USD3 allocation update proposal
Summary
We propose adding Morpho SteakHouse USDC or Gauntlet USDC Prime Vault to USD3 basket of yield-bearing tokens to enhance the yield obtained by RSR stakers and USD3 holders alike while reducing risk by diversifying the yield sources.
About Morpho Vaults
Morpho is a trust-minimised permissionless lending primitive that allows creation of efficient money markets. Risk management is externalized from the core protocol to Morpho Vaults, curated by the best risk managers such as Gauntlet andSteakhouse Financial.
To date, Morpho has $4B of assets supplied on its protocols on Ethereum and Base, while being the most audited protocol in DeFi with the highest DeFi Safety score (98%).
SteakUSDC is curated by SteakHouse Financial, a market recognized risk manager. Steakhouse USDC Vault lends against the highest quality collaterals such as WSTETH, CBBTC and tokenized T-bill products that have shown safety and reliability. In such way, the SteakHouse USDC Vault produces a dual-engine return leveraging both high quality crypto collateral and Tradfi yields.
The Gauntlet USDC Prime vault aims to optimize for risk-adjusted yield across large market cap and high liquidity collateral markets like WSTETH, WBTC or CBBTC. Gauntlet is a DeFi-native quantitative research firm specializing in risk management, utilizing tools from the algorithmic trading industry to help protocols manage risk.
Suggestion:
The Morpho product line features Prime Vaults - Steakhouse USDC and Gauntlet USDC Prime.
Steakhouse USDC is curated by Steakhouse Financial. This vault aims to optimize yield by allocating deposits to blue-chip (wstETH, cbBTC) and RWA (tokenized T-bills) as collateral assets, utilizing the dual engine - crypto and TradFi.
Gauntlet USDC Prime is curated by Gauntlet. This vault aims to optimize for risk-adjusted yield across large market cap and high liquidity collateral assets (wstETH, wBTC or cbBTC).
Rationale
USD3 current vault investment strategy
The current USD3 vault is depositing 50% to Compoundv3 and 50% to sDai. At the moment, the DAI yield is 6.6%. Current yield of Morpho USDC Vaults provides an improvement to USD3 holders and RSR stakers, having an average base supply rate of 7.3% over the last 30 days.
Proposed allocation in Morpho Vaults
We propose replacing the sDAI allocation with Steakhouse USDC or Gauntlet USDC Prime to improve the base APY by 50% compared to Sky. The position will also earn an approximate 6% APY in MORPHO, depending on the Morpho price. Details of the Morpho Rewards Model can be found in the forum. We recommend adding a Morpho Vault up to 25% of the reserves and deploying the rest to Compound USDC. This limit allows the protocol to improve the yield while keeping exposure to the Vault and underlying markets under 10%. We propose to monitor at this level and increase the cap once the pool liquidity allows it.
| Asset | Allocation | APY | Rewards | Total APY |
|---|---|---|---|---|
| Morpho USDC Vault | 25% | 7.3% | 6% | 13.6% |
| Compound USDC | 75% | 9.3% | 0.47% | 9.73% |
Recent Market Developments
By replacing entirely a low-yield option with a higher-yield one, we address previous community concerns about gas costs. Likewise, as Morpho has become transferable RSR users and stakers can fully realize the rewards APY.
In this fashion, the allocation of $8M USD3 to Morpho Vaults would limit the exposure to the underlying markets to no more than 10% of each. For WBTC/USDC the total exposure would be up to 6% of the pool at current $39M liquidity, 8.85% for WSTETH/USDC with current $40M liquidity and 9.9% for CBBTC/USDC with $21.73M liquidity. With these developments, we believe we have addressed the concerns the community had express in the past regarding this allocation.
Risk minimized option for USD3
Changing the backing of USD3 may introduce risk concerns. However, we believe expanding the backing of USD3 to a Morpho Vault will reduce risk:
- Governance-minimized: Morpho Governance cannot halt the operation of a market or manage funds on users’ behalf, nor does it impose specific oracle implementations.
- Zero updated code risk: Morpho immutability ensures that there is no risk of a DAO update introducing bugs to existing Vaults or Markets. This safety by design approach will reduce counterparty risk of USD3.
- Minimal Code Base: 1400 lines of code for Morpho and Morpho Vaults, with over 23 audits by crypto’s most renowned security firms.
Economic risks: When depositing into isolated markets via a Morpho Vault, a depositor is exposed to the collateral of each underlying markets and therefore to the risk of a borrower not being able to fully repay his debt. This exposure is the same as the one in either Compound or Maker. The key difference is that the yield is higher and the collateral exposure is reduced, since these particular USDC Vaults lend against less risky assets than Compound or Maker.
