Lite Update: Securing the Lite vaults and stETH peg
We at the Instadapp team want to thank our community for their patience during this difficult time as we find the best solution for our community. The instability and breakdown of the UST has caused major market downturns and during the market downturn we saw the stETH price began to depeg from ETH posing increased risk to the Instadapp Lite vaults.
TL:DR
- Lido reached out to Instadapp and other participants of stETH and advised us to reduce the size of our positions due to the increased risk from stETH depegging and market illiquidity.
- The Instadapp team and investors added additional collateral to the Lite vaults (~$35m) to protect the vaults from a stETH price depeg.
- To further protect the Lite vaults; the Lite vaults were unwinded by 25,000 ETH, which resulted in a 500 ETH loss due to the price variance between stETH and ETH.
- The Instadapp team will make depositors whole by taking on the losses incurred by the deleverage. The team will pay ourselves back overtime by redirecting the fees from Instadapp back to the team until we repay ourselves the losses we covered.
- The Instadapp vaults are now significantly safer with better health ratios of 63/75% backed by stablecoin USDC collateral which will further improves stability and combats price fluctuations on stETH.Our target health ratio for the iETH vault will be 70/81% after AAVE proposal 75
- We will restore the Instadapp Lite service a few days after removing the additional collateral added to the vaults; when Lite is resumed iTokens will be fully redeemable.
- Instadapp Lite Users will experience no losses from the deleveraging of the vaults.
- Instadapp Lite vaults will have a 1% management fee starting in July.
The Lido Risk Analysis Team contacted us that they had produced some modeling that showed there were current strains on the market for stETH/ETH. The number of leverage products on stETH and the overall stETH liquidity on AAVE now surpassed the stETH/ETH available in the open market. This imbalance in stETH liquidity could cause a short term depeg through illiquidity or potentially a cascading liquidation event.
We appreciate the swift actions taken by the Lido team to reach out to teams utilizing and leveraging Staked Ethereum and recommended out of an abundance of caution, that we decrease the size of our positions due to the instability of the stETH peg until market conditions improve for stETH. For our users this was compounded by the depeg of stETH which decreased the availability of ETH in the Lite Vault.
There were many difficult decisions and scenarios we had to adjust and respond to. Firstly we understand users deposit funds with us and we at the Instadapp Team also ourselves have a lot of our own funds in the vaults, we take this responsibility extremely seriously and it was important not to make hasty decisions under pressure to react, but to work with the larger stETH community and infrastructure to find the best solution and to model different scenarios to determine the best course of action.
Due to the sensitivity of the topic it was important for us and others informed to minimize the risk outside of the public sphere until we were able to put in place better protections from an stETH depeg. The Instadapp Lite vaults are also the largest position in stETH/ETH. The Instadapp team along with Lido modeled out how best improve the stETH peg and how best for Instadapp to further deleverage the vaults. It was determined that adding additional collateral along with deleveraging would be the best option to maintain the stability of the peg and to safely deleverage. This will allow the market to liquidate other positions that were smaller and prevent Lite from causing additional pressure against the stETH peg and was the best way to minimize losses. We want to thank the Lido team for helping to manage this situation and providing liquidity to the Instadapp Lite vaults to further protect and secure our users.
The Instadapp team, Lido team, and our investors added an additional ~$35M USD to the vaults to improve the overall health factors of all the Instadapp Lite Vaults before we deleveraged the iETH vault. We want to give a very special thanks to Imran (@imrankhan) from AllianceDAO. Imran helped facilitate our introduction to Wintermute which loaned us additional liquidity to further protect the vaults.
Once all the additional collateral was added to the vaults the team executed a deleverage of 25,000 ETH, further improving the vaults health ratio at a loss of 500 ETH to the iETH vault.
Here you can find the transactions made into the Instadapp Lite Vaults:
Transactions to the iETH Vault:
https://gist.github.com/thrilok209/ea18d2f1d876d6df493a9552cde65b02
Transactions to the iUSDC Vault:
https://gist.github.com/thrilok209/c529ee2f0cd83184c724c99890aecd33
Transactions to the iDAI Vault:
https://gist.github.com/thrilok209/22ab4ed8b936d9e7a20082497f94c656
Transactions to the iWBTC Vault:
https://gist.github.com/thrilok209/67d789366b4d12b71d1c529c9999d273
Withdrawing Fees Generated from the FLA:
https://gist.github.com/thrilok209/82e4d81a1f30ff2b62ff6e9a092ba937
In Total: ~$22.7M USDC & ~6380.4 ETH & stETH was deposited into the Instadapp Lite Vaults including ~$0.6m in fees generated from the Flash Loan Aggregator.
Team executed Deleverage Tx: https://etherscan.io/tx/0x31f7bd7da1236242a97d4562f4bd0296725b3363b0abbc6fa86283e0dfd3ca9a
This deleveraged the iETH vault by around 25,000 ETH incurring a ~500 ETH loss due to the depeg when deleveraging.
Team transactions restoring Lite Service:
https://gist.github.com/thrilok209/ae81cca5c6706ce04aa6d7df67df9b99
This shows our transactions covering the losses, updating ratios and re-enabling vaults.
You can view the iETH Vault position here: https://debank.com/profile/0x94269a09c5fcbd5e88f9df13741997bc11735a9c
The Instadapp team will make depositors whole by taking on the losses incurred by the deleverage. The team will pay ourselves back overtime by redirecting all protocol fees from Instadapp Lite back to the team until we repay ourselves the losses we covered. All Instadapp Lite users will be made whole once we re-enable the Instadapp Lite vaults. Starting in July we will be adding a 1% Management fee to Instadapp Lite vaults, this fee will first go to the team to recover the funds we covered in this event and long term may be utilized to mitigate Lite risk or issued to the DAO Treasury.
The Aave protocol governance proposed some changes that will improve the stETH liquidation limit while also preventing new users from creating risky debt positions against stETH within Aave. This will allow us to enable withdrawals sooner and decrease the overall debt generated against stETH. You can follow that proposal here: https://app.aave.com/governance/proposal/75/
The Instadapp vaults are now significantly safer with better health ratios of 63/75% backed by stablecoin USDC collateral which further improve instability and price fluctuations on stETH. If the AAVE proposal passes, the vaults will be closer to 70/81% after removing investors funds. In order to expedite users ability to withdraw from the Instadapp Lite vaults, and under careful consideration of other market metrics, the Instadapp team will prioritize enabling withdrawals as soon as possible. We will prioritize withdrawals through the ‘Deleverage and Withdraw’ feature and we will no longer wait for a peg restore.
Users will be able to fully withdraw their deposit from the Instadapp Lite vaults even while stETH is depegged. Users who force a deleverage of the vaults will assume any losses incurred for doing so. This will allow users who want to stay in the Lite vaults to continue to earn staking rewards and allow others to exit if they so choose.
The current outline for withdrawals are first removing all the additional collateral added by the team and investors, the Lido team, and our loan from Wintermute. We believe this will occur this week. Once we do this, we will implement the ‘Deleverage and Withdrawal’ features in the following few days. These features have been audited and ready for production. This will make iTokens fully redeemable at any time allowing anyone to fully withdraw even if there is a stETH price depeg.
This has been an extremely challenging event on the stETH ecosystem in particular the Instadapp Lite vaults posed an outsized risk in the market. We saw amazing communication from the Lido team across the DeFi ecosystem and are extremely thankful for their support in this situation. Instadapp has agreed to work more closely with Lido and their Risk Assessment team as we continue to develop and grow the Lite product. We want to thank our users again for their patience and trust during this difficult market downturn as we worked to resolve and make the Lite products more resilient and secure.
