Wow, very impressed with the discussion here. Don’t think it would be difficult to tease out some high priority action items to set the foundation for a stronger eUSD offering in 2026.
Firstly, however, i’d like to focus on the proposed basket.
1. Heavy RLUSD exposure
Despite it not being explicitly stated in the mandate i’m uneasy with the proposed basket being ~75% concentrated in RLUSD. Firstly, this weight would leave us with a diversification ratio of 0.375 which feels low when there are so many stablecoin yield offerings out there. Also, this level of concentration is well above the level of overcollateralization that eUSD enjoys, it the event of a significant depeg where RLUSD is written off at or close to zero, however unlikely, RSR stakers will be completely wiped out and eUSD holders will be left with a sizeable haircut.
The concentration in RLUSD is even more concerning when you take into account the falling level of overcollateralization which now sits at 44%. While the recent sudden drop can be attributed to the short term negative price action of RSR I expect RSR to continue trending down as revenue share is transferred from stakers to UC. For reference the latest proposal plans to reduce revenue shared with stakers by a further 2.9%.
However, I will concede i’m less worried about the concentration given the strong bluechip rating and protocol mechanics which means a depeg is unlikely and if it were to happen the protocol would likely flee for it’s emergency collateral well before a scenario which would see the RLUSD allocation being written to zero and eUSD holders take a haircut. Although this is DeFi and strange things can happen e.g PAXOS accidentally minting $300T PYUSD which also enjoys a A- rating on Bluechip. It’s also worth noting the current imbalance in the RLUSD/USDC Curve LP so total actual exposure to RLUSD sits slightly lower at 63% based on Sawyer’s numbers.
2. Supply Caps
Before we proceed to onchain voting i’d like so more information on the Aave supply cap. Currently RLUSD supply is sitting at it’s $600M supply cap demonstrating huge demand for the yield opportunity. However, in my mind given the way eUSD operates we can’t operate in an environment where the markets supply cap is close to or has been reached seen as though mints will fail. In this situation it’s also unlikely we can just reduce our exposure to the market seen as though other market participants will enter and fill the gap leaving us no option but to completely exit the position. With this in mind it leads me to think that this market is better off left alone until it has found equilibrium between supply and demand, unfortunately though this means likely the last ones to the table in terms of yield.
3. Duration of incentives
As per the Merkle campaign the incentives for the Aave RLUSD market as due to expire in 5 days. While i’m sure these are planned to continue it’s probably worth trying to find out the planned level of incentivization and their duration before going ahead with the rebalance. I’d hate to rebalance into the proposed basket just to rebalance out a month or so later if / when these incentives dry up.
I acknowledge this will be hard to get from Ripple directly but maybe they have published in on socials or in their blog?
4. Interim Basket
Lastly, I understand your desire to improve the yield profile of the basket as soon as possible Sawyer but before pushing ahead with this interim basket I’d like some clarity on duration and an exit plan in place in case we’re not able to achieve the desired final basket given it’s concentration in a single position and of course ABC labs confirmation that the interim basket can be entered smoothly especially since we’ve seen slashing occur in the past with LP positions.
I think the clarifications around the interim basket can be as simple as when you expect we’ll swap into the final basket, a deadline upon which we’ll diversify the basket if we haven’t been able to allocate to the Aave RLUSD market and what this alternative basket looks like.
Summary
While i’m in favour of the direction this proposal takes, providing higher yield for eUSD holders, stakers and reducing the collateral baskets dependence on lending markets there are a few considerations that need addressing before i’d be happy to vote this proposal through.
- Consideration to reduce the concentration in RLUSD.
– Adding another asset at a 25-40% weight would reassure me that the level of overcollateralization now and in the future would be able to cover any depeg scenario.
– @josh What is yours and UC take on this? - A defined strategy as to eUSDs actions if the supply caps on Aave’s RLUSD market are hit as to minimise the duration where mints fail.
- A basic evaluation of RLUSD incentive programmes.
- A clear plan around the duration of the interim basket and ABC labs confirmation that this basket can be entered smoothly with minimal slashing risk.
eUSD onchain liquidity
I think you raise some good points regarding onchain liquidity Sawyer and I generally agree. We’ve already seen this play out with our current LPs which are now imbalanced against eUSD as fintechs, quite rightly, aquire eUSD through the most efficient routes. However, @josh I think it would be good to model your costs of swapping in or out of eUSD vs your costs of minting and redeeming eUSD through the protocol. If you can’t share them publicly i’d definitely encourage you to to share them with ABC labs, if you haven’t already, to see if they can mitigate some of these issues for you.
Completely removing the DEX liquidity for eUSD is interesting and would certainly remove the operational oversight and incentive drain on ABC Labs I’d be concerned about the reduction in venues where eUSD can be supplied ultimately cause capital to exit eUSD as these incentives to dry up, reducing the level of collateralization even further. I’d also be concerned about how critical the LPs are for money markets but definitely worth exploring further.