Risks
Use at your own risk. Do not deploy more capital than you are willing to lose.
As with any yield-generating DeFi product, there are associated risks with holding primeETH that are important to understand. These risks can be broadly classified into the following categories:
Smart contract risk
Underlying third-party platform risk
Underlying collateral risk including slashing
Regulatory risk
Smart contract risk
The original smart contracts from Kelp have been audited by multiple, well-respected security firms. However, it is important to note that even with formal audits, it is still possible for there to be logic errors that could lead to the loss of funds. While we have taken every precaution to ensure the safety and security of our smart contracts, users are reminded to use at their own risk. Neither Prime Staked nor Origin Protocol will be held responsible for any loss of funds, regardless of who is at fault.
Third-party platform risk
Prime Staked ETH is built on top of Eigenlayer and inherits significant smart contract risk for their code as well as from each of the collateral assets that are supported. We are choosing to work with platforms that have tens or hundreds of millions of dollars worth of assets under management and have made reasonable efforts to ensure the security of their protocols. However, there are no guarantees that the underlying third-party platforms will continue to work as intended, and any failure in an underlying strategy would potentially lead to a loss of funds for primeETH holders.
Collateral risks
It is important to understand that primeETH is only as strong as the backing collateral. Any loss of value to underlying LSTs will cause a similar loss to the value to primeETH. primeETH is designed as a basket of LSTs and does not guarantee which LSTs will make up that backing nor the value of those coins.
It is important to note that each of the supported LSTs introduces non-trivial counter-party risk that may grant their issuers the power to freeze funds in their holder's wallets.
If any of the node operators that are backing the LSTs that are backing primeETH are slashed, you can expect that primeETH holders will similarly lose money. In the case of a minor slashing like we've seen to date, the result will be that primeETH holders will earn slightly less yield. In the event of a major slashing, you can expect that primeETH will drop in value proportional to the percentage of the backing LST that was impacted.
Slashing
In Ethereum's Proof-of-Stake system, validators put up ETH as collateral to participate in validating transactions and creating new blocks. This act is called "staking."
"Slashing" is when some or all of a validator's staked ETH is taken away as a penalty. It happens if a validator breaks the rules or acts carelessly. Reasons for slashing include:
Double signing: Trying to validate two different versions of the truth.
Liveness faults: Not being online and active when needed.
Safety faults: Actions that risk the network's security.
Slashing is crucial for two main reasons:
It stops dishonest behavior by making validators lose money if they break the rules.
It promotes network reliability by punishing careless actions.
In essence, slashing ensures validators have a financial reason to do their job correctly and keeps the Ethereum network secure.
Regulatory risk
On Feb. 21, 2023, a judge in the High Court of England and Wales ordered Oasis, a gateway for the DeFi lender MakerDAO, to "take all necessary steps" to retrieve assets that were stolen as part of a $320M heist last year. Unfortunately as a result, no risk assessment would be complete without mentioning the risk of antagonistic regulators trying to meddle in the affairs of the protocol.
Risk mitigation
While it's impossible to guarantee our contracts are 100% safe, we have taken every step possible to mitigate the chance of losing funds, including using battled-tested contracts, performing thorough internal audits, and soliciting feedback from respected security experts in the industry.
Actions speak louder than words
You should also know that many members of the Prime Staked team are holding a significant portion of their personal wealth in primeETH. Origin Protocol's corporate treasury is also holding millions of dollars of primeETH. The team has skin in the game and are willing to put our own money at risk.
Last updated