This proposal implements a change in our previous one where we accept LSD tokens as collateral within MahaLend and not within ARTH itself.
This keeps ARTH and its holders relatively risk-free and delegates the risk of LSD tokens to MahaLend.
This proposal suggests that we look at accepting Liquid Staking Derivative tokens (LSD) as collateral for MahaLend.
By accepting LSD tokens as collateral in MahaLend, we provide liquidity to these holders in the form of ARTH (and other stablecoins).
LSD tokens also have an active user base 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 is the centralization of their power.
In the past few months in the crypto space, we have seen projects and infrastructure 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 an 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 can be borrowed and how much debt each token can take on.
The initial debt limits can be set to 1mn$ or 10% of the ARTH circulating market cap. Whichever is higher.
Another notable risk to consider is the diversification of our collateral pool to other 3rd party tokens and projects. Each LSD token comes with its own risks (centralized/decentralized, oracles etc…), which means that those risks get carried onto MahaLend as well.
This post elaborates a bit on 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 its 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 its 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 a tally that will implement changes to the ARTH token that will then go through a 30-day timelock before it goes live.
Following feedback from the community, with special thanks to @Sebastian, who pointed out that one cannot use funds and stake them at the same time without any risk - a concern as this approach is new and not battle-tested - we have taken this into account in our deliberations.
Consequently, in addition to our initial proposal, we will also be focusing on accepting LSD tokens as collateral on MahaLand. This inclusion is aimed at managing risks while still pursuing innovation and growth within our platform.
Original proposer and contributor: CryptoMedic