(Eth is Money)² = dEth

8 min readJul 16, 2021

It has become a proud tradition within DeFi for us to redo 50 years of derivatives innovation and claim it as new art. In our defence we do often come up with these ideas independently of actually having studied traditional finance. I continue that proud tradition here ;-)

Introducing perpetually levered, tokenised Ether. Meet dEth.

Shurrup and take my money!

You can mint and/or redeem dEth here.

You can trade dEth here.

You can provide liquidity for dEth here and earn $DAI as reward.

You can track the official ERC20 contract here.

tl;dr

Buy dEth if you are already familiar with smart contract risk and derivative risk but you feel “Eth is money” and you want to ride that train as hard as you can.

Why you should care about dEth

If you believe that “Eth is money”, then the benefit of hodling dEth is that you will get to make way more Ether (if the price indeed does go up) than you would have otherwise been able to make. Roughly speaking, dEth gives you 2x the exposure to the Ether price you would otherwise experience. In the short term this works in both directions; so if Ether goes up 20%, dEth will roughly go up 44%, and if Ether drops 20%, dEth will roughly go down 36%. In the longer term, as long as the trend is up, dEth would still gather more Ether, although a squaring of the price moves cannot be expected due to the dynamics of having to repay the debt.

Arranging this type of exposure on your own, directly on the blockchain in a safe, automated fashion requires a considerable amount of capital to overcome the gas price inefficiencies. dEth solves this for smaller holders and gives almost anyone access.

How it works

Unlike centrally managed perpetual contracts, dEth is built entirely with DeFi legos. At the very bottom layers it runs on the Ethereum blockchain. It uses Ether as a collateral type. On the next layer it used MakerDAO, where it supplies ETH and loans DAI, with which it buys more ETH, to target an exposure rate of roughly 2x. The targeting is done with another set of DeFi legos provided by the incredible team at DefiSaver (check them out, they the bizniz!) On the final layer we have tokenized the above to allow people to enter and exit Ether into and out of the leveraging system. This allows for far, far lower gas costs and far greater capital efficiency for those who want the maximum Ether price exposure.

Ethereum and MakerDAO

On the Maker level we have an Eth-A Maker CDP. This is a managed debt position that can have a maximum leverage of 150%, secured against Ethereum’s native token, Ether. At 150% it is however in danger of being defaulted upon so the system targets 200%. At 200% collateralization it also gives us roughly 2x exposure to the price of Ether. I say roughly because it is too costly in terms of gas to keep it at exactly 200% all the time.

DeFiSaver

After the launch of MakerDAO’s DAI system in later 2017, many holders of Ethereum realised that they could put their Ether into CDPs (Collateralised Debt Positions, also known as Vaults) and then loan DAI against the CDP and the buy yet more Ether and also put that Ether into the CDP.

If you’ve been around crypto for more than a few minutes you can probably imagine what happened to lots of these debt positions… They got liquidated! The problem is that people always underestimate market moves and then get themselves into hot water.

The team at DeFiSaver then saw an opportunity to offer automatic CDP management to MakerCDP holders. The service basically allows you to set ranges in which your CDP must remain and they then manage that for you (minus a well deserved fee and the gas costs). You can play around with their backtesting tool to see how a CDP might have performed by clicking here.

At present we use the DefiSaver system to keep the dEth contract’s price exposure to Ether at 200%. Whenever the total collateralization ratio of dEth’s CDP falls below 170% or moves above 230%, DefiSaver uses several great DeFi backend systems to efficiently either pay off the excessive debt with some of the collateral or to buy more collateral by loaning more from MakerDAO.

dEth tokenisation

The problem with running your own DeFiSaver or Maker vault is that there is a significant barrier to entry at present for either system. Maker requires all Vaults to have at least $10,000 or be closed. DeFiSaver will only set up new positions for automation of $40,000 or above. The reason for this is not to keep the little guy out, but to protect the system during highly congested time frames. Whenever Ethereum becomes congested, gas prices spike. Often the congestion itself is caused by major moves in the prices of some assets on Ethereum. It is during drops for instance that the Maker and DeFiSaver systems are the busiest. Typically Maker is busy managing liquidation of vaults, and DefiSaver is repaying debt on vaults to ensure they do not get liquidated. These are gas intensive processes and the gas alone would drain smaller players to nothing.

This is where dEth comes in. dEth essentially holds one debt position with MakerDAO, automated by DefiSaver. This allows very small players to enter and exit the system cheaply for very predictable fees and then ride the price exposure like the humpback whales.

Fees

The fees involved in the dEth contract are:

Protocol fee. This is a fixed 0.9% and is goes to rewarding $FRY hodlers by increasing their permafrost. (link)
Automation fees. Currently set to 1%. This goes directly into the CDP and is meant to compensate longer term dEth holders when dEth holders enter or exit the contract. Entering or exiting will likely move the collateralization ratio away from 200% and may incur rebalancing fees later.
Rebalancing fees. This is when DeFiSaver’s automation system pulls the CDP collateralization ratio up from 170% back to 200% or when it takes it back down from 230% to 200%. This is quite an advanced system and uses a combination of flashloans and advanced AMM routing to perform the relevant market actions. DeFiSaver charges 0.3% of the size of the rebalance amount for this. Additionally they recoup the gas fees, up to a maximum of 5%, from the collateral in the underlying dEth CDP.

Potential upside

Longer term

The biggest upside of hodling dEth is that you will essentially ride the Ether price action at twice the acceleration in either direction.

Gas efficiency

Since the dEth contract aggregates a lot of smaller positions, it consumes less gas when it rebalances as opposed to hundreds of smaller positions. This makes it a more cost effective price ride. This is in fact such a huge benefit that it could likely include thousands of participants who would not have been included otherwise.

Risks

OK, so a few notes on potential risks.

Smart contract

We have clean audits (here). However, the original “The DAO” also had audits. It’s always possible we missed something and our auditors missed something.

Progressive decentralisation

We will start the first few weeks off with a single, centrally controlled owner key. This is so that we can rapidly intervene as the project progresses and we take on more TVL.

After we’re satisfied we don’t need to hold dEth’s hand, we’re going to move its owner keys to a TimeLock contract (see an example here) and give control of the TimeLock contract itself to our team multisig. That means you’ll have 48 hours to exit dEth if you think we’re making bad calls on changing some of its parameters. Thereafter we will move ownership of the TimeLock to our DAO governance contract, making it fully decentralised.

Price

I hope it’s been clear, but by entering or exiting a position in dEth, you will be accelerating at twice the rate of the Ether price in either direction! This is why I called it “dEth” and not “Eth2xMoonGuaranteed”. You could lose money as fast as you could potentially make it with dEth. You have to have high conviction of the value of Ether and the soundness of dEth.

Default

Because the only triggers for rebalancing are based on the collateralization ratio of the underlying CDP, it means that the contract will always be “buying high” and “selling low”. This works well in bull markets, but in bear markets is means that an insufficient amount of interest might remain in dEth to keep the CDP open. Getting into or out of dEth is of course possible well before this point and the real losses in price would have already been realised at this point.

The simple way to mitigate this is to not hold dEth in a bear market.

Starvation

Due to how the MakerDAO and DeFiSaver systems work, it is possible for gas prices to become so onerous or interest to become so depressed that the contract will be closed due to the restrictions of either underlying system. We have done a lot of due diligence to avoid this but it is still possible.

Intervention modes

It is possible that intervention from either TeamToast or the FoundryDAO is necessary. This could be due to a smart contract bug, or due to gas inefficiencies, or due to some other slow bleed exploit, or due to the contract defaulting due to either automation failures/lack of interest.

The dEth contract essentially inherits functionality from a DSProxy contract that will, in its final form, be owned by the FoundryDAO. This allows the FoundryDAO to basically performa any rescue action on the locked capital, given that it is useful and viable to perform within a 48 hour window. The most likely outcome of any such scenario is that the underlying TVL is released, the relevant debts paid and the effective difference (minus gas and sundry costs) returned to the dEth hodlers.

Thank you for your attention, if this sounds interesting to you;