yETH is a community-governed index token consisting of various Ethereum liquid staking tokens. yETH is backed 1:1 by staked ETH but does not accrue any yield. Instead, all staking rewards accrue to Staked yETH (st-yETH) holders.
yETH is a low-cap, fully collateralized asset. This asset depends on a centralized entity for custody services. This asset is exposed to the underlying risks of Yearn, a protocol rated as Average.
yETH has an uncapped supply but has inflation control or burn mechanisms in place.
yETH is created by depositing any of the collateral liquid staking tokens (LSTs) or by swapping against the Curve yETH-ETH pool. In yETH, each LST has an assigned weight representing its proportion in the basket. This weighting serves to ensure that the basket remains properly diversified and allows the pool to optimize risk and yield distribution among the LSTs.
yETH can be thought of as similar to WETH (Wrapped ETH) as it does not accrue any yield. This makes the token ideal for market making in stableswap pools like Curve as users will not incur any impermanent loss from the increase in value from staking yield. Instead, users can stake their yETH to mint st-yETH, which accrues yield and earns incentives for participating in yETH governance.
Since yETH consists of a basket of LSTs with various weightings determined by governance, it serves to diversify risk from any one LST dragging down the entire pool. Each asset in the yETH pool has safety bands around their target weight. Asset weightings are not allowed to go outside these bands as the pool will simply refuse to trade. For example, if an asset has a weight of 20% and a band of 5%, then the maximum loss for yETH holders is capped at 25%. In the same example, if the user were holding the failed LST, they would have lost 100% of their value. Lastly, st-yETH users can also adjust the pool weights to reduce a specific LSTs weighting based on protocol and market updates.