Collateral Basket Change Proposal

High Yield USD (hyUSD) hyUSD RFC
1

Summary

Remove the MIM+3Crv Pool on Convex from the collateral basket and replace it with the ​Balancer boosted Aave V3 composable stable pool on Aura for the hyUSD Rtoken.

Abstract

Aura Finance is a protocol built on top of the Balancer system to provide maximum incentives to Balancer Liquidity Providers. The proposed proposal, if enacted, would swap out the 36.5% of the collateral basket that is occupied with the MIM+3Crv pool on Convex and replace it with ​the Balancer boosted Aave V3 composable stable pool on Aura.

Problem Statement

The current basket for hyUSD contains 36.5% of the MIM+3Crv pool on Convex. The APY for this strategy has dropped significantly over the past 3 months, recently hitting a low of 4.26% APY on June 14, 2023. The Abracadabra team which is the team behind the stablecoin MIM has stated that they have no intention of boosting the APY for the MIM+3Crv pool. Currently it sits at just around 6% APY. The asset MIM has a history of depegging and is considered to be the most risky asset in the hyUSD collateral basket.

Rationale

By adding the Balancer boosted Aave V3 composable stable pool on Aura to the basket in place of the MIM+3Crv pool on Convex we will achieve an overall safer underlying basket for hyUSD by omitting the asset MIM and the APY will not significantly change.

The Balancer Boosted Aave USD (symbol: bb-a-USD) is a Composable Stable Pool that facilitates swaps between three US Dollar stablecoins (USDC, USDT, and DAI) while sending idle liquidity to Aave. The underlying Linear Pools are:

  • bb-a-USDC (consisting of USDC and wrapped aUSDC)
  • bb-a-USDT (consisting of USDT and wrapped aUSDT)
  • bb-a-DAI (consisting of DAI and wrapped aDAI)

ATokens are wrapped because they are incompatible with the Balancer Vault because they have streaming balances. These tokens must be wrapped into a static token, which accounts for any accrued value. The Balancer Pool Tokens (or BPTs) from this pool are deposited into Aura Finance for boosted rewards, yielding approximately 5.55% APY and has a TVL of 18.76 million USD.

Consideration needs to be given to gas costs when minting hyUSD with the new collateral. This will likely increase and could potentially hinder new potential minters.

Risks

Given the proposed proposal makes no change to any other collateral in the basket I believe the following changes decrease the overall risk of hyUSD. We are omitting a potentially risky asset MIM that has a history of depegging, but we are adding in a new silo of smart contracts that we haven’t seen on the Reserve Protocol before.

Instead of going down the smart contract risk path of Curve to Convex we are going down a new path of Balancer to Aura. The risk here is going down a new path, but I believe the overall risk is no more or no less risky than the Curve and Convex path. We are diversifying away from the Curve/Convex ecosystem and omitting an asset with a complex history.

  • Yes, I am in favor of this proposal
  • No, I am against this proposal

0 voters

3 Likes
2

Good proposal @0xTomSawyer. I am in support of this change:

  • It diversifies this RToken and a large player in the Reserve ecosystem exposure away from curve
  • It reduces risk that (for now) is not adequately relfected in the return generated
  • The replacement is reputable and established, at the same time as receiving relatively good yield.

I look forward to seeing how this proposal develops!

2 Likes
3

Given the recent volatility of MIM, I definitely support this change.

Security of the proposed pool is my first concern. Unfortunately I don’t know anything about Aura or smart contracts, so I am unable to offer any valuable opinion on why this particular collateral would be good or bad.

But it should be less risky than dealing with MIM, correct?

2 Likes
4

Thanks for spearheading this proposal @Tom_hyUSD. I agree that MIM-3CRV has to go, especially with its recent depeg. Even prior to this, I’ve received feedback from different sources that the presence of MIM in hyUSD unfortunately makes it uninvestable.

Issues with Proposed Aura Pool

Conceptually, I think the proposed Aura pool using Aave V3 stables is a great idea. In practice, there may be a number of challenges. First, I’ll summarize what Tom has brought up in Discord around the uncertainty around rewards on this pool. The Aura UI currently provides this message that the pool is migrating:

image
image1042×136 33.2 KB

A number of other links shared in Discord indicate uncertainty whether rewards will be streamed to this pool going forward.

On top of this, the engineering team has indicated that inclusion of this Aura plugin will increase gas costs of minting hyUSD by ~25%, with the engineering lift of the plugin being significantly higher than any of the other existing plugins. This is all suggests that we should seek another alternative.

Alternate Proposal - Morpho

I propose replacing MIM-3CRV using Morpho’s Aave V2 lending optimizer. Specifically, I suggest using the USDT pool, which current provides 3.6% APR (due to P2P matching) with [currently] unvalued MORPHO rewards on top (which will accrue to hyUSD holders at some point in the future).
image

I believe this improves hyUSD’s risk profile in a few ways:

  • Morpho has an excellent reputation for security
  • Lending positions are presumptively less risky than LP positions for their greater simplicity (just a single asset)

One of the potential drawbacks is that the yield is perhaps not as high as one may desire for a high-yielding flatcoin. This is a fair criticism. But on a balance, with the increased safety profile, and MORPHO rewards which will materialize some time in the future (which I expect to be relevant), this approach makes hyUSD stronger overall.

2 Likes
5

I appreciate the response @Larry. I have added in a few comments as well as a new poll.

Aura Proposal Concerns

Minting Concerns:

On top of this, the engineering team has indicated that inclusion of this Aura plugin will increase gas costs of minting hyUSD by ~25%, with the engineering lift of the plugin being significantly higher than any of the other existing plugins. This is all suggests that we should seek another alternative.

Due to the fact that minting is going to cost an extra 25% in gas with the Aura pool accounted for, I do not think it would be wise to add it to the collateral basket. High Yield USD is relying on people to mint and adding in the extra minting cost might dissuade new potential minters of hyUSD.

APY Concerns:

A number of other links shared in Discord indicate uncertainty whether rewards will be streamed to this pool going forward.

It has been confirmed that there will be rewards streamed to the bb-a-USD pool on Aura after July 31st. However, these rewards/APY’s are currently unknown. Adding in the Balancer Boosted Aave USD pool on Aura could be beneficial in the future.

With the uncertainty in the APY and the added gas cost for the Aura plugin I think it’s best to find a better alternative.

Alternate Proposal - Morpho

New Proposal:

I propose replacing MIM-3CRV using Morpho’s Aave V2 lending optimizer. Specifically, I suggest using the USDT pool, which current provides 3.6% APR.

I second this proposal. As @Larry mentioned Morpho adds a peer-to-peer layer on top of Aave allowing lenders and borrowers to be matched more efficiently with better interest rates. When no matching opportunity exists, funds flow directly through to the underlying protocol(in this case Aave).

Security:

  • Morpho has an excellent reputation for security
  • Lending positions are presumptively less risky than LP positions for their greater simplicity (just a single asset)

Morpho has been live for over a year with audits completed by Pessimistic on July 25, 2022 as well as Spearbit on May 9, 2022 with several audits being completed in Beta.

Additional Considerations:

One of the potential drawbacks is that the yield is perhaps not as high as one may desire for a high-yielding flatcoin. This is a fair criticism. But on a balance, with the increased safety profile, and MORPHO rewards which will materialize some time in the future (which I expect to be relevant), this approach makes hyUSD stronger overall.

The apy will be lower in the beginning with the addition of Morpho, but hyUSD will have an increased safety profile. The lower apy will only be temporary as the added Morpho Rewards will be an addition to the 3.6% in the near future.

I have created a new poll below to gauge support from the community.

  • Morpho Aave V2
  • Balancer Boosted Aave V3 pool on Aura
  • Leave MIM+3Crv
0 voters
2 Likes