Summary
Remove low liquidity, and low yield assets from the hyUSD basket and replace them with scalable, higher yield and liquid assets.
Current Basket:
13.5% fUSDC - Flux USDC.
36.5% Convex/Curve eUSD+FRAXBP pool.
25% sDAI - DAI Savings Rate.
25% Morpho Aave V2 USDT pool.
New Basket:
33% Compound V3 USDC
33% Morpho Aave V2 USDT pool.
33% crvUSD USDC curve/convex.
Abstract
Morpho:
Morpho is an on-chain peer-to-peer layer on top of lending pools. The Morpho Aave V2 USDT pool utilizes the Aave protocol, specifically the USDT pool. The proposed proposal, if enacted, would increase the collateral basket that is occupied with the Morpho Aave V2 USDT pool from 25% to 33%.
Problem Statement
The current basket for hyUSD contains 25% of Morpho Aave V2 USDT pool. We are striving to increase the yield in the hyUSD collateral basket. Given the proposed adjustments in the hyUSD collateral basket. The additional allocation will come from reducing the Convex portion of the collateral basket from 36.5% to 33%, the 3.5% will be added to the 25% of Morpho Aave V2 USDT pool. The missing 5.5% allocation will come from 13.5% Flux USDC(fUSDC) and the 25% of sDAI from the collateral basket. This totals 38.5%, of which 33% will be used elsewhere. The additional 5% will go to the Morpho Aave V2 USDT pool, totalling to 33%.
Convex:
Convex allows Curve Finance liquidity providers to earn trading fees and claim boosted CRV without locking CRV themselves. Convex is a protocol that is currently being used in the hyUSD collateral basket. The proposed proposal, if enacted, would swap out the 36.5% of the collateral basket that is occupied with the Convex eUSD+FRAXBP Curve pool and replace it with 33% of the Convex crvUSD+USDC Curve pool.
Problem Statement
The current basket for hyUSD contains 36.5% Convex eUSD+FRAXBP Curve pool. The rewards streamed to the eUSD+FRAXBP pool are largely reliant on Reserve as well as the TVL is relatively small compared to other options. If we were to switch to the crvUSD+USDC pool on Convex we believe this does two things. First it removes the need for Reserve to continue providing the incentives through their vote weight. Secondly, as of writing this, the TVL of the crvUSD+USDC pool on Convex is 19m whereas the TVL of the eUSD+FRAXBP pool on Convex is 5.4m.
Compound:
Compound enables supplying of crypto assets as collateral in order to borrow the base asset. Accounts can also earn interest by supplying the base asset(USDC) to the protocol. The proposed proposal, if enacted, would swap out the 13.5% Flux USDC(fUSDC) and the 25% of sDAI from the collateral basket. That 38.5% of the collateral basket would be replaced with 33% of the Compound V3 USDC pool. The additional 5.5% allocation would be added to the Morpho Aave V2 USDT pool.
Problem Statement
Flux Finance:
The current basket for hyUSD contains 13.5% of Flux USDC(fUSDC). The problem with Flux Finance USDC is that borrow rates don’t scale with utilization which could potentially be a problem in the future. Keeping fUSDC in the basket might limit scalability and therefore should be removed from the basket.
Savings DAI:
The current basket for hyUSD contains 25% of Savings DAI(sDAI), which yields 5% APY. The reason to remove this asset from the basket is that while 5% is great yield, we believe we can add assets to the collateral basket that equal or better the risk for sDAI but also have greater yield.
Rationale
Morpho:
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).
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.
Convex:
Convex is already used within the hyUSD basket for the eUSD+FRAXBP pool on Curve. Convex allows liquidity providers to earn trading fees and claim boosted CRV without locking CRV themselves. Liquidity providers can receive boosted CRV and liquidity mining rewards with minimal effort.
Convex Finance has had an external Audit performed by MixBytes Prior to launch, aside from the DNS attack where their Domain was stolen there haven’t been any smart contract vulnerabilities.
Convex is already used within the hyUSD basket and simply switching the underlying pool from eUSD+FRAXBP to crvUSD+USDC will not add any more complexity to the hyUSD basket.
Compound:
Compound enables supplying of crypto assets as collateral in order to borrow the base asset. Accounts can also earn interest by supplying the base asset(USDC) to the protocol. We believe Compound to be a bluechip protocol within DeFi. The Compound protocol is already used in the collateral basket for USDC+ on ETH as well as hyUSD on Base, and therefore we can see that it will be an overall positive to the hyUSD basket on ETH.
The security of the Compound protocol is a high priority; the development team, alongside third-party auditors and consultants, have invested considerable effort to create a protocol that is safe and dependable.
Consideration needs to be given to the new asset(crvUSD) being introduced into the basket as well as the new protocol(Compound). The other notable point is that updating the percentages drastically will require several auctions in order to do so. However, when the upgrade is significant, which we believe this is, it will be worth the gas and time.
There is an overall issue with minting cost still being relatively high on ETH. However, by reducing the number of items in the basket from 4 to 3 we are also reducing the cost of the Zap. This could potentially allow for retail to see hyUSD on ETH as more affordable and have a positive impact on growth of the Market Cap.
Risks
By removing low liquidity, and low yield assets from the hyUSD collateral basket, we believe that we are improving the overall yield and scalability of hyUSD. We believe we are doing so in a way that doesn’t increase the risk profile.
We are introducing a new protocol(Compound) into the collateral basket but this protocol has been seen twice before in other RTokens. We are also introducing a new asset(crvUSD) into the collateral basket, but we believe this asset, if rated by Bluechip, would receive a very satisfactory score.
Overall we believe we are increasing the yield, improving scalability, and making hyUSD cheaper to mint.
- Yes, I am in favor of this proposal
- No, I am against this proposal