Replacing eUSD's USDT with pyUSD and USDM

Summary

I propose removing the Tether collateral from eUSD and adding pyUSD that has scored A- via Bluechip’s rating framework, and USDM that has scored B+.

Abstract

Swap out eUSD’s Tether collateral for a pyUSD derived receipt token from Aave. Consider swapping out the remaining 25% of eUSD collateral with USDM.

Problem Statement

USDT derivatives comprise half of the eUSD basket. That is, 25% of eUSD is cUSDT and 25% saUSDT. USDT scores a D from Bluechip and a 4 from S&P Global.

The other half of eUSD is USDC derivatives, 25% cUSDC and 25% saUSDC. USDC scores a B+ from Bluechip, and a 2 from S&P Global. In spite of its previous depegging event in March of 2023, it’s more attractive to hold than USDT.

You could potentially view these two ratings, in combination, to understand the Bluechip rating for eUSD as a C. The same for S&P Global potentially rating eUSD a 3.

Tether’s presence drastically lessens the attractiveness of eUSD, from an RToken holder and staker’s perspective. We want eUSD to be attractive such that the TVL of eUSD increases.

Rationale

In order to make eUSD more attractive to DAOs and treasury managers, we must remove USDT and replace it with safer assets.

Below is a link to Bluechip’s website, which compares USDT, pyUSD and USDM.

pyUSD is an excellent candidate for replacing 25% of eUSD’s collateral (half of USDT).

pyUSD scores an A- from Bluechip. It can be inferred that S&P Global would rate pyUSD a 2, based on their assessment of USDP.

USDM scores a B+ from Bluechip, and is a good candidate for replacing 25% of eUSD’s collateral (the other half of USDT).

USDM’s inclusion would diversify eUSD to three assets from two. This is likely to make eUSD more appealing as a treasury asset.

USDT being scored poorly via two different ratings agencies speaks volumes about its integrity. Does including USDT speak volumes about eUSD’s integrity?

The world is looking more closely at stablecoins and it is imperative that eUSD be the flagship for not only RTokens, but for consciously governed stablecoins. If eUSD is meant to be a flagship, it is ridiculous to include Tether in its basket.

Risks

pyUSD is a relatively new asset.

USDM holds the same B+ scores as USDC, but it could be argued that USDM has less of a track record compared to USDC and pyUSD (PayPal + Paxos).

Removing USDT may lower yield to stakers. While valid, I don’t think this will discourage stakers, as evidenced by the eusdRSR yield rate going down steadily due to additional, continued RSR staking.

Thank you for the consideration. I look forward to hearing your comments below!

Bluechip comparison link:

6 Likes

Do you propose naked pyUSD with no lending and hence no yield, or pyUSD via a lending protocol or liquidity pool?

Re USDM, I think one important question is whether MobileCoin and BFF would be comfortable with offering an asset to their users that included a tokenized treasury coin, given the legal uncertainty around that in the US. They may be totally fine with it, but given that eUSD is on both platforms I think it makes sense to ask them to weigh in on this RFC. I’ll send them the link and ask them to consider.

4 Likes

Overall I think removing USDT entirely from the eUSD basket makes sense given your reasons stated.

What if we do this instead.

25% saUSDT → 25% saPYUSD
25% cUSDT → 25% pyUSD(raw)

There would be no yield from the raw pyUSD, but it would eliminate USDT from the basket.

I do think it would be important as Nevin said to get feedback from the MobileCoin team as they were against adding tokenized US treasuries to the basket in a previous proposal. Here is the previous response from Henry regarding adding Flux’s FTokens to the collateral basket: Addition of Flux’s fTokens, fUSDC and fUSDT to the eUSD collateral basket - #7 by henry

2 Likes

I propose sapyUSD, not naked pyUSD. Given the result of this vote, the Aave market for pyUSD is due to be created:

https://snapshot.org/#/aave.eth/proposal/0xb91949efad61b134b913d93b00f73ca8a122259e6d1458cf793f22a0eebfd5d5

That’s a good point regarding USDM and I appreciate you bringing that up, as it was something I had not considered. I look forward to them weighing in.

1 Like

Could be good to include a history of eUSD in the RFC for newcomers. For example if USDM or PYUSD teams wanted to better understand mandate, partners, TVL and (successful) history with bank run stress tests. Its mostly included in the Dec 31 2023 Reserve protocol recap thread for 2023 but could be worthy of more explicit breakout here @Braden .

1 Like

Make sense to me. I strongly agree with relying on private (non-govt) rating agencies to build up their credibility. Even if a govt agency does come along and start rating stables at some point, I would still use this company as long as they maintain their reputation.

This mindset needs to be ingrained into people’s heads.

1 Like

From a BFF perspective, we would not feel comfortable with the inclusion of USDM in the collateral for eUSD. USDM is a tokenized security, and considering our use of eUSD as a digital bridge between US bank customers and our Latin American customers, the legal risk exposure could jeopardize the relationship with our partners due to the current lack of legal clarity in the US regarding such assets.

If there were more legal clarity regarding tokenized securities, which might happen in the future, our position would be different.

3 Likes

Good to hear this point of view. It seems that we have a few options to eliminate USDT from the basket.

25% saUSDT → 25% saPYUSD
25% cUSDT → 25% pyUSD(raw)

OR

25% saUSDT →
25% cUSDT → 50% saPYUSD

OR

33% saUSDC
33% cUSDC
33% sapyUSD

Curious to hear everyones thoughts or if there are other alternatives worth considering.

2 Likes

Heyo,

I understand the concern that USDT derivatives currently make up 50% of eUSD but…

I don’t think it would be a good idea to eliminate it completely, I would agree to eliminate one of the two derivatives (saUSDT or cUSDT).

And although regarding pyUSD (raw) it does not give me complete confidence (Especially because of how new and small it is, ≈300M MC) I think it is the only option and given that according to @gabo, USDM could be a problem for BFF/ MobileCoin.

So, I would be in favor of:

remove: saUSDT or cUSDT
add: sapyUSD.

IMO.

2 Likes

I think the ultimate aim to remove USDT is the right one with eUSD - I would like to see it put forward for a rating from Bluechip in a state without USDT as any collateral to see what rating they thought was fair. I would expect it to be a B at worst, depending on their evaluation of smartcontract risk with Compound/AAVE etc. For the USDM part, I’m only mirroring others views - it’s an issue with being a security. Since eUSD pays nothing to holders it makes sense for it to be the highest rated RToken for safety.

1 Like

Trident is in favor of any inclusion of PYUSD in eUSD.

We would be most happy with saPYUSD comprising the entirety of the PYUSD backing position as eUSD would become a major supply side provider for the Aave market, furthering the goal of increasing utility of PYUSD across chain.

Let us know if there is anything we can do to help this initiative along

-M

1 Like

Here’s a poll with the basket options that it seems we have narrowed down to:

  • 33% wcUSDC + 33% saUSDC + 33% sapyUSD
  • 25% wcUSDC + 25% saUSDC + 25% sapyUSD + 25% wcUSDT
  • No changes to existing basket
  • Other changes not listed (please post reasoning)
0 voters

Looking forward to seeing the results.

PYUSD is now live on Aave, any estimate of timeline to make this proposed change?

2 Likes

pyUSD market is now live on aave!

Biggest challenge with including apyUSD to start is that the yield rates are so low in the beginning of a market. eUSD governors would probably be more amenable to including higher % of backing in apyUSD if Paxos/Trident were able to commit to sharing some of the rewards budget of pyUSD with eUSD to help kickstart that aave lending market.

1 Like

Hi all. Thank you Braden for this thoughtful proposal and thank you as well to others who have given it consideration and commented.

If I were to summarize the motivation for this proposal in a single line, I would pick this one:

Tether’s presence drastically lessens the attractiveness of eUSD, from an RToken holder and staker’s perspective.

USDT is attractive to holders of eUSD

While acknowledging the reasons why Bluechip.org gave Tether a D rating, I’d also like to mention the evidence that Tether is, in fact, the best known, most trusted, and highly desired stablecoin:

  • With almost 100B TVL, there is over 3 times as much Tether held as USDC, PyUSD and USDM, combined.
  • Tether’s daily volume is greater than 7.5x the daily volume of USDC, PyUSD, and USDM, combined.

and Bluechip.org themselves, recognize that USDT:

  • is the longest surviving stablecoin in circulation.
  • It has lived through multiple stress tests, regaining its dollar peg each time it was tested.
  • USDT’s issuer has consistently fulfilled all redemptions, despite widespread accusations of USDT not being fully backed by reserves.

Aside from these quantitative and qualitative plusses in the USDT column, we at Sentz have performed and continue to perform customer and partner interviews where we find that outside of the USA, Tether is just about the only stablecoin that people broadly recognize and express a desire to obtain, hold and use for transactions.

When our interviews indicate an initial lack of interest in eUSD, we find that we can turn this around by explaining that eUSD is basket of stablecoins, including USDT and other coins like USDT, shifting opinion in favor of eUSD.

USDT is attractive to stakers

It has already been acknowledged that swapping out USDT for saPyUSD will drastically lessen the yield on the eUSD basket, at least initially. While the aPyUSD lending market has been listed, it only has a tiny bit of lending and no borrowing thus far. It is honestly too early to tell if this market will take off.

Yield, however, is certainly attractive to stakers.

Diversifying the basket

Ok, so I’ve made my pitch for keeping USDT. We think, at this time, keeping USDT in the basket is important for MobileCoin / Sentz. It helps with getting our partners and customers onboard with eUSD, and we do care about the yield that eUSD is earning for stakers.

That said, we’re not against diversifying the basket, and we are big fans of Paxos and how they manage their funds, including protecting customers by holding reserves completely segregated from their corporate treasury in a trust with oversight by the NYDFS.

Should we put USDP into the basket? PyUSD? Both? I don’t think it is clear yet. Their TVL is about the same. aUSDP has been around for a while, and there hasn’t been a lot of interest in it. aPyUSD is completely untested.

There’s an argument that we might jump-start a lending market by putting a bunch into the respective Aave pool, making the cost of borrowing very low.

There’s also an argument that demand for borrowing is tied not only to low interest rates, but also utility. What can you do with your borrowed USDP/PyUSD to give you returns?

Bottom line: I think we could wait and see, but would not oppose dipping our toes in to seeing if we can jumpstart the lending market. I would suggest not going as high as 4.5MM (25%) at first, though. Maybe start more like 1MM?

What about USDM?

MobileCoin / Sentz concurs with BFF – we like what Mountain is doing but think that the regulatory picture around USDM is still unclear in a couple of important dimensions that impact us and our customers. We wish them luck and hope that these issues get worked out. At this time, though, we would vote against any proposal that puts USDM in the basket.

Parting thought

I appreciate our keeping abreast of what’s happening in the stablecoin space, looking out for cool new projects and continuously monitoring the old to make sure they are continuing to perform,

Is this the right moment for a basket change? I’m not sure that we either learned something new about USDT that we didn’t know before, or that PyUSD has caught on to the point where it’s a no-brainer to put it in the basket.

2 Likes

Thank you for the thoughtful post @henry. You made great arguments for USDT and I’ve heard similar in my own explorations. Also appreciate your point on diversification of the basket where USDP or PYUSD with meaningful DeFi yield could be attractive.

Curious to hear your thoughts as well as @gabo 's on Bluechip rated B+ DAI in the basket as a means toward greater diversification. Coincidentally 2 years ago DAI was mostly backed by USDC itself however its made a dramatic shift to a diverse portfolio of real world assets backing.

A basket of USDT, USDC, DAI, PYUSD gains high quality collaterals and diversifies counterparty risk, and could further strengthen the safety of RSR overcollateralization.

2 Likes

super helpful context @henry , thanks for sharing here!

Henry your response is great, and exactly the perspective I wished to hear.

I understand the reticence to rebalancing the basket solely to stablecoins minted by companies in the US. Additionally your points about Tether and its metrics are well taken. Potentially, Tether could improve the way that it discloses it’s backing. At the moment it seems like a measured way to handle eUSD’s Tether exposure and US stablecoin exposure, is to rebalance the basket as follows:

25% saUSDC
25% wcUSDC
25% sapyUSD
25% wcUSDT (or saUSDT)

This addresses the concern of centralization of the basket to a single jurisdiction while also mitigating the appearance of risk to those that prefer not to hold Tether. If we did come into agreement on this basket, we could certainly wait for sapyUSD yields to reach more favorable levels before rebalancing.

Agree with dropping consideration of USDM.

Would love to hear thoughts from everyone on this potential basket.