Summary
The USD3 asset management will be upgraded and moved to automated, yield-optimized ERC-4626 vaults based on the technology of the Fusion Protocol.
Problem statement
USD3 deploys the underlying USDC, USDT, and DAI in static allocations across DeFi credit markets. With changing dynamics in DeFi native interest rates, the underlying APY could be drastically improved by using a secure, automation first, and DAO controlled strategy using Fusion.
Abstract, Rationale
What is Fusion?
Fusion is a modular asset management framework designed to optimize fragmented liquidity across DeFi. It uses ERC-4626 vaults and automates asset allocation and risk management. By integrating various protocols into a unified smart contract layer, Fusion streamlines complex operations like looping, carry trades, arbitrage, leveraged farming, and passive lending. This approach reduces operational burdens for asset managers, enhancing capital deployment efficiency and effectiveness across DeFi’s diverse yield venues. Fusion was designed and built by the IPOR Labs team, who also builds the IPOR Derivatives protocol.
The first Fusion vault was the USDC Lending Optimizer which optimizes USDC allocation across premier money markets, factoring in gas costs, interest rates, and market liquidity. It dynamically adjusts to maximize returns, leverages rate arbitrage through borrowing, and automatically compounds token rewards.
(The purple line shows the optimized performance against the grey line which is a static allocation similar to the current USD3 strategy.)
How USD3 could benefit from Fusion technology
Dynamic allocation optimization offers the potential to increase interest rates for USD3 holders without increasing risk. For this purpose, Fusion vaults could be set up to manage USD3’s underlying assets deposited in predefined, DAO whitelisted lending markets (e.g., Aave, Compound, Morpho, and Sky) depending on the current market situation. Automatic optimizations can be performed either at specific intervals or dynamically.
The USD3 DAO would assume the role of Atomist (this is what we call vault owners in Fusion who determine a vault’s strategy) and thus have full control over the vaults. The vaults could be set up as a closed vault so that they can be used exclusively for asset management of USD3. IPOR Labs could act as a service provider to automate allocation optimizations (Alpha). The Alpha can only carry out transactions within the given restrictions, for example, only moving assets between Aave and Compound or other markets decided by the USD3 DAO. The Atomist could assign the automation service to another service provider at any time.
Controls
USD3 DAO as Atomist (vault owner and curator): The Atomist controls the vault from assets, to actions, and markets. Fuses are smart contracts connecting the vault to external destinations. Fuses are modular and the USD3 DAO can change the vault’s configuration through an admin panel including adding and removing credit markets. The USD3 DAO can control the vault deposit whitelist, ensuring the USD3 contract is the only authorized depositor into these strategies.
USD3 DAO instructs IPOR Labs running the Alpha about threshold and risk limits e.g. no more than 50% deployed to a single market.
Timeline
Due to its modular nature, vaults for USD3 for USDC, USDT, and USDS/DAI can be spun up, configured, and automated quickly following a successful governance vote. The primary timeline would depend on USD3 and Reserve’s deposit integration into the vaults. IPOR Labs estimates that a strategy could be built and deployed within 1-2 weeks fully automated. There are no setup costs.
Details
We propose a structure of three different stablecoin optimizer vaults:
- USDC:
Fuses/markets:
- Aave v3 Core
- Compound v3
- Morpho Steakhouse USDC
vault name: USD3 Lending Optimizer USDC
vault ticker: usd3USDC
strategy: dynamic optimization for highest APR, automatic token rewards claiming and compounding
- USDT
Fuses/markets:
- Aave v3 Core
- Compound v3
- Morpho Steakhouse USDT
vault name: USD3 Lending Optimizer USDT
vault ticker: usd3USDT
strategy: dynamic optimization for highest APR, automatic token rewards claiming and compounding
- USDS
Fuses/markets:
- Aave v3 Core
- Compound v3
- Sky Savings Rate
vault name: USD3 Lending Optimizer USDS
vault ticker: usd3USDS
strategy: dynamic optimization for highest APR, automatic token rewards claiming and compounding
The USD3 DAO could determine a fixed allocation both between the three vaults and within the vaults, or set minimum and maximum limits for each individual market.
Fees
Fusion as an infrastructure has base fees which go to the IPOR/Fusion DAO which are as follows:
- 0.3% on management + 0.2% for automation
- 2% on performance
These fees are annualized and taken at the smart contract level. With historical automation from other optimization vaults outperforming static allocation on average by 2x the base yield should more than pay for itself.
Risks
Security
Fusion was designed for modularity, security, transparency and automation. As the USD3 DAO decides to change strategies, the strategy and markets can be shifted by adding or removing fuses with no need to upgrade the vault smart contract or touch the internal storage.
The IPOR Protocol has undergone more than a dozen audits in total and handled tens of millions in assets and billions in derivative volume with no smart contract issues over more than 2.5 years onchain. The Fusion protocol has undergone two full audits and running live strategies for 6 months on mainnet, Arbitrum and Base.
Fusion handles integration and accounting. Any external markets that the USD3 DAO chooses carry their own smart contract risks, but assuming the DAO would be deploying similarly to current strategies there is no additional smart contract risk outside of the Fusion routing and accounting architecture.
Audits
- Yes, I am in support of this proposal.
- No, I am not in support of this proposal.