Overview
This proposal seeks DAO approval to integrate the Compound V3 WETH market on Ethereum as an additional lending and borrowing venue within the tETH yield strategy.
The integration will follow tETH’s existing Market Efficiency Yield (MEY) strategy:
- Supply wstETH as collateral
- Borrow WETH when borrowing rates are favorable relative to the underlying staking yield
- Convert borrowed WETH into wstETH to increase yield-generating LST exposure
The objective is to improve yield efficiency and capital utilization of tETH by expanding access to lending liquidity, while preserving existing leverage structures, safety parameters, and risk controls.
Background
tETH, like other tAssets, enhances native Ethereum Proof-of-Stake (PoS) yield by combining staking rewards with interest rate arbitrage across major lending protocols.
1. Base Yield
tETH is backed by liquid staking tokens (LSTs) that generate Proof-of-Stake (PoS) rewards. The underlying LST is currently wstETH from Lido.
2. MEY Yield Enhancement
tETH generates additional yield through Market Efficiency Yield (MEY) by deploying capital across lending markets when prevailing rates present suitable opportunities.
Under the current strategy, wstETH may be supplied as collateral to borrow WETH at rates below its underlying staking yield. Borrowed WETH is then converted into additional wstETH exposure, generating incremental staking yield while contributing to greater efficiency across fragmented lending rates.
3. Additional Rewards
Beyond base staking yield and MEY, tETH holders may receive additional ecosystem incentives where applicable. These may include benefits from points and rewards programs across integrated protocols. These benefits accrue to tETH holders.
Current Strategy Venues
The tETH MEY strategy currently operates across four lending venues:
- Aave Core
- Aave Prime
- Gearbox
- Spark
Capital allocation across these venues is managed dynamically based on prevailing borrow rates, utilization conditions, and available capacity.
Motivation
As tETH’s TVL grows, the protocol’s ability to efficiently deploy capital across MEY strategies depends on access to sufficient lending liquidity at competitive borrow rates. Expanding to additional venues improves capital efficiency and reduces single-venue concentration risk.
Compound V3 structures each market around a single borrowable base asset with multiple supported collateral assets. The Compound V3 WETH market (cWETHv3) accepts wstETH as collateral for WETH borrowing, making it compatible with tETH’s existing MEY strategy.
Integrating Compound V3 is expected to:
- Expand lending liquidity access by introducing an additional WETH borrowing venue
- Improve capital deployment by allowing the strategy to allocate to Compound V3 when market conditions are favorable relative to existing venues
- Diversify lending venue exposure across a broader set of lending protocols, thereby reducing single-venue concentration risk
- Support rate convergence across a broader set of Ethereum lending markets
Specification
If approved, the protocol will:
- Integrate the Compound V3 WETH market (cWETHv3) as an active MEY venue
(Market address: 0xA17581A9E3356d9A858b789D68B4d866e593aE94) through:- Supplying wstETH as collateral
- Borrowing WETH against it at prevailing market rates
- Converting borrowed WETH back into wstETH to maintain LST exposure
- Allocate capital dynamically alongside existing lending venues, subject to prevailing market conditions and existing strategy risk parameters
The DAO retains authority to revise the integration or associated parameters through future governance proposals.
Risk Considerations
The integration introduces additional exposure to:
- Compound V3 smart contract risk
- Oracle risk associated with the Compound V3 WETH market
- Variable borrowing rate risk
- Liquidity and utilization conditions within the Compound V3 WETH market
Mitigations
Risk will be managed through:
- Existing collateral and leverage limits applied across the tETH strategy
- Dynamic capital allocation based on prevailing rates, utilization, liquidity, and risk conditions
- Ability to reduce or exit exposure if market conditions deteriorate
- Ongoing monitoring of borrow rates, utilization, liquidity, and position health
- DAO authority to revise or discontinue the integration through governance
Implementation Plan
If approved, the DAO assigns Treehouse Protocol to:
- Finalize integration parameters for the Compound V3 WETH market, including collateral ratios, leverage limits, and initial allocation ranges
- Update strategy execution logic to incorporate Compound V3 as an active MEY venue
- Update the Proof of Reserves dashboard to reflect positions held on Compound V3
- Monitor yield performance, borrow rate dynamics, and position risk metrics across all active venues on an ongoing basis
No structural redesign of the tETH strategy is required.
Next Steps
- Gather community feedback on the Governance Forum
- Escalate the proposal to Snapshot for formal voting
- Implement the Compound V3 integration upon approval