osETH Liquidity: osETH-ETH on Balancer

StakeWise
6 min readNov 30, 2023

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The osETH-ETH pool on Balancer is osETH’s flagship pool and will form the majority of the token’s liquidity. This pool provides a simple way for osETH holders to put their capital to work and earn extra rewards in the form of SWISE tokens. For those who are unfamiliar with the Balancer Decentralized Exchange, check out the Balancer Explained section below to give you a solid foundation of the DEX’s pricing and incentivization mechanisms. For those who want to jump straight in, follow the step-by-step guide below.

!Note! Incentives for this pool have been switched to a mix of AURA, BAL, and SWISE accrued through Aura Finance. Liquidity providers will need to stake their LP tokens on Aura to receive the rewards. If you have previously staked LP tokens on Balancer, unstake them from Balancer and skip to Step 3 in the instructions below.

Step-by-step guide to deploying liquidity on Balancer

  1. Navigate to the osETH-ETH pool page and select “Add Liquidity”.
  2. Enter the amount of assets you wish to deploy as liquidity. Note, Balancer allows you to deposit liquidity in any ratio, however, it is recommended to deposit ~50/50 WETH/osETH to avoid price impact and capital loss (see the Balancer Explained section for more information).
  3. Head to the Aura Finance dApp to stake your LP tokens.
  4. Enter the amount of liquidity tokens you wish to stake. Once you confirm both transactions (the first to approve the use of your LP tokens, the second to stake your LP tokens), you will start earning both BAL and AURA rewards, as well as SWISE. Liquidity rewards can be claimed via the Claim page.

We have also prepared a visual guide about adding liquidity — find it here: https://x.com/stakewise_io/status/1730276404338508140?s=20

Balancer Explained

Balancer is a decentralized exchange that has been live since June 2020 and has over $700M of TVL. Just like UniSwap, Balancer allows users to deploy liquidity in a permissionless fashion and for traders to trade assets via its automated market maker (AMM).

Incentives mechanism

Mechanically, receiving BAL and other tokens requires liquidity providers to lock their LP tokens. Note that at this time, LPs in the osETH-ETH pool are receiving BAL, AURA, and SWISE incentives as long as they have staked their LP tokens on Aura Finance.

Balancer adopted a similar tokenomics model for its native token, BAL, to that originally introduced by Curve, namely veTokenomics. This means that it rewards LPs with the BAL token as an incentive for providing liquidity in Balancer pools. The BAL token has a fixed emissions schedule that extends for over 25 years, where every week a set amount of tokens are issued to liquidity providers in the participating liquidity pools. The full emission schedule can be found in the Balancer docs, here. For more information on the Balancer incentives mechanism, visit the Balancer docs.

As an incentive to hold on to the farmed tokens, Balancer also offers liquidity providers to pair their BAL with ETH in a Balancer liquidity pool and lock the LP tokens (i.e. stake them in a special contract for long, defined periods of time) in order to “boost” the BAL APY of their original LP position by up to 2.5x. However, since the amounts and lengths of time required for receiving this boost are unattainable for most users, Aura Finance emerged to help them achieve the boost.

Aura is a protocol built on top of Balancer veTokenomics and has been live since June 2022. The protocol is designed to obtain control of as much veBAL (locked BAL/ETH LP tokens) as possible in order for Aura Finance’s native token, AURA, to have majority control over BAL emissions. As a result, Aura has emerged as a platform where you can obtain the 2.5x boost to BAL APY by staking your LP tokens into Aura, not Balancer. In addition to this, you become eligible to receive AURA emissions, significantly boosting your overall APY from providing liquidity on Balancer.

It is important to stress here that liquidity providers do take on extra smart contract risk when interacting with Aura and LPs must be comfortable with this risk in order to access the extra rewards. However, Aura has a track record of operating without vulnerabilities, and currently has in excess of $300M in Total Value Locked on its platform.

Pricing Formula

Balancer allows for a variety of different liquidity pool types. The osETH-ETH pool is a ‘Composable Meta-stable Pool’, best suited for assets that consistently trade at a similar price.

Meta-stable pools borrow from the Curve playbook and use stable math to price assets. Pioneered by Curve, stable math increases the trading efficiency of ‘stable’ asset pairs compared to the x*y=k pricing curve first introduced by Uniswap. See the differences in pricing curves below:

Comparison of StableSwap invariant with Uniswap (constant-product) for a liquidity pool consisting of coins X and Y which have the “ideal” price of 1.0.
Price slippage: Uniswap invariant (dashed line) vs Curve (solid line). Curve’s pricing model leads to lower slippage for stable pairs around their ‘fair value’.

(ref: Curve Stableswap whitepaper)

Balancer goes one step further, allowing the pricing curve to adjust based on the ‘true’ price of the underlying asset. osETH is a repricing token, meaning its price will slowly increase with respect to ETH. The Balancer pool’s pricing curve will consequently adjust by using the native osETH price pulled directly from StakeWise. This means that even when the osETH/ETH price is far from 1, the liquidity pool will continue to trade efficiently.

Balancer also allows single-sided deposits, however, single-sided liquidity deployment behaves very differently from that of UniSwap V3. Because all Balancer pools are full-range liquidity, the AMM automatically swaps your single-sided deposit behind the scenes to adjust your token ratio to match the pool. This means that by providing single-sided liquidity, you are simultaneously committing to sell a percentage of your tokens into the other asset alongside deploying liquidity. In short, deploy single-sided liquidity with care, and if you are not sure, always deploy tokens in the ratio suggested by the Balancer UI.

To read up further on Stable Math, visit the Balancer docs here. More information on Composable Meta-stable pools can be found here.

What to think about as an LP (Risks / Rewards)

As liquidity is only deployed full-range on Balancer, there are no extra considerations other than whether are you happy taking price exposure to both ETH and osETH, alongside the associated smart contract risks of StakeWise, Balancer, and Aura.

ETH and osETH are a ‘stable asset pair’ where osETH should slowly reprice higher with respect to ETH with little volatility (in theory). In practice, volatility should be expected and cause a shift in the ratio of tokens within your LP position. For example, should osETH decrease with respect to ETH by 10%, LPs effectively sell ETH to buy osETH as the price decreases. This effect will be directly offset should osETH return to its true price and your asset ratio return to 50/50.

It is also important to consider that osETH redemptions are currently switched off and are planned to go live in early 2024. The main implication from this is that osETH may experience a period of trading at a discount compared to its real price until redemptions are enabled. We advise LPs to take this into consideration before providing liquidity.

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