tAsset Whitepaper v1.0
Treehouse Team
June 26, 2024

Abstract. This paper introduces tAsset, a new liquid restaking token (LRT) designed
to consolidate the fragmented on-chain interest rate market. The first iteration, tETH,
implements a leverage staking strategy by integrating Lido and Aave. Historical data
backtesting demonstrates that tETH consistently outperforms stETH while maintaining
minimal risk exposures. The primary risks identified include potential liquidation due tothe depegging of the liquid staking token (LST) and interest rate fluctuations from overutilization of the lending pool. Analysis indicates that tETH’s risk management parametersprovide substantial buffers against severe depeg events historically observed. Moreover, theprotocol’s safety mechanisms effectively mitigate interest rate risks, showcasing negligible
impact on overall strategy returns.

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1

tAsset Overview

tAssets are liquid restaking tokens (LRT) designed to unify the fragmented on-chain interest
rates market across various blockchain networks. Holders of tAssets earn real yield in excessof the network’s native rewards through interest rate arbitrage, while still being able to use
tAssets for DeFi activities. Risks associated with tAsset strategies are closely monitored toensure users can enjoy the highest real staking yield with minimal risks.
The first iteration of tAssets, tETH, addresses the interest rate fragmentation of ETH on the
Ethereum blockchain. tETH also supports the implementation of the Treehouse Actively Validated Service (AVS). By holding tETH, users extend cryptoeconomic security to the Treehouse
AVS.
This paper aims to quantitatively assess the viability of the tETH strategy and the effectivenessof the various risk management mechanisms put in place to ensure the safety of users’ assets.

2

Definitions• LST: Liquid staking tokens (LSTs) are tokenized receipts for staking assets. LSTs represent the staked tokens and can be used in DeFi applications while still earning staking
rewards.
• AVS: Actively Validated Services (AVS) are distributed applications that inherit the
security of an underlying blockchain’s security mechanisms. AVSs can take many forms,
including systems like Layer 2s, data availability layers, oracle networks, bridges, etc.
• LRT: Liquid Restaking Tokens (LRTs) are tokenized receipts for restaked assets. LRTs
represent the restaked tokens and can be used in DeFi applications while still earning
staking rewards.
• Leverage: Leverage refers to the use of borrowing to increase the potential return of
an investment. It allows users to open larger positions than their actual capital would
normally permit, effectively amplifying both gains and losses.
• Collateral: Collateral is the asset that a user must provide to secure the borrowed funds
used for leveraging. This collateral, often referred to as margin, acts as a safety buffer forthe lender, ensuring that potential losses can be covered. If the value of the collateral falls
below a certain threshold due to market movements, a margin call may occur, requiring
the user to deposit additional funds or liquidate positions to maintain the position.
• LTV: Loan-to-value (LTV) is a term used to express the ratio of a loan amount to thevalue of the collateral. It is a critical factor in determining the risk level for lenders whenproviding loans. The higher the LTV ratio, the riskier the loan is perceived to be, as it
indicates a smaller equity cushion for the lender in the event of default.

2• Depeg: Depegging refers to the loss of a fixed exchange rate between two assets. In thecontext of tETH, depegging refers to the process of disassociating the value of wrappedstaked Ethereum (wstETH) from its pegged value to Ethereum (ETH), thereby causing
unfavorable risks that may lead to the liquidation of the collateral used in the strategy.
• Wrapped Assets: A wrapped asset is a tokenized representation of an underlying asset.
This process involves “wrapping” the original asset by depositing it into a smart contract,which then issues the wrapped version of the tokens on the target destination. In thecontext of wstETH, it is designed to maintain a constant balance despite the fluctuating
nature of staking rewards. wstETH maintains a fixed balance of stETH for users while
incorporating an underlying share system to reflect staking rewards, allowing users toseamlessly participate in DeFi activities.

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Strategy mechanisms

Version 1.0 of tAsset employs a leveraged staking strategy, utilizing borrowed assets to capitalize on the discrepancy between borrowing costs in lending markets and the Ethereum staking
rate.
This section aims to quantitatively illustrate the mechanisms employed by the LST platform
and the lending market, which are then integrated into the Treehouse Protocol to optimize
real staking yields while minimizing risks.
The strategy is executed in the following sequence:• Stake the native asset into an LST platform.
• Supply the LST to a lending market to receive a receipt token representing the collateralin the lending pool.
• Borrow more of the native asset from the lending market, receiving the debt token.
• Stake the borrowed native asset back into an LST platform.
• Repeat for a given number of times based on the desired risk tolerance level until thearbitrage opportunity is fully eliminated.
For each rehypothecation step i-th, the amount (A) of LST received from the LST platformby staking the native asset (NA) is given by:
(i)

AN A

(i)

ALST =

pLST /N A

where pLST /N A is the spot price of LST/NA at the time of staking.

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(1)

(i)

The amount of suppliedLST received from the lending platform by supplying ALST is given
by:
(i)
(i)
AsuppliedLST = ALST
(2)
Using the above LST as collateral, the amount of native asset borrowed from the lending
market is given by:
pLST
(i)
(i)
AN A =· ALST · RLTV
(3)
pN A
max is the Loan-to-Value ratio defined by the strategy, and Rmax is thewhere RLTV ≤ RLTV
LT V
maximum Loan-to-Value ratio allowed by the lending platform. pN A , pLSY are the lending
market’s USD prices of native asset and the LST, respectively.

Borrowings from lending markets will often result in the receipt of a debt token, which cantake the form of either floating rate debt or fixed rate debt. These debt tokens are rebasing
tokens that are pegged 1:1 to the borrowed tokens.
(i)

(i)

AvariableDebtN A or stableDebtN A = AN A

(4)

From Eq.(1), Eq.(2), and Eq.(3), it can be seen that after each rehypothecation step, the value(i)(in the native asset) of the initial liquidity AN A is reduced by the decay rate Rd :Rd =plending
LST
lending
pliquid
LST /N A · pN A

· RLTV(5)

are the prices of the LST and the native asset on the lending platform
and plending
where plendingNA
LSTand pliquid
is
the
price
of
LST to the native asset defined by the liquid staking platform.
LST /N A

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Strategy return formula

With n rehypothecation steps, the total NA amount staked to the LST platform is given by:
AstakedN A =

n
X

(0)

(i)

AN A =

i=0

AN A · (1 − Rdn+1 )1 − Rd(6)

Total LST amount supplied to the lending market is given by:
AsuppliedLST =

n
X

(0)

(i)

ALST =i=0An
AN A · pN
LST · (1 − Rd )1 − Rd(7)

Total amount of native asset borrowed from the lending market:
AborrowedN A =

n
X

(0)

(i)

AN A =

i=1

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AN A · Rd · (1 − Rdn )1 − Rd(8)Note that from Eq.(7) & (8), the tAsset v1.0 strategy does not engage in the supplying andborrowing of the asset at the n-th step. By not supplying all the final LSTs, the strategy
ensures that it retains a certain amount of liquidity, which can be used to react to various
adverse market conditions.
As such, the total expected daily earnings (E) can be expressed as the following (in the native
asset):
E = EstakedN A + EsuppliedN A − EborrowedN A
AsuppliedLST= AstakedN A · rLST +rsupply − AborrowedN A · rborrowing
plending
LST /N A
(0)

(0)

=

(0)

A
· (1 − Rdn+1 )AN A · (1 − Rdn )A· Rd · (1 − Rdn )· rLST + N A· rsupply − N A· rborrowing
1 − Rd
1 − Rd
1 − Rd(9)where the rLST , rsupply , rborrowing represent the daily interest rates for staking with a LST,
supply and borrow on a lending market, respectively. All of these rates have been adjusted toaccount for the impact of the tAsset on their respective pools.
Therefore, the tAsset strategy’s daily percentage yield r is given by:r=(1 − Rdn+1 ) · rLST + (1 − Rdn ) · (rsupply − rborrowing Rd )1 − Rd(10)55.1Strategy backtesting
Methodology

As the first tAsset, tETH is backtested with historical data to evaluate its performance andrisk management mechanisms given the following strategy parameters:• LST Platform: Lido
• Lending Market: Aave
• Debt Token: Variable Debt
• Initial Principal: 500 ETH• LTV: 0.8• Number of rehypothecation: 1• Backtest duration: 1 year. Specifically, from June 9, 2023, to June 9, 2024
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Using the strategy mechanisms discussed above, the Ethereum Mainnet was forked at block
17436912 to deploy 500 ETH to the tETH v1.0 strategy. As a result, we obtained a portfolio
consisting of three tokens:• wstETH: 354.2838966653234 (wrapped Lido Staked ETH)
• awstETH: 443.39964821544254 (Aave’s aToken representing that amount of wstETH in
the portfolio that is supplied and used as collateral)• variableDebtWethEth: 399.50854504645565 (Aave’s variable debt token on the portfolio’s
ETH borrowings)
To simulate the returns of the strategy, we calculated the returns of each assets using theinterest rate model of Aave and Lido.
For Lido, the balance of wstETH remains unchanged, but the price of wstETH/ETH changes
at each “TokenRebased” event. Therefore, we used web3 calls to the Lido contract to retrieve
every rebase event and calculate the updated spot price of wstETH/ETH. The details of thiscalculation are discussed in Appendix A.
On the other hand, Aave’s price of the collateral token (awstETH) and the debt token (variableDebtWethEth) are pegged 1:1 to their underlying assets. Therefore, the returns fromlending and borrowing come from the growth of the respective token balances. To calculate
the returns of the Aave tokens, we gather all the ”ReserveDataUpdated” events for the above
tokens. The details of this calculation are discussed in Appendix B.
Then, the timestamp of Lido’s rebase event was utilized daily to perform the return calculation.
The daily strategy PnL (in ETH) for date t is calculated as follows:

PnL = BwstET H · (pt − pt-1 ) + (pt · Bcoll, t − pt-1 · Bcoll, t-1 ) − (Bdebt, t − Bdebt, t-1 )(11)

where pt is the spot price of wstETH/ETH at time t,and BwstET H , Bcoll, t , Bdebt, t are thebalance of wstETH, awstETH, variableDebtWethEth at date t respectively. Therefore, thedaily return is given by:
Rt =

P nL
pt-1 · (BwstET H + Bcoll, t-1 ) − Bdebt, t(12)Then, the APR/APY of the strategy is calculated by annualizing the daily returns:
APR =

Rt
· SecondPerYear∆tRt SecondPerYear
APY = 1 +
−1
∆t
6

(13)

(14)

where ∆t is the time difference between date t and t − 1 in seconds, and SecondPerYear is thenumber of seconds in a year.
To calculate the strategy’s cumulative return, we use Eq.(12). However, instead of using theprevious day t − 1, we use the initial date of the backtest as a reference point:
Rtcum =

5.2

BwstET H · (pt − p0 ) + (pt · Bcoll, t − p0 · Bcoll, 0 ) − (Bdebt, t − Bdebt, 0 )p0 · (BwstET H + Bcoll, 0 ) − Bdebt, 0(15)

Result and discussion

In Fig.1, the annualized daily return (APR) of the tETH strategy (black line) is presented
over the past 12 months and compared with the Lido staking APR (dashed blue line). The
figure illustrates that the tETH v1.0 strategy consistently outperforms Lido’s, despite the highborrowing rate from June 2023 to November 2023. From November 2023 onwards, however,the borrowing rate decreased, leading to an even more significant outperformance of the tETH
strategy over Lido’s.

Figure 1: Backtested daily return of the tETH strategy over 12 months.
The same trend is observed in the cumulative return of the tETH strategy (black line) against
Lido staking (dashed blue line) (Fig. 2). Over the course of the 1-year backtesting period, thetETH strategy has outperformed Lido staking by approximately 0.6%.
In Fig. 3, a breakdown of the tETH strategy’s daily returns is provided against the Lido staking
rate. The black line represents the difference between the tETH strategy and Lido staking APR.
Specifically, Lido staking rate, Aave Supply APR, and Aave Borrow APR are represented by
the blue, red, and green lines, respectively. The vertical grey bars indicate periods where the7Figure 2: Backtested cumulative return of the tETH strategy over 12 months.
Lido staking APR is higher than the strategy’s APR due to high borrowing costs from overutilization of Aave’s lending pool. Interestingly, not all days with high borrowing rates result in
lower returns for the strategy as compared to the underlying LST. Although the LST supply
rate is generally negligible, historical instances show occasional spikes in the supply APR,
resulting in extra income for the strategy. Further investigation reveals that the yield spikefrom the supply rate is not solely from regular borrowings but also from flash loan activities
by arbitrageurs.

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6.1

Risk management
Depeg risks

The safe LTV ratio is defined as the the level at which the position’s health factor stays ator above 1.0, even during the worst possible LST-ETH deppegging event based off historical
data. With the tETH strategy, the health factor is defined as:
HF =Asupply
wstET H · pwstET H · Lt

(16)

Aborrowing· pET HET H

where pwstET H , pET H are Aave’s USD price of the tokens. Lt is the liquidation threshold.
As such, Eq. (16) can be re-written as:
HF =Asupply
wstET H · pwstET H/ET H · Lt
Aborrowing
ET H
8

=

Lt
LT V

(17)

Figure 3: Breakdown of the tETH daily return against Lido staking, Aave supplying andborrowing .
H
where pwstET H/ET H = pwstETpET H is the Aave’s oracle spot price of wstETH/ETH.

In the event of an LST-ETH depeg, where the price of wstETH drops by a factor of x.
′
PwstET
H/ET H = pwstET H/ET H · (1 − x)(18)

From the Eq. (17) and definition of the safe LTV, it can be derived that:
1.0 ≤Lt · (1 − x)
⇒ LT Vsafe ≥ Lt · (1 − x)
LT Vsafe(19)

Using Eq. (19), the proposed tETH strategy is safe from a price drop of 15.79% with Aave’s
eMode enabled (Lt = 0.95), and the safe LTV set to 0.8. This level of LTV provides a sufficientbuffer to respond to adverse market conditions and avoid potential losses from liquidations.
For reference, Lido’s historical data shows that the price of wstETH only dropped by approximately 6.7% during the worst depegging event in June 2022. However, this event occurred
before Beacon Chain withdrawals were enabled through “The Shanghai Upgrade”. With “TheShanghai Upgrade”, arbitrageurs are able to profit by buying the depeg to unwrap to stETH
and redeem stETH 1:1 with ETH, which creates even more resistance for any attackers attempting to create a depeg in the LST.

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6.2

Interest rate risks by over-utilization of Aave lending pool

Utilization ratio is defined as the ratio between the amount being borrowed and supplied toa spcific pool within a lending protocol. Due to the interest rate model employed by mostlending protocol, borrowing costs for all borrowers within a given pool surge significantly as
the pool cross a certain utilization threshold.
In Aave, the interest rate model is defined as the following:
if U ⩽ Uoptimal : Rt = R0 +Ut

· Rslope1(20)

Ut − Uoptimal· Rslope2
1 − Uoptimal(21)

Uoptimalif U > Uoptimal : Rt = R0 + Rslope1 +where Rt is the interest rate, U is the utilization ratio, Uoptimal is the utilization ratio thresholdthat defines the inflection point between slope 1 and slope 2.
During the backtesting period, the borrowing rate exceeded the LST yield on eight occasions.
Of these instances, seven lasted only one day due to the natural market forces of supply anddemand reducing the utilization rate. Specifically, when interest rates increase because of overutilization of the pool, external users are incentivized to supply funds to the pool to benefit
from the high interest rates. Concurrently, existing borrowers are encouraged to repay theirdebts due to the increased costs. This dynamic restores the market to an equilibrium at the
optimal utilization rate.
The only exception was when the borrowing rate was continuously high for 2 days from 04 Aug
2024 to 05 Aug 2024, when the strategy incurred a minor setback in the yield premium on topof stETH. The tETH safety mechanism was enacted on day 3 when the strategy vault repaid
a portion of the debt to the strategy’s ”Internal Utilization Rate - Lower Bound” in order to
optimize the realized yield for the vault investors. (For information on the tETH repayment
strategy, refer to the tETH Official Doc.)
Specifically, this two-day event resulted in the strategy’s underperformance of 0.0435 basis point
when compared against stEH. However, this gap was quickly covered by the outperformancein the immediate next day, presenting an example for effective risk management practices
employed by the protocol.

10References[Aave, ] Aave. Aave Documentation. https://docs.aave.com/hub.
[Lido Finance, ] Lido Finance. Lido Documentation. https://docs.lido.fi/.
[Treehouse, ] Treehouse.
protocol.

Treehouse Documentation.

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https://docs.treehouse.finance/

AppendicesA

Lido rebase

Every day, at around 12:25 UTC, the Lido stETH contract emits a rebase event that updates
the total supply of stETH and wstETH. The rebase event includes the following information:
timeElapsed : 86400
preTotalShares : 6356881294769610780573341
preTotalEther : 7168342735897795185723748
postTotalShares : 6343229466385294913452552
postTotalEther : 7153750793235088775329935
sharesMintedAsFees : 79067463831878653867
The price of wstETH/ETH is calculated as follow:
postTotalEther
postTotalShares(22)(postShareRate − preShareRate) · SecondPerYear
timeElapsed · preShareRate

(23)

pt =

Lido APR:
APR =
where

preShareRate =preTotalEther
preTotalShares(24)

postShareRate =postTotalEther
postTotalShares

(25)

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B
B.1

Aave interest rate model
Index

For Aave, the Liquidity Index and the Borrow Index are metrics to track the accumulationof interests over time. The Liquidity Index measures the growth of aTokens’ supply (Aave’s
interest-bearing rebase tokens), reflecting the accrued interest since the last update and ensuring lenders receive their fair share of interests generated. Conversely, the Borrow Index
tracks the accumulation of interest on borrowed funds, indicating the growth of the debt owed
by borrowers. Together, these indices maintain a transparent system for both lenders andborrowers on the Aave platform.
At the inception of the pool, the Liquidity Index and Borrow Index are initialized to 1. Astime passes and interest accrues, the index increases to reflect the growth of both supply anddebt.
Let ItL , RtL be the Liquidity Index and the supply rate at time t respectively, and ∆t be theelapsed time since t − 1. The current liquidity index is calculated as:
L
ItL = It−1
· (1 + RtL ∆t)(26)

The Borrow index is updated in a similar fashion but with compounding interest instead:

∆T
RtB
B
B
It = It−1 · 1 +(27)
SecondPerYear
B.2

Aave’s scaled balance

Upon any deposits or borrowings from the Aave protocol, users receive aToken (in variableDebtToken or stableDebtToken), representing their share of the pool’s liquidity, for the same amountof the deposited/borrowed tokens. Aave then uses a scaled balance system to calculate theinterest accrued on these tokens. The scaled balance is the amount of the user’s principal
divided by the current liquidity or borrow index.
When the index has grown to a new value, the user balance is updated to reflect the accrued
interest:
User Balance = Scaled Balance · Current Index(28)
For example, at time t0 , a user will receive 100 aWETH if he deposits 100 ETH into the Aave.
Assuming the current liquidity index is at 1.1, the scale balance of the above deposit is:
Scaled Balance =100= 90.90909090909091
1.1

Assuming the liquidity index has grown to 1.2 at time t1 , the user balance is then updated to:User Balance = 90.90909090909091 · 1.2 = 109.0909090909091
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