Summary
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Chaos Labs has thoroughly reviewed Fluid and the mechanics of DEX pool 21: the ezETH/ETH pool, and Vault 104: the ezETH-ETH / wsteth Vault. Our analysis recommends launching with a leverage of 7, to balance the need for deep ezETH on-chain liquidity, with managing the risk of a sustained spike in wstETH borrow rates causing a material loss for the community.
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This would add approximately 4,900 ETH of total liquidity, primarily allocated to support ezETH-to-ETH redemptions, due to the pool’s liquidity concentration 30 bps below the center price. Our model estimates that this will cost the DAO approximately 6.0 ETH per year, a yield of -0.86% APR.
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The Fluid vault employs dynamic withdrawal limits at both the token and share level. While individual tokens (ezETH and ETH) are currently unrestricted, share-level redemptions are capped and expand gradually over time. This means that in periods of high demand or market volatility, the DAO may face delays in fully exiting its position.
How Fluid works
Fluid is a DEX built on the Fluid protocol, which integrates lending and trading functionalities to achieve high capital efficiency and dynamic liquidity management.
Core Features
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Unified lending and trading layer
Fluid operates as an integrated DEX built directly on its lending protocol. When users supply assets, they simultaneously provide liquidity for both lending and trading, removing the need for separate capital allocation and enabling higher capital efficiency.
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Smart Collateral, Smart Debt, and rebalancing
Assets are managed in token pairs (e.g., ETH/wstETH or USDC/USDT), allowing users to borrow or supply both sides. Each swap dynamically rebalances these positions across the collateral and debt pools, ensuring liquidity availability and aligning user positions with market demand. Borrowers can also provide liquidity using their debt, earning swap fees while maintaining exposure.
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Price Stabilization Mechanism
Fluid doesn’t rely solely on constant product AMM logic. Instead, it anchors swaps around a central reference price—typically sourced from external oracles—and defines “imaginary reserves” around this price to simulate concentrated liquidity. The central price adjusts gradually, with per-block changes capped to small increments (e.g., 0.1%) to maintain market stability. These limits are governance-controlled, enabling protocol-level responsiveness to evolving conditions.
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Liquidity Management
Fluid maintains two mirrored pools for each token pair: one for collateral operations (supply/withdraw) and another for debt operations (borrow/repay). Every swap triggers rebalancing across these pools to ensure consistent pricing between tokens. Price changes during swaps are also capped at 5% per transaction, protecting against slippage and oracle manipulation.
Liquidity Strategy Modeling: ezETH-ETH / wstETH Vault
To evaluate risk for Vault 104: ezETH-ETH / wstETH, we model the expected return and liquidation profile of a leveraged LP strategy using the ezETH/ETH pool as collateral and wstETH as the borrowed asset. We assess safety under adverse market conditions (e.g., a spike in borrow APR), we model Days to Liquidation using the strategy’s risk profile. The vault gets liquidated once the loss on the leveraged LP position exceeds the allowable buffer, defined by the liquidation threshold (96%).
Modeling Return and Risk
The net yield from the strategy is derived by aggregating rewards from lending, staking, and trading, offset by borrowing costs. Based on the pool’s composition and leverage, the effective LP APR is calculated as:
Key Assumptions for ezETH-ETH / wstETH Vault
Using the current market rates outlined in the key assumptions, we simulate the strategy’s performance across a range of leverage levels and borrow cost scenarios. These inputs allow us to estimate the net LP APR and calculate days to liquidation using the modeled risk framework. The results of this simulation are shown in the chart below.
The simulation results show that the number of days to liquidation decreases as the wstETH borrow APR increases, with higher leverage levels accelerating this effect. We also include an extreme scenario of 30% Borrow APR to stress-test the strategy’s durability under rate spikes.
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At 5x leverage, the strategy shows strong resilience at lower borrow rates, remaining above 100 days to liquidation when APR is up to 15%. Even under extreme conditions with a 30% borrow APR, the strategy offers around 70 days to liquidation. This makes 5x leverage ideal for maximum safety, though capital efficiency is lower.
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At 7x leverage, the strategy maintains more than 100 days to liquidation up to around 10% APR and still holds a buffer of nearly 40 days even when rates spike to 30%. This shows that the strategy can withstand high-cost environments long enough for the DAO to take action.
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At 10x leverage, the strategy becomes significantly more vulnerable to changes in borrowing costs, with Days to Liquidation dropping below 50 Days once the borrow APR exceeds approximately 5%, and drop under 20 days at 30% APR. This narrow margin leaves little room for error, especially during periods of market volatility or sharp rate increases, requiring a higher degree of active management.
Given these dynamics, we recommend launching Vault 104 with a maximum leverage of 7x. This level balances capital efficiency with risk management and supports the vault’s objective of deepening ezETH liquidity without exposing the DAO to unacceptable downside risk should borrow rates spike in a sustained manner. If wstETH Borrow APR sustains above 5%, the vault should consider gradually reducing leverage or pausing new deposits to protect against short-term rate spikes.
Impermanent Loss
The DEX has positioned nearly all of its active liquidity just below the center price, meaning the vault is structurally set up to absorb ezETH-to-ETH redemptions. As users swap ezETH for ETH, the vault gradually becomes net long ezETH.
This exposure carries a potential premium compression risk—if the price of ezETH converges toward ETH, the vault effectively buys ezETH at higher prices and realizes a loss. However, if ezETH maintains or increases its premium, impermanent loss is minimal and may even reverse, resulting in a net gain as the vault is not only facilitating redemptions but also accumulating more ezETH at favorable rates, earning trading fees in the process
Oracle Risk
The Fluid protocol uses a modular, multi-layered oracle system to accurately price assets across its lending and trading components. Each token has a dedicated, source-specific price feed—minimizing single-point-of-failure risk and allowing for better isolation of errors or manipulation in one asset’s pricing. Each rate relies on the respective protocol-internal data sources reflecting each token’s exchange rate—Renzo’s BalancerRateProvider for ezETH and Lido’s own wstETH contract—meaning there is no reliance on third-party oracles.
These rates are wrapped in Fluid’s internal oracle contracts, which update under two specific conditions: when the price changes by at least 10% since the last update, or when 90,000 seconds (~25 hours) have passed, even without significant movement. A threshold of 10% may delay updates during volatile conditions—potentially resulting in temporary over- or under-valuation in thinner markets. However, in practice, both tokens’ rates are typically rebalanced approximately once per day.
Both price feeds are used to calculate a central price for the swap layer. This central price acts as the anchor for swaps and liquidity concentration, guiding where liquidity is placed and how trades are executed. To further maintain stability and reduce manipulation risk, updates to this central price are capped at a small percentage per block.
For vault share valuation and redemption, Fluid uses a composite oracle that combines the latest ezETH and wstETH prices with vault reserve data. Furthermore, the contract has a small peg buffer to calculate the ETH value of one vault share, which protects the protocol from overestimating collateral or underpricing risk. Given that Fluid directly integrates each protocol’s native rate logic, we do not identify any material oracle risk in this setup.
Further Risk Considerations around the ezETH-ETH / wsteth Vault
Fluid employs dynamic limits for borrowing and withdrawals that adjust based on user activity and market conditions. Currently, the protocol allows withdrawals up to $5,128,767 which is divided across the tokens and shares as:
The Current Limit for both ezETH and ETH tokens is shown as $0, which means withdrawals are fully open—all users can redeem their available balances up to the withdrawable amount. However, at the vault share level, withdrawals are still subject to a cap: Of the $6.3 million base share limit, $5.1 million is currently unlocked, and $2.76 million is actively withdrawable.
This means that while the individual tokens are fully withdrawable within the vault’s liquid reserves, the total amount of shares that can be redeemed is still limited to avoid destabilizing the overall strategy. If the system nears the base limit, the withdrawal capacity can expand by 35% over a 6-hour period. If market conditions shift or users begin mass withdrawals, the DAO may not be able to redeem its full position immediately, limiting how quickly the DAO can deleverage or exit during volatile conditions.
