How RedStone helped to solve $ezETH depeg — A study of the importance of robust security with price fluctuation 🔒
Users were affected, fears were installed, and that’s because of a single reason : the momentary depeg of a price feed from the token $ezETH at around 02:45 UTC, the 24th April.
All of that because of an announcement that wasn’t well received by their community.
$ezETH is an LRT (Liquid restaking token) from Renzo Protocol.
A depeg is a phenomenon that occurs when a stablecoin, which is a cryptocurrency whose value is pegged to another currency, decreases or increases in value relative to the asset it is pegged to.
While ezETH isn’t a stablecoin, ezETH is pegged to native ETH, at a ratio of 1:1. It means that 1 ezETH should be equal to 1 ETH. The whole purpose of this token is to improve the security of external systems, such as Oracle, Rollups, RPCs, data availability, etc.
It basically allows users to restake their LSTs (liquid stacking tokens), or staked native ETH to being re-used. Check this complete guide from RedStone to understand the concept of LRTs better.
The problem remains in the fact that the ratio of ezETH went down, as low at a ratio of 0.27:1 to its underlying ETH asset, making restakers fears that the asset was in danger, while it affected several users who got liquidated on multiples platforms. People thought a cascade was bound to happen, but fortunately, layers of securities allow the $ezETH accident to be reduced from applications who were prepared. We will delve in more details about this accident, and learn the concept of price fluctuation, leverage trading, how RedStone handled it, and why securities were able to save the funds of several users with passive and active actions.
How is, exactly, price fluctuation a danger to traders ?
A price fluctuation is bound to happen with cryptocurrency, as all tokens has their price that fluctuate each day, with some more than others. More established tokens like $BTC and $ETH are less subject to volatility, as they are well renown with a huge ecosystem and investors behind them.
Because of that, those tokens have way lower chances to fall off quickly compared to others Altcoins (tokens different than Bitcoin) — which means the loss, but also the gains, will be less.
However, they are still able to lose a large part of their value in the long-term, such as previous bear market and previous cycle.
During price fluctuation, there are a lot of things that are bound to happen, such as the fear and greed index. During a time of fear, people are more willing to sell their assets quickly — while in greed, people will tend to buy more assets than they’re selling.
When people buy assets, everything is great ! If the price goes up, people will start taking about several cryptos happily that perform well, and users will be more subject to spend money towards them in particular.
But when there’s fear, there’s people willing to sell more quickly — in order to avoid their losses, or reduce the values they already lost.
Depending on which currencies, this can be devastating and provoke a heavy price fluctuation — that will be, of course, higher for altcoins, as seen previously.
And this is where some traders want to make their deeds by taking advantages from all of this : leverage trading.
Let’s discover… Leverage trading — How to multiply the value of your current assets ⚡
Leverage gives traders the ability to trade larger value contracts while putting down relatively smaller amounts upfront. This provides traders with greater efficiency for their capital and also allows them to increase their exposure without needing additional capital. Leverage can help magnify your gains from trading, but it’s also important to understand that leverage also amplifies your potential losses.
https://www.coinbase.com/fr-fr/learn/advanced-trading/leverage-trading
The people that are more at risk from price fluctuation are leverage traders. By allowing their initial funds to be higher than their current holdings, they also put themselves at higher risk the more aggressive their leverages are.
Let’s take a look at the below example, with numbers totally made up by me on a non-existing tokens, which we will call $LEV (Leverage), based on an initial funding of $300 for two users (traders), that open up a trade with a different leverage👇
A short position is basically gambling on the fact that the asset will go down — and, if so, traders will be at gain. If the price goes up, it will be the contrary — they will be at lost. Moreover, if the price reach a certain point, both of them will be at a risk of liquidation. A long position is simply the contrary of a short position.
Now, what’s the difference between both users ? Well, it’s simple.
User 1 will be less exposed to the volatility of the asset, but gain less overtime. If the asset reach $4, they’ll be liquidated, and loss their initial funds.
User 2 will be way more exposed, and the threshold for liquidation will be closer at $2.5. However, they’ll gain more than user 1 if their trade is succesful.
Now, the price fluctuation isn’t always dictated as simple as 1 and 0. Front-runners, death spiral, a rug, all of those can heavily fluctuate the price.
Imagine if $LEV price suddenly go up by 300% — Both traders mentioned above would both be liquidated in an instant ! That’s why opening up a short — or a long position is extremely dangerous on Altcoins that has several up and down compared to more established assets.
Depending on the price fluctuation, it’s not always the user's fault. Incorrect price feeds coming from an Oracle is the prime example of what protocols should avoid at all costs.
Here’s the simplest example to take, divided in two cases :
- If the user is liquidated from a price fluctuation, that’s considered as normal from a crypto volatility (which can happen quite regularly), the user is at fault. If they are liquidated, they will lose the liquidity provided
- If the user is liquidated from a price fluctuation, coming from an error from the price feed that was incorrect, even for a few minutes, we could argue that funds lost should be covered up by the protocol
All of it was simplified for you to understand that while leverage trading is indeed dangerous for your assets, securities has to be put in order to avoid the below example — which is still considered as infamous as of today.
The infamous fall of Terraform Labs “stablecoin” and its native token —UST and LUNA, a traumatic experience that still haunts people as of today
Do you know what happened when you tried to mix your “stablecoin” with a volatile asset that has almost NO securities behind it ?
A death spiral that was bound to happen.
First, it was the people who leverage aggressively, getting liquidated in an instant. People like User 2.
Then, soon after, it was people with lower leverage that got liquidated. People like User 1.
Slowly, but certainly, all traders panicked — and started selling $LUNA in order to avoid the price fluctuation. Which, since UST was correlated to it, crashed and was soon depegged from its 1:1 ratio.
Because of that, both Luna and UST price feeds went down until reaching as low as 0.
They tried to burn down a part of the treasury, by selling Bitcoin and burning several LUNA tokens, in attempt to restore UST stability. But it wasn’t enough, as the treasury was being burned while the price kept falling as low as $1, before falling off in the 0.001 and lower range…
While it was a terrifying experience that affected the crypto community as a whole, many platforms learned from this dreadful event — By integrating securities, assurance funds, and avoiding pegging A STABLECOIN TO A VOLATILE ASSET.
We can only hope that those events won’t happen again. There will always be bad actors, but learning from it — as a user, is also important for YOU so that you don’t receive the same treatment. EigenLayer has learned from it, which is a main reason of the primary existence of LSTs and LRTs : avoiding a death spiral.
What provoked ezETH depeg, and why dual asset is important in order to avoid the death spiral
Thanks to the existence of ezETH, the withdrawing from Renzo only allows withdrawing ezETH, and not its underlying ETH asset. This helped mitigate the damage from this issue. We call it dual asset, since we are technically interacting with ETH, while not putting ETH at risk. Also, while Renzo is present inside the EigenLayer ecosystem, it’s depeg hasn’t affected others LRTs.
However, while this first layer of security is important for the ETH ecosystem, we now have the second layer of people to protect, which are people holding the ezETH token from Renzo.
The depeg was issued because of an announcement about an airdrop for the $REZ token— that was not well received at all from the communities.
The airdrop allocation was deemed too low — and too hard to obtain for the community as the points necessary to be eligible for the airdrop was too high. Furthermore, the airdrop would happen two days after the listing on Binance, which would make pre-sellers on Binance benefits more than people who re-staked their ETHs on Renzo.
The initial reaction resulted in multiples people withdrawing their ezETH, provoking a fear while the price depeg April 24th, at around 02:45 UTC, for a few minutes. This provoked waves of liquidations on multiples protocols with traders that mostly relied on leverage trading.
Fortunately, an Oracle rised up to the test — Which is nonether than RedStone.
Data aggregation from RedStone — A mix of data correctness and availability
To understand the importance of data aggregation — which is a mix of data correctness and availability, I would heavily suggest you taking a read at one of my previous article covering this subject with Redstone.
All of the points mentionned during this article HAS to be taken into account when using an Oracle — Which RedStone has already thought about already. Assuring the data quality from its median method and data sources, and avoiding malicious actors profiting from data fluctuation is a huge problem Oracles has been faced with for years.
The qualities of the data provided by RedStone was well perceived during the ezETH accident, which was a good step to show the performance of RedStone during a time of needs. In which we will learn more on how RedStone is actually delivering the price feed with ezETH.
How is ezETH price feed brought by RedStone
This application from RedStone finance allows you to check in real-time the value of a price feed provided by the Oracle. Furthermore, depending on which price feeds you’re looking at, you’re able to take a look at all the data sources being used for the selected price feed, as well as the price shown by the Median method. Depending on the method of integrations the protocols that has RedStone integrated, this will play a crucial role in how the Oracle will act.
As seen from the screen above, the price fluctuation was heavily reduced on platform that relied on the price provided by RedStone : it was secured above $2960, which was way higher than others platforms that reported a price as low of $700.
While it didn’t cover the whole problem, it heavily reduced the price fluctuation that happened during this hour. They also were able to reduce people getting liquidated that relied mostly on their price feeds compared to others.
RedStone actually performed pretty well from this accident, renforcing its trust with the protocol it’s being integrated into
Will Sheehan, founder of Parsec Finance, reported that RedStone was more receptive than Chainlink, another Oracle. As seen from the gap above, the few minutes in advance from RedStone data feeds is crucial to guarantees an alert as fast as possible to protocols that relies on ezETH.
Performing on par, or even slightly faster than Chainlink is a huge step from RedStone, as they’re able to match an Oracle that has more footprints in the ecosystem.
This renforce their commitment with the recent announcement were RedStone has guaranteed 100% of the protocols who relies on LRTs price feed.
The speed in the response of this accident from RedStone was probably the main reason as of why they were able to be mentionned by Gearbox Protocol, and how they helped them secured the funds from the impact.
The collaboration between Gearbox Protocol and RedStone, assuring the securities of the users funds
Gearbox reported quickly after the accident that they were advertised by RedStone from the $ezETH depeg. This quick action allows Gearbox to prepare in advance for the liquidations that happens from leverage users, will as well freezing the trading of $ezETH price feeds.
Multiples tweets have highlighted the median method from RedStone, saving leveraged users around the mark of *5. This is huge as more than a multipliers of *5 in leverage trading is considered in the dangerous spectrum for those who have no experience in leverage trading.
Not only that, RedStone has provided a price feed that has drastically reduced the price impact from this issue. They, as well, were able to advertise Gearbox of this impact firsthand before the issue could impact too much of its users.
In RedStone defense, it’s impossible to negate 100% of a price fluctuation that happened with Renzo, since it was the data feeds provided to them that was incorrect. But it’s damn possible to reduce it as much as possible — with the help of the Median method mentionned above.
This succesful collaboration between Gearbox and RedStone highlighted the importance of mutliples layers of securities : assuring a safety funds, an Oracle that can broadcast the data fastly ( IE : RedStone !), and reducing as high as possible a price fluctuation from a mistake are prime example.
500 millions in restaked ETH secured in order to reinforce RedStone Oracle security within its node ecosystem
RedStone has an heavy comitment in the LRTs sectors. Not only they reduced the damage done from the depeg, their comitment has been proven from all of their past integrations that you can check in my latest thread covering a Q1 review of RedStone.
This is probably why EtherFI has given an heavy allocation of $500 millions in restaked ETH, improving RedStone Oracles nodes securities, the 12th of April.
This is thanks to this comitment that, RedStone and others actors in the space will improve the ecosystem — and avoid the past graveyards such as Luna.
Conclusion
After learning from previous death spiral, front-running, data aggregation, this accident was fortunately less impactful thanks to applications, protocols, and Oracles who has learnt from previous accidents. And RedStone is one of them.
Unfortunately, liquidations can still happen for people who use high leverage — but it’s a risk to take into account when you borrow a large funds.
While it’s a protocol reponsibility to passively defend its userbase funds, leverage traders exposed themselves more at risk than simple lenders and borrowers, and taking leverage traders into account is necessary for protocols and Oracles to avoid a death spiral.
Official links
RedStone
Main website : https://redstone.finance/
Twitter : https://twitter.com/redstone_defi
Documentation : https://docs.redstone.finance/
Blog : https://blog.redstone.finance/author/user/
Showroom : https://showroom.redstone.finance/
Gearbox
Main website : https://gearbox.fi/
My social medias & previous articles
Extensive Q1 review of RedStone
Discord : chachalotte
Twitter : https://twitter.com/ChachalotteF
