# stETH peg protection

## Summary

NounsDAO currently holds over $26M in stETH, which represents more than 50% of the treasury. Currently, the DAO is not hedged against the [risks](https://help.lido.fi/en/articles/5230603-what-are-the-risks-of-staking-with-lido) associated with stETH. The DAO can derisk these holdings by purchasing [stETH depeg protection](https://www.cozy.finance/protection-market/0x3b548fbadc2d926adb7e5a5d44d824a1c7f3614d) on Cozy v2 protocol. 

By doing so, NounsDAO will:

- Hedge against protocol risk for stETH
- Enable the DAO to execute transactions on L2, starting with Optimism

Both of these outcomes will help the DAO proliferate Nouns. The former protects the income generating portion of the treasury. The latter establishes a NounsDAO footprint on a lower fee environment chain, increasing accessibility.

As a starting point, the DAO could protect $1M worth of stETH for roughly 12 ETH. This protection would cost an estimated 1.5% APR, compared to staking yields of 4-6% APR. There’s also a one-time cost of $4k to audit the contracts required to buy the protection on Optimism.  

## Cozy Protection

Here’s how Cozy protection works:

1. Buy protection tokens from the stETH depeg market
2. If stETH depegs below 50%, the market “triggers” enabling protection token holders to claim a payout

So if something bad happens to stETH causing a 50%+ depeg, the DAO can recoup its losses based on how much protection it holds.

You can learn more [here](https://www.cozy.finance/) and in the [docs](https://www.notion.so/1272a15348dc481b9de0e29a33b81c04?pvs=21).

## NounsDAO on Optimism

To buy protection on the Cozy protocol, the DAO needs a way to execute transactions on Optimism. The DAO can use a proxy contract deployed to Optimism, “L1Proxy,” to execute transactions.

The DAO on L1 would execute transactions on L1Proxy by sending messages through [Optimism messengers](https://community.optimism.io/docs/developers/bridge/messaging/) from L1. L1Proxy has an `owner` role which would be the DAO address on L1, and has an authed function which checks [xDomainMessageSender](https://community.optimism.io/docs/developers/bridge/messaging/#accessing-msg-sender) == `owner` that can execute arbitrary transactions. 

Once deployed, the DAO would be able to fund the L1Proxy by using a bridge like Hop.

You can review the verified contracts [here]. 

## Trustlessly buying protections

Once the L1Proxy is deployed, the DAO can now execute transactions on L2 from L1. To buy protection from the Cozy protocol, the DAO can use the [tokenbuyer contract](https://github.com/nounsDAO/token-buyer) developed by the Verbs team with a custom pricefeed. The DAO would fund the tokenbuyer with ETH, specify a price (e.g. $2 per $100 of protection, or ~1.5% APR), and a third party can swap protection tokens for ETH at that price. 

Click here to review the contracts for the [token buyer](https://github.com/portaldiscovery/cozy-v2-token-buyer) and the [cross-chain proxy](https://github.com/portaldiscovery/optimism-cross-chain-proxy).

## How it works all together

- **Setup:** Deploy L1Proxy and tokenbuyer on Optimism
- ********************Proposal:******************** Set the purchase price in the tokenbuyer and bridge ETH to the tokenbuyer
- ********************Followup:******************** Transfer protection tokens from the tokenbuyer to the L1Proxy

![Untitled](https://cozyfinance.notion.site/image/https%3A%2F%2Fs3-us-west-2.amazonaws.com%2Fsecure.notion-static.com%2F368d12be-ce44-4b5b-a0e1-5c94020539f3%2FUntitled.png?id=a93f5bc8-605f-4728-8fad-fcf160832739&table=block&spaceId=2f87461d-478a-4b6b-8c56-3d60c2901f5c&width=1440&userId=&cache=v2)

## How this proliferates Nouns

Funding proposals using the treasury is the singular proliferation mechanism for Nouns. Balancing income generation with risk management is essential for the long term viability of this mechanism. Showing that the DAO can earn income on treasury assets and hedge risk strengthens the DAO’s ability to continue funding proliferation. 

Cozy can also be used to protect other LSDs like Rocketpool ETH. Managing protocol risk for other LSDs could make it easier for the DAO to diversify. 

Further, the newly established footprint on L2 opens up exciting possibilities to expand Nouns to lower cost chainspace, increasing accessibility to a more mass market audience.

Some potential use cases include:

- Funding a multisig on optimism to distribute microgrants
- Open edition mints on Zora
- Streaming payments
- On-chain prophouse

## Funding

The following can be accomplished with 13 ETH and 4000 USDC. 

- 4000 USDC for a [Veridise](https://veridise.com/) audit
- 12 ETH would be used to fund the token buyer. This will all get converted into stETH depeg protection tokens.

## Proposal ops

This proposal requires two on-chain proposals. The first to audit the two contracts. The second to fund the tokenbuyer that will acquire the Cozy protection.

1. (We are here) Transfer 4000 USDC to Veridise for the audit of the contracts
2. (Follow up) Transfer 12 ETH to the tokenbuyer, which will get converted into Cozy protection

## Conclusion

For ~15 ETH, the DAO is getting $1M+ of stETH depeg protection and an address on Optimism that the DAO can control directly through governance. Both outcomes empower the DAO to further proliferate Nouns by funding Nounish projects. 

If you have any questions about the proposal, join this [discussion telegram group](https://t.me/+rfuoI8SkzxdhYjRh).

## FAQs

**How much does protection cost?**

Protection is priced by a bonding curve reflecting supply and demand. The current price is ~$1.4 per $100 of protection and at 80% utilization, the price would be $2. 

Because the DAO will be buying through the tokenbuyer contract, it should set a price slightly above market to create a small arbitrage opportunity, incentivizing third parties to swap.

**How long will protection last?**

Protection on Cozy v2 is perpetual. It decays at a 50% per year. So protection for $1M at the start of the year will cover $500K at the end of the year. 

**What’s the APR of the protection?**

The estimated APR is ~1.5%. 

This value factors in the proceeds of selling back the protection at the end of the year and normalizes for the decay rate. In this example, the DAO could expect to recoup ~$0.9 per $100 of protection initially purchased. And the average protection amount over the course of the year is 75% (the average of 100% and 50%).

**Who will swap protection for ETH in the tokenbuyer?**

By setting a price in the tokenbuyer that is higher than the current market price on Cozy, the DAO can expect an economically rational third party to take the arbitrage opportunity.

Outcome: EXECUTED