Jan 30, 2025
This is an archive of our post on Aave governance forum. Read the full thread here.
Note: We’re offering our preliminary review of pufETH to offer Stakeholders insights; while we believe that pufETH could be safely integrated within Aave, we find very little upside given the current liquidity and trends observed.
Summary
LlamaRisk does not recommend onboarding pufETH to Aave V3 Ethereum at this stage, given its current market trajectory and lack of demand. After the pufETH withdrawals were enabled on October 14th, 2024, its total supply declined sharply from $1.7B (535k pufETH) to $235M (73k pufETH) currently, with the downtrend continuing. This contraction has also impacted DEX liquidity, now at just $5.9M, representing the value of tokens available in LPs against the remaining 3k pufETH, a 12x reduction from the 36k pufETH available before the airdrop in October 2024.
pufETH Total Supply Flows.Source: IntoTheBlock, January 29th, 2025.
Additionally, new pufETH mints have been minimal, indicating a lack of demand. The validator cap has fallen from 0.84% to 0.16% in relation to its self-imposed 22% Burst Threshold. Key risk factors include double-slashing exposure from native restaking, pricing complexity due to its unique validator ticket (VT) model, and the absence of an active bug bounty program.
1. Asset Fundamental Characteristics
1.1 Asset
Key Statistics (as of January 29th, 2025):
Circulating Supply: 72,589 pufETH
Market Cap: $235M
Current Yield: ~2% APY
Launch Date: January 31st, 2023.
Contract: 0xD9A442856C234a39a81a089C06451EBAa4306a72
Puffer Protocol is a decentralized native liquid restaking protocol (nLRP) built on Eigenlayer. pufETH is a reward-bearing nLRT token, different from LRTs as it generates the rewards through native restaking. Users can deposit ETH, stETH, and wstETH to receive pufETH. The yield for pufETH comes from a diversified streams like PoS rewards, Validator Tickets (VTs) and Restaking rewards.
Users can withdraw pufETH using two different methods. The first one is one-step and is instant ETH redemption with a 1% fee (configured by DAO and burned); however, this option is only available as long as the PufferVault has enough ETH liquidity. The second method is a fee-free two-step withdrawal process that takes longer (14+ days) to process.
1.2 Architecture
Stakers can deposit ETH and mint the pufETH nLRT via the PufferVault (pufETH token) contract, which is a redeemable receipt for their restaked ETH. At the protocol’s inception, the pufETH/ETH ratio was 1:1. Currently, this ratio is around 1.032.
Puffer Protocol Architecture.Source: Puffer Docs
Since pufETH is reward-bearing its value increases from Validator Tickets (VTs), PoS rewards, and restaking rewards. Validator Tickets are ERC20 tokens that grant the right to run a staker-funded validator by depositing ETH, and this ETH goes to pufETH holders for financing the validators. pufETH is minted when node operators (NoOps) deposit collateral worth 2 ETH (VTs + some ETH) to PufferProtocol contract. As soon as the PufferVault accrues 32 ETH in chunks from NoOp deposits, it creates a new validator within EigenPod to natively restake on Eigenlayer.
Though the VT model makes it capital-efficient to run a validator, it complicates the yield reward calculations for pufETH since it is repriced daily and can be traded on secondary markets. PoS rewards distribution is done through execution (immediately deposited into NoOp wallets) and consensus rewards (accrue in EigenPod via PufferModule and withdrawn upon NoOp exit). Restaking rewards comprise the accumulated fee commission restaking operators receive for executing AVSs on the module’s behalf. Users also accumulate Puffer Points on their pufETH holdings, but they’re separate from the LRT yield and rewarded via PUFFER airdrop.
Penalties are another factor affecting the rewards, and they happen when a validator gets slashed on PoS or the restaking operator gets slashed while running AVSs.
1.3 Tokenomics
PUFFER is the governance token for all Puffer products and services. The total supply is capped at 1B. It also has a vote escrow governance mechanism (vePUFFER). vePUFFER is used for voting and doesn’t require users to specify a lockup duration. The voting power increases over time, rewarding long-term engagement, but resets upon withdrawal, incentivizing rigid lockups.
PUFFER Distribution and Vesting Schedule.Source: Puffer Medium
Puffer has already distributed 85.5% of the 7.5% amount set aside for Season 1 of their airdrop, with the remaining tokens subject to a 6-month vesting period, which will conclude on April 14th, 2025. Season 2 has also commenced, with a total of 5.5% of the supply allocated for this round.
1.3.1 Token Holder Concentration
pufETH Top 100 Token Holders.Source: Etherscan, January 29th, 2025.
The top 5 holders of pufETH are:
Zircuit: Restaking Pool - 18.68% of the total supply.
Pendle: SY pufETH - 12.5% of the total supply.
Karak Network: KpufETH - 7.37% of the total supply.
Puffer Finance: Puffer Protocol - 4.62% of the total supply.
Nucleus: unifiETH - 4.19% of the total supply.
The top 10 holders own 61.2% of the total supply. When considering the top 100 holders, this concentration increases to 89.7%.
2. Market Risk
2.1 Liquidity
pufETH/ETH swap within 7.5% price impact.Source: Odos Router, January 29th, 2025.
Odos Router shows that a user can swap up to 1740 pufETH ($5.59M) for ETH on Ethereum within 7.5% price slippage.
2.1.1 Liquidity Venue Concentration
pufETH DEX Liquidity.Source: IntoTheBlock, January 27th, 2025.
About 76.7% of pufETH’s liquidity (3104 pufETH, roughly $10M) is held by Curve’s pufETH/wstETH pool, followed by Balancer’s pufETH/wstETH (16.9%) and Uniswap’s pufETH/WETH pools (6.4%).
2.1.2 DEX LP Concentration
The liquidity for pufETH on DEXs across Ethereum is evenly distributed with moderate concentration among a few uesrs. The breakdown for the top 3 pufETH pools by TVL (as of January 29th, 2025):
Curve pufETH/wstETH ($6.46M TVL): The top liquidity provider is an EOA, holding just 9% of the total liquidity.
Balancer V2 pufETH/wstETH ($3.18M TVL): Aura Finance is the top liquidity provider with a share of 40%. The top 4 holders share ~97% of the total liquidity.
Uniswap V3 pufETH/WETH ($1.4M TVL): The top liquidity provider is an EOA, holding 50% of the total liquidity.
2.2 Volatility
pufETH Peg Monitor.Source: IntoTheBlock, January 27th, 2025.
pufETH has crossed the -1% depeg threshold multiple times over the past month, indicating low liquidity in secondary markets. On August 5th, 2024, it experienced its largest depeg event, deviating by -5.46% against WETH and -4.35% against wstETH.
2.3 Exchanges
pufETH is exclusively traded on DEXs and is not currently listed on any centralized exchange despite being backed by Coinbase Ventures and YZi Labs (prev. Binance Labs).
2.4 Growth
Puffer TVL.Source: Dune, January 24th, 2025.
A massive decline in the total supply of pufETH was observed after October 14th, 2024, triggered by several key catalysts like Puffer Finance enabling withdrawals on pufETH, PUFFER token launch (end of airdrop season), and EigenLayer concluding its Season 2 Stakedrop and enabling transfers a couple of weeks prior in September 2024.
Once the airdrop season concluded, many airdrop farmers, including notable figures like Justin Sun, unstaked their pufETH, contributing to the rapid decline in its TVL. Since then, Puffer Finance has failed to maintain its dominance among other LRT protocols, and as a result, the TVL continues to decline to date.
Puffer has had two campaigns till now with the Season 2 ongoing. But its incentives aren’t targetted towards pufETH directly.
3. Technological Risk
3.1 Smart Contract Risk
Puffer Finance has been audited multiple times by leading audit firms:
Creed (May 1st, 2024)
BlockSec (April 23rd, 2024)
Nethermind (April 16th, 2024)
Trail of Bits (March 25th, 2024)
Immunefi (March 7th, 2024)
Quantstamp (February 14th, 2024)
SlowMist (January 29th, 2024)
The deployed smart contract code is verified, and the presence of these audits goes some distance in mitigating smart contract risk.
3.2 Bug Bounty Program
Puffer Finance does not currently have an active bug bounty program. Previously, they collaborated with Immunefi to launch Puffer Boost, an audited competition that ran from February 22nd to March 7th, 2024. The program offered a $50,000 guaranteed reward pool and an additional $200,000 for critical vulnerabilities. Over the course of the audit, 14 valid vulnerabilities (categorized as medium or low severity) were identified. The program’s full scope can be found here.
3.3 Price Feed Risk
Chainlink recently deployed a pufETH/ETH feed. The update trigger parameters are set at a 0.5% deviation threshold and 24-hour heartbeat.
3.4 Dependency Risk
EigenLayer Native Restaking
While the concept of restaking is promising, it introduces inherent risks to stakers. These revolve around potential AVS slashing. Puffer relies on reputable restaking operators (ReOps) like Eigenlayer to mitigate these issues and uses its anti-slashing mechanism (Intel SGX and its Secure-Signer, a remote signing tool to prevent slashable offenses). Since Puffer relies on native restaking by allowing PufferModules to service any AVS, it exposes the stakers and node operators to increased slashing risks. To mitigate this, Puffer initially restricted ReOp participation.
4. Counterparty Risk
4.1 Governance and Regulatory Risk
PUFFER is the governance token of Puffer Finance. The voting rights are reserved for the users who lock their tokens in the voting escrow token vePUFFER.
Puffer DAO Governance Model.Source: Puffer Docs
A minimum five-day discussion period allows community members to study the proposal on the Puffer Governance Forum. After the discussion period is over, the Puffer Governance Review Committee evaluates and finalizes the proposals for voting (min. 2 days).
The voting is exclusive to vePUFFER holders and is conducted through this platform. Voting epoch lasts seven days and occurs every Thursday at 12 am UTC. A simple majority decides the quorum. A minimum warmup period of 3 days is required for vePUFFER to become active for a vote. A staker needs to hold the escrow token for at least a month before withdrawing the underlying tokens through the exit queue, which takes 1 month to process the exit.
4.2 Access Control Risk
4.2.1 Contract Modification Options
pufETH is powered by two contracts:
pufETH ERC-20 deployed behind ERC1967Proxy, which serves as a proxy to route function calls to the implementation contract and its authority is given to an AccessManager contract.
Implementation Contract deployed behind PufferVaultV3, which implements the core logic and its authority is given to the burn address.
The AccessManager contract handles the role-based controls for criticial protocol functions.
Role ID Role Label Role Granted 25 Withdrawal Finalizer Beacon Depositor, Puffer Operations Multisig 26 Revenue Depositor Puffer Operations Multisig 1235 Puffer Vault Withdrawer Puffer Protocol 1236 pufETH Burner PufferWithdrawalManager, Puffer Protocol, Puffer VT
4.2.2 Timelock Duration and Function
Puffer Finance has a 7-day timelock configured on the AccessManager contract.
4.2.3 Multisig Threshold / Signer identity
AccessManager has the authority of the pufETH ERC20 contract. The Puffer Operations Multisig, which handles critical roles like withdrawal finalizer and revenue depositor, is a 3/6 threshold safe.
Note: This assessment follows the LLR-Aave Framework, a comprehensive methodology for asset onboarding and parameterization in Aave V3. This framework is continuously updated and available here.
Disclaimer
This review was independently prepared by LlamaRisk, a community-led non-profit decentralized organization funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.
The information provided should not be construed as legal, financial, tax, or professional advice.