Risk Management
Some risks associated with $brktETH and the underlying treasury
Risks
$brktETH treasury is backed by a blended composite of LSTs/LRTs selected based on the above criteria. Below is an explanation of various circumstances that could arise and how Bracket would address the issue should it transpire:
Temporary Collateral Depeg
A depeg event is when the market price in public DEX markets is trading below the LST/LRT’s protocol's conversion price to ETH that the protocol offers on redemptions. Bracket ignores the market price and only uses the LST/LRT protocol's conversion factor for it's own valuating and when processing withdrawals. Therefore we are somewhat insulated from market price depegging. To further reduce potential depegging arbitrage opportunities, $brtkETH will have a withdrawal queue of 5 days, based on the conversion factor at the time the withdrawal was requested. Further, we reserve the right to add a withdrawal fee at a later time.
Collateral Impairment & Slashing
While Bracket does not stake ETH directly, $brktETH can still be affected by slashing events for assets within its treasury.
Slashing Slashing refers to the penalty enforced when validators in Proof-of-Stake (PoS) networks act maliciously, negligently, but usually simply not rapidly enough, which leads to a portion of the validator's staked tokens being confiscated. Assets that experience non-trivial slashing event will be revaluated for participation in the composite.
Compound Slashing Compound Slashing refers to the compound slashing risks of LRTs, because LRTs are already subject to Ethereum’s slashing conditions. However, when LRTs are restaked on EigenLayer, they become susceptible to the slashing conditions of both Ethereum and EigenLayer AVSs. Assets that experience significant or frequent slashing events will be reevaluated for participation in the treasury. In the case some collateral within the treasury becomes impaired for any reason (slashing penalties or other), that drop in permanent value could be reflected in the asset’s conversion factor from the protocol. In this case, the value of $brktETH will decrease by the corresponding percentage weight of that asset within the treasury.
If a slashing event should occur, it will be reflected in the price of $brktETH since it is an aggregate of the underlying collateral. If a slashing event is more than 0.01% of the asset's value, Bracket will investigate the event to determine if the event is due to a systemic issue or a one-time issue. If Bracket feels the event is adequately addressed, no further action needs to be taken. If Bracket does not feel it’s adequately addressed, then the protocol will give the asset a warning. If the protocol is unable to provide a plan to remedy within a reasonable period, then Bracket reserves the ability to remove the asset from the pool. To do so, Bracket may redeem the staked asset directly from the protocol and then deposit that ETH into a more suitable staked asset at a different protocol.
Cross-Network and Validator Dependencies
The dependency on multiple smart contracts across different networks increases the risk of failure if any one contract is compromised. There is also a risk that validators act negligently or experience a hack, in which case the underlying ETH value may be compromised. If a composite asset’s contract is compromised, Bracket may use emergency measures to secure the treasury and reduce exposure to the compromised asset.
Contract Risk
For any smart contract, there are general risks that users should understand.
Bugs and Exploits: bugs or vulnerabilities can be exploited by malicious actors. In liquid staking, this can result in loss of staked assets or derivative tokens.
Complexity: Liquid staking protocols often involve intricate logic to manage staking, liquidity, and rewards. The complexity increases the likelihood of undetected bugs.
Malicious code: While rare among mainstream assets like stETH, it is possible that malicious actors have access to the codebase and manipulate the asset, leading to possible loss of value
Governance
DAO Votes: Some assets have Decentralized Autonomous Organizations (DAOs) controlling some governance components of the asset or protocol. These may include votes on fees, treasury, utility, or other proposals. These votes could impact holders of the tokens as well as the potential value of the tokens.
For example, stETH token is the upgradable contract behind AppProxyUpgradeable proxy at https://etherscan.io/address/0xae7ab96520de3a18e5e111b5eaab095312d7fe84 and can be changed or stopped by a successful DAO vote. In the above instance, operations changing stETH balances can be performed on the stopped contract. Read more here.
The Protocol DAO has the power to change settings on the protocol. Setting changes are proposed & voted on by members.
In the case of Rocket Pool, a Node DAO comprised of Rocket Pool node operators can vote on proposals using the RPL (governance token) stake of the node.
Conversion Factor or Oracle Risk
On-chain pricing relies on oracle systems to report the proper network prices. Because we use the protocol's conversion price, $brktETH is not usually not overly affected by market prices due to oracle risks. $brktETH does rely heavily on the protocols to provide us with the LST/LRT’s ETH conversion factor. This is particularly relevant during redemptions as protocols need to know what amount of ETH to provide for the staked asset, and during deposits to know how many $brktETH to allocate for a given amount of collateral deposited. If there is a disruption, dishonesty, or other issue, $brktETH deposits/redemptions could be miss-calculated and more underlying treasury assets could be given to the user, or more $brktETH will be allocated than should have been due. Unlike market prices that can vary wildly, a staked asset’s conversion rates should stay extremely stable. It should continually go up at approximately the rate of block rewards. For example, 3%. Any huge jump is probably a sign of manipulation. Similarly, a drop in the assets conversion rate can only happen if there is a slashing or other negative event. Historically, slashing events have been minimal. To mitigate this risk, $BrktETH will have logic to watch for large/sudden changes in conversion rates. If a large/sudden change is detected, deposits and withdrawals of that asset will be temporarily halted.
Other Liquidity Risk
During bankruns or other massive deleveraging events, the value of liquid staked assets may trade lower than the protocol's internal conversion factor leading to arbitrage and lack of liquidity as described in the depeg section. This is a market risk that was observed during the Celsius Collapse as holders rushed to swap out of stETH before withdrawals could be processed at the protocol (Lido) These types of liquidity risks can lead to a number of problems for assets locked on centralized exchanges, where liquidations cannot occur naturally on-chain.
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