Safety Mechanisms

Protocol-Owned Peg Protection (PPP)

The tETH:wstETH exchange rate on the Treehouse dApp aims to accurately reflect the intrinsic value of tETH assets compared to wstETH. Many protocols currently allow users to redeem their LST or LRT for underlying assets directly but impose a withdrawal period. This becomes problematic during periods of heightened volatility when protocols rely solely on market forces to determine the price of their LST or LRT, even if there are enough underlying assets available.

Notable de-pegging incidents have occurred in the past, such as the June 2022 Terra-Luna incident, where the value of stETH dropped by -7% relative to ETH. Another incident involving Renzo’s ezETH occurred in 2024, where forced sellers from leveraged liquidations caused the value of its LRT, ezETH, to plummet by -80% relative to ETH, despite sufficient underlying assets being available.

These de-pegging events are often triggered by uncertainty and liquidity events, forcing market participants to speculate on the true value of these assets. To address this, Treehouse has developed the Protocol-Owned Peg Protection (PPP) mechanism, designed to safeguard tETH holders from such occurrences.

Exclusive Role in Redeeming tETH’s Underlying Assets

With the Protocol-Owned Peg Protection (PPP) mechanism, Treehouse assumes the exclusive responsibility for redeeming tETH for its underlying assets.

In case of a tETH:wstETH de-peg on the tETH/wstETH Curve Liquidity Pool, where the intrinsic value of tETH exceeds its market price, Treehouse will intervene by purchasing tETH from the open market using the Treehouse Insurance Fund for immediate redemption. This mechanism offers several benefits to tETH holders:

• Unbiased Intervention: Treehouse can perform this role impartially, particularly during periods of heightened market volatility. By acquiring tETH on the open market, Treehouse demonstrates its confidence in the value of the underlying assets.

• Redistribution of Yield: In de-peg events, the yield that would typically be captured by market participants engaging in arbitrage now goes to benefit existing tETH holders, the protocol, and to enhance liquidity (see Revenue Distribution below).

Revenue Distribution The profits generated from Protocol-Owned Peg Protection (PPP) operations will be allocated to support various aspects of the protocol’s ecosystem:

• 25% to the Treehouse Insurance Fund;

• 25% to the tETH/wstETH Curve Liquidity Pool;

• 25% to existing tETH holders in the form of arbitrage yield;

• 25% to the Treehouse Treasury.

Note: These values will be a governance-determined parameter in the future.

Treehouse Insurance Fund

The Treehouse Insurance Fund, denominated in ETH, serves three key purposes:

• To support PPP: A portion of the revenues generated from the Protocol-Owned Peg Protection (PPP) mechanism contributes to the Treehouse Insurance Fund to strengthen the fund's capacity to intervene during a de-peg event. Specifically, ETH from the Treehouse Insurance Fund is utilized to purchase and subsequently burn tETH from circulation, aiding in stabilizing the tETH:wstETH peg on the tETH/wstETH Curve Liquidity Pool.

• Daily Rebalancing Shortfall: In the rare circumstance where the overall tETH yield becomes unprofitable between daily rebalancing periods (e.g., if borrowing costs exceed staking returns throughout the day), Treehouse initiates an unwinding process (See Loan-repayment Strategy). Any resulting losses are funded by the Treehouse Insurance Fund, up to the prevailing ETH staking rate.

• Loss from Risk Events: The Treehouse Insurance Fund may potentially cover losses arising from various risks. Ultimately, decisions regarding loss coverage are initially made by the protocol and are subject to governance in the future.

Underlying LST De-pegging Contingency Plan

In the event of an underlying LST de-peg exceeding 2% and persisting longer than 1 day, the protocol automatically triggers a contingency plan. This calculation is conducted on a per-block basis to distinguish between true de-pegs and transient flash de-pegs.

Steps:

• Continuous Monitoring: The protocol continuously monitors the ETH/LST price ratio to detect any deviation exceeding the 2% threshold.

• Automatic Initiation: If the de-pegging surpasses the internal 2% threshold for the specified duration, the protocol automatically begins unwinding positions.

• Position Unwinding: LST holdings are swapped back to ETH through a liquidity pool. The acquired ETH is then utilized to repay outstanding loans on lending platforms.

• Collateral Withdrawal: Following loan repayment, any remaining collateral in the form of wrapped LST is withdrawn from the lending platform.

• User Withdrawals: Users are provided with the option to withdraw their deposits in the form of LST. Subsequently, they retain sole discretion over their remaining collateral.

Note: The specified values are currently arbitrary and subject to governance determination in the future.