ACM and Peg Stability

Deep Liquidity and Boosted Yield

Rest Finance differs from standard liquid staking products, and other liquid restaked ETH products, through its Algorithmic Collateral Management (ACM) system. Maintaining deep liquidity is one of the primary aspects of any liquid-staked token protocol. A focus on building deep liquidity ensures that restETH is positioned to emerge as the most liquid, highly utilized liquid restaking token.

Deep liquidity allows users to bypass the restaking queue and minting fees while enabling low slippage exits and the avoidance of the usual seven-day unstaking period enforced by EigenLayer. Additionally, the greater the concentration of liquidity a protocol can maintain around the price of the native LST, the more effectively that LST can be used as collateral across DeFi.

While most liquid-staking products are purely wrappers for the underlying Beacon Chain staked ETH, Rest differs as it is partially collateralized by restaked ETH and partially by ETH deposited within a DEX liquidity pair. Let’s go through an example:

Vitalik deposits 100 ETH to the Rest deposit contract and receives 100 restETH in exchange. The deposit contract restakes 90 ETH and deposits 10 ETH to the ACM. The ACM then mints another 10 restETH and deposits them with the 10 ETH already collected from Vitalik’s deposit into a Uniswap v3 Concentrated Liquidity Position. The yield Vitalik earns is a combination of the restaking yield, and yield generated from trading fees.

At this stage, the total supply of restETH exceeds the total number of ETH, restaked or otherwise, in the system. This does not, however, indicate bad debt or insolvency in any way. The entirety of the surplus restETH is contained within the ACM’s LP position, meaning that it can be removed and burnt at any time, eliminating the debt. Let’s look at an example of the ACM reducing the supply of restETH:

Vitalik has accrued 10% yield on his restETH thus far and seeks to exit, redeeming 110 restETH for ETH. Accordingly, the withdrawal contract redeems 99 ETH restaked on EigenLayer, which is a seven-day process. It also redeems 11 ETH from the ACM’s liquidity position. In exchange, Vitalik’s 110 restETH are burnt, along with 11 restETH from the liquidity position.

In sum, the protocol has released 110 ETH but burnt 121 restETH, thus rebalancing the total supply of restETH with the number of ETH deposited in the system. As illustrated, upon withdrawal the surplus restETH is burnt, thus restoring supply parity. At any point in time if the system becomes overweighted with restETH compared to ETH, the ACM is able to burn surplus debt to restore this parity.

This ACM system is inspired by the Algorithmic Market Operations Controller (AMO) v2 system employed by Frax in the design of frxETH, which is a relatively battle-tested system. Their implementation in frxETH have been consistently profitable, and the system has remained fully solvent since inception, and has contributed to the continued growth and success of the Frax ecosystem.