :white_check_mark: wstETH market is correctly initialized

    • :white_check_mark: Decimals for all parameters are correct

    • :white_check_mark: All borrow-side reward rates are greater than 0

    • :white_check_mark: Hundred Finance exploit is correct mitigated (market total supply is greater than 0)

    • :white_check_mark: Parameters are same as specified in proposal

  • :white_check_mark: The proposal passes sanity check tests

Complete report is available on Warden Finance’s documentation.

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