Special thanks to @CryptoMedic for the initial proposal and intent for the DAO to persue LSD tokens.
This proposal suggests that we look at accepting Liquid Staking Derivative tokens (LSD) as collateral for our protocol.
By accepting LSD tokens as collateral, borrowers will automatically see a portion of their ARTH debt getting repaid by the yield ETH 2.0 offers.
LSD tokens also have an active userbase of users looking to spend their tokens at various protocols.
Using staked ETH helps secure the Ethereum network, thus reinforcing our DAO’s commitment to the stability and future success of the ecosystem. It also contributes to the overall decentralization of the Ethereum.
There are risks involved in using these LSD tokens as collateral. Notably the biggest one being the centralization of their power.
In the past few months in the crypto space we have seen projects and infrastrcuture that have become too big to fail, actually fail. UST collapse, FTX collapse, USDC depeg and the list goes on. It means under no circumstance should we consider a LSD token as “too-big-to-fail”.
Keeping this in mind there are 3-4 candidates for collateral that we can use for ARTH. Candidates for LSD include:
Given that no LSD token is perfect, it is best we accept these tokens as collateral keeping limits on how much ARTH can get minted with each token.
Other notable risks to consider is the diversification of our collateral pool to other 3rd party tokens and projects. Each LSD token comes with it’s own risks (centralized/decentralized, oracles etc etc…) which mean that those risks get carried onto ARTH as well.
This post elaborates a bit how the LSD ecosystem is still slightly centralized and can be prone to cartels. Headache we don’t really want to deal with.
The Ethereum ecosystem is an ever evolving and ever upgrading ecosystem. Whilst it might seem interesting for the DAO to develop it’s own LSD, it’s a mammoth task to accomplish.
Developing our own LSD would require us to build the staking/unstaking infrastructure, running validator nodes, maintaining the MEV software etc… The list goes on. It’d be much more advisable to use an existing LSD token and their infrastructure.
It also becomes a lot easier to interact with their respective communities for use cases with their LSD token and hence attract more liquidity/TVL.
With this proposal, we can look to accept any of the above LSD tokens (whichever the community and the core contributors feel most apt after studying the pros and cons) as collateral for ARTH.
Once it is ready, we can pass a vote on tally that will implement changes to the ARTH token that will then go through a 30 day timelock, before it goes live.
This initiative aligns with the DAO’s commitment to technological advancement and provides us with a competitive edge in the DeFi ecosystem.
Original proposer and contributor: CryptoMedic