[RFC] Ratification of eUSD Mandate & Methodology V2 and Initial Eligible Collateral Universe

[ham]

Summary

This proposal seeks to ratify the eUSD Mandate & Methodology V2 document and establish an Initial Eligible Collateral Universe comprising Core, Enhanced and Opportunistic collateral buckets.

The proposed methodology introduces formal collateral selection criteria, portfolio construction rules and a framework for evaluating, approving and monitoring collateral opportunities. The proposal also approves an initial set of eligible collateral assets from which future basket allocations may be constructed.

Together, these changes aim to improve diversification, governance consistency, transparency and yield competitiveness while providing a scalable framework for the long-term management of the eUSD collateral basket.

Problem Statement

The current eUSD collateral basket has served the DTF well since launch, providing exposure to two of DeFi’s largest and most established money markets, Aave and Compound. However, as the protocol and product has matured and the universe of eligible yield opportunities has expanded, several limitations have emerged.

Today the basket is allocated entirely to two pooled lending markets, resulting in significant concentration at both the protocol and strategy level. While Aave and Compound remain industry-leading platforms, the basket currently lacks adequate diversification and exposure to other established sources of yield.

Governors also currently lack a formally ratified framework for evaluating and comparing collateral opportunities. As the universe of eligible collateral expands with this RFC, there is an opportunity to introduce a formal set of selection criteria and portfolio construction rules that allow governors to evaluate opportunities against a common framework. This would improve consistency across governance decisions while helping to streamline discussion, analysis and decision making. The current absence of a formal framework also reduces predictability for external stakeholders, providing limited visibility into how collateral opportunities are assessed and how the basket may evolve over time. As eUSD continues to grow as a financial product, transparency and consistency around portfolio construction is increasingly important for integrators, prospective partners and regulatory engagement.

Finally, yield competitiveness remains an important consideration. Based on @josh latest UGLYCASH report, the existing basket generates approximately $37,100 per month of yield on UGLYCASH eUSD balances held against customer payouts of approximately $73,800 per month, resulting in a monthly deficit of roughly $36,800 (~50%). As eUSD adoption continues to grow, the basket’s ability to generate sustainable yield becomes increasingly important for both integrators and RSR stakers. Without a clear framework for evaluating a broader range of opportunities, eUSD risks underperforming comparable products and reducing its attractiveness to both existing and prospective integrators.

Together, these factors demonstrate the need for a formal mandate and methodology that establishes clear portfolio construction rules and provides governors with a consistent framework for evaluating current and future collateral opportunities.

Rationale

This proposal seeks to introduce a refreshed mandate and formal methodology for the construction and management of the eUSD collateral basket. The Mandate & Methodology V2 document introduces a clear set of objectives, selection criteria and portfolio construction rules that can be consistently applied across future governance decisions. Rather than replacing governor discretion, the framework provides a common basis for evaluating opportunities and balancing yield, diversification, liquidity and risk.

A key feature of the methodology is the introduction of three collateral buckets: Core, Enhanced and Opportunistic. This structure allows governors to access a broader range of yield opportunities in a risk-adjusted manner while maintaining clear portfolio constraints and allocation limits. By applying these constraints, the framework enables eUSD to diversify beyond its current collateral set while maintaining a transparent approach that can be readily understood by integrators, stakeholders and regulators alike.

The introduction of an Eligible Collateral Universe also creates a clearer separation between collateral approval and portfolio construction. Once a collateral asset has been evaluated and approved for inclusion within the Eligible Collateral Universe, governors may focus future rebalance discussions on portfolio construction, relative value and methodology compliance rather than eligibility. By contrast, proposals seeking to introduce new collateral opportunities require a more comprehensive review of strategy design, risk characteristics, liquidity and operational considerations. This distinction should help streamline routine basket management while ensuring new collateral opportunities receive appropriate scrutiny.

Together, these changes improve consistency, transparency and predictability while providing a scalable framework for the long-term management of the eUSD collateral basket.

The full Mandate and Methodology v2 document can be accessed here.

Initial Eligible Collateral Universe

In addition to ratifying the eUSD Mandate & Methodology V2, this proposal seeks to establish an initial eligible collateral universe and assign each strategy to an appropriate collateral bucket.

The introduction of the methodology requires an agreed set of approved collateral assets from which future basket rebalances can be constructed. The proposed initial collateral universe comprises strategies that satisfy the methodology’s eligibility requirements, initially including pooled and curated lending markets.

Approval of an asset within the eligible collateral universe does not imply inclusion within the active basket or any minimum allocation. Rather, it permits governors to allocate to the strategy during future basket rebalances where appropriate.

The assets have been grouped into Core, Enhanced and Opportunistic buckets according to their liquidity profile, strategy characteristics and role within the broader collateral basket.

Core Bucket

The Core Bucket forms the foundation of the eUSD collateral basket and is expected to represent at least 70% of total collateral allocations. Strategies within this bucket prioritise liquidity, transparency, operational maturity and predictable performance characteristics.

Core strategies are expected to provide the baseline yield for eUSD through conservative allocation frameworks, high-quality collateral and deep liquidity. These strategies should remain resilient across a range of market environments, including periods of market stress, while providing governors with sufficient capacity to deploy capital at scale.

Enhanced Bucket

The Enhanced Bucket allows governors to access higher-yielding opportunities while maintaining relatively stable USD exposure and a risk profile broadly consistent with the objectives of eUSD. Allocations to the Enhanced Bucket may not exceed 30% of the total collateral basket.

Strategies within this bucket introduce additional protocol complexity and longer tail collateral exposures. These strategies seek to enhance portfolio returns through access to less efficient markets, alternative liquidity sources or differentiated stablecoin yield opportunities. While these strategies are expected to maintain strong liquidity standards, they face illiquidity risks during times of market stress.

Opportunistic Bucket

The Opportunistic Bucket provides a controlled allocation to specialised yield opportunities that may introduce different liquidity, capacity or strategy characteristics than those typically found within the Core and Enhanced buckets. Allocations to the Opportunistic Bucket may not exceed 10% of the total collateral basket.

Strategies within this bucket may include more specialised lending, liquidity or yield generation mechanisms capable of improving overall portfolio returns. Inclusion within the bucket does not imply a lower standard of due diligence or that a strategy is inherently riskier than those within other buckets. Rather, it recognises that certain opportunities may warrant tighter allocation limits and additional governance oversight due to their unique characteristics.

The live sheet containing all three proposed buckets and links to respective strategies can be found here.

Risks

The proposed methodology enables exposure to a broader range of collateral opportunities, each with its own risk profile and operational characteristics. While all eligible collateral must satisfy the methodology’s selection criteria, no strategy can be considered entirely risk free and governors must continue to evaluate the unique characteristics of each opportunity.

The introduction of a formal methodology and Eligible Collateral Universe also increases the complexity of basket management. Governors will be required to evaluate opportunities against a larger set of criteria, constraints and monitoring requirements, which may increase the analytical burden associated with governance decisions.

There is also a risk that predefined methodology constraints could reduce governance flexibility in certain market environments or limit the basket’s ability to respond to unique opportunities. While governors retain ultimate discretion over basket construction, portfolio constraints may occasionally prevent allocations that would otherwise be considered desirable.

The methodology also enables allocations across strategies with different dependencies, liquidity profiles and capacity constraints. During periods of market stress, liquidity conditions may deteriorate and capital may become more difficult to withdraw or redeploy than under normal market conditions. This risk is partially mitigated through liquidity requirements, allocation limits and ongoing monitoring.

As with all Yield DTF collateral baskets, losses arising from basket rebalances, smart contract exploits, protocol failures or other adverse events may ultimately result in recollateralisation requirements and potential RSR slashing. While the methodology seeks to minimise the likelihood and impact of such events through diversification, concentration limits and risk controls, these risks cannot be eliminated entirely.

Finally, the DeFi ecosystem continues to evolve rapidly. As protocols, strategies and risk considerations change over time, the methodology may require periodic review and amendment to ensure it remains aligned with market conditions and the long-term objectives of eUSD.

These risks are mitigated through collateral eligibility requirements, portfolio construction constraints, liquidity monitoring, diversification requirements and ongoing governor oversight. However, governors should recognise that no methodology can eliminate risk entirely and that prudent portfolio management remains essential.

Conclusion

The current eUSD collateral basket has provided a strong foundation for the DTF, but the growth of both eUSD and the broader DeFi yield landscape presents an opportunity to introduce a more structured approach to collateral management.

By ratifying the eUSD Mandate & Methodology V2 document and approving an initial eligible collateral universe, governors can establish a transparent framework for evaluating opportunities, constructing the collateral basket and managing future growth. The proposal seeks to improve diversification, governance efficiency and yield competitiveness while maintaining the liquidity and risk standards expected of eUSD.

Governors are therefore asked to vote on the adoption of the eUSD Mandate & Methodology V2 document and the approval of the initial eligible collateral universe described in this proposal.

Poll

Should the eUSD Mandate & Methodology V2 document and the proposed Initial Eligible Collateral Universe be adopted as described in this RFC?

• For
• Against
• Abstain

[Raphael_Anode]

Thank you for this incredible proposal. Together with the newfound cadence of UGLYCASH updates I can sense a decided uptick in professionalism and communications from eUSD all around. Very good to see that.

[0xd15co]

I am in favor in principle here, but I do think that we also need to find a way to quantify “adequate overcollateralization” with the same rigor as the other metrics used throughout this RFC/document. It can’t be a static percentage, as market shocks increase the likelihood of collateral defaults as well as leading to a price decline of RSR. So could we tie it to the basket’s actual risk?

1. Estimate what the basket could lose in a serious stress event, including combined failures, e.g. where several positions on the same protocol go down together, not just each one on its own.
2. Discount the staked RSR to a stress-adjusted value, i.e. whatever fraction could actually be relied on in a wider market crash, since the price of RSR is highly correlated with overall market sentiment.

This means required OC could be defined as “potential stress loss / stress-adjusted RSR value”, with a fixed floor.

The gist: Changes in the basket may also increase the risk of collateral default and should in turn open a discussion about a new target OC rate. Subsequent proposals might then address this by adapting the revenue shared with stakers by increasing/decreasing their share.

EDIT: I am aware of the complexity of this topic, so a reasonable middle ground would be to at least acknowledge that the “competitive risk-adjusted yield” mentioned in the mandate/methodology should equally apply to staking rewards.

[blue]

Balancing collateral types through decentralized governance is difficult, and this is a well-prepared foundation for doing it consistently.

Separating collateral approval from portfolio construction is a smart design choice:

@ham

Once a collateral asset has been evaluated and approved for inclusion within the Eligible Collateral Universe, governors may focus future rebalance discussions on portfolio construction, relative value and methodology compliance rather than eligibility. By contrast, proposals seeking to introduce new collateral opportunities require a more comprehensive review of strategy design, risk characteristics, liquidity and operational considerations.

One note for down the line:

A 50% single-protocol cap makes sense today, as there are only a handful of protocols we can trust, and forcing allocation lower would just push capital into weaker ones. Worth tightening in a future version as more protocols earn our confidence.

Overall, I think this proposal strengthens eUSD and sets a good template for future DTFs. In favor, and excited to see how it develops.

[ham]

Thanks for your early comments guys.

@0xd15co, I appreciate you bringing overcollateralization up. It’s a key component of eUSD’s architecture and should always be top of mind, especially in proposals like this where we are discussing fundamental changes to collateral approval and basket construction frameworks.

I broadly agree with the problem statement you’ve outlined. As the collateral universe expands and diversifies into the long tail, it is reasonable to ask whether a static view of “adequate OC” and stRSR revenue share remains sufficient or if these should vary based on the risk profile of the collateral basket.

Where I struggle is with the practical implementation. While a stress-adjusted OC framework sounds sensible in principle, defining potential stress losses, dependency failures and an appropriate stress-adjusted value for RSR quickly becomes highly complex. I worry that introducing such a framework could shift governance discussions towards the scrutiny of risk models rather than basket construction itself.

While much simpler, we’re already seeing this play out for ETHplus as differing interpretations of the ETHplus methodology are used both in support of and against the latest rebalance proposal. While this is healthy and expected, adding a mandated framework for evaluating basket risk may push us towards a level of governance complexity I’d rather avoid.

I also think that eUSD’s stRSR model already balances yield, risk and over-collateralization quite nicely. As, any increase to basket yield, increases RSR staker revenues. In theory, this should encourage additional staking and increase the size of the staking layer over time. At the same time, stakers provide first-loss capital. If we assume higher-yielding baskets generally carry greater risk, this creates a natural balancing mechanism where stakers are incentivised to balance yield generation against collateral risk.

That said, I don’t think the relationship is straightforward enough to rely on. Markets are often inefficient, staking participation doesn’t always respond proportionally to yield and there may be a significant lag between increased revenue generation and increased OC. While basket risk, protocol revenue and OC are clearly related, the strength and timing of these relationships are difficult to quantify.

There is also a broader product design consideration around predictability. One of the objectives of this RFC is to provide integrators, fintech partners and regulators with greater clarity around how the basket is managed. eUSD revenue forms a core component of UGLYCASH’s business model and future fintech integrations are likely to place similar importance on predictable yield generation. A dynamic relationship between basket risk, OC requirements and stRSR revenue distribution may improve risk alignment, but it would also reduce product predictability and weaken the incentive for fintechs to build around eUSD.

For those reasons I kept the methodology relatively high level on OC requirements. My view is that this RFC should focus on establishing a framework for collateral approval and portfolio construction, while preserving governor discretion when evaluating whether OC remains appropriate for a given basket composition.

That said, I do think you’ve identified an area that deserves further discussion. Competitive risk-adjusted yield should not apply solely to fintech customers, but also to RSR stakers who are ultimately underwriting the basket. As governors evaluate future basket compositions, the relationship between basket risk, protocol revenue, staker compensation and OC should remain an important consideration.

@blue, 100% agree! A 50% allocation into a single protocol feels right today but this can definitely come down as the collateral universe expands. Another consideration is to limit allocation by yield type; pooled lending, curated lending, RWAs, DEX LPs etc makes a lot of sense to me as the collateral universe matures. Only thing I think we need to be careful of is tightening these constraints too early. For example during market stress we may need to reduce collateral baskets risk, removing enhanced and opportunistic allocations or exit one protocol completely e.g Aave during the rsETH hack, if constraints are tight it may be impossible to redistribute allocation while still being aligned with the methodology. Although, this could be remedied with a clause in the mandate that allocation restrictions can be lifted during significant market stress. Food for thought for any upcoming methodology amendments…

[Raphael_Anode]

One more thing that came to mind when thinking deeper about this. All the proposed candidates are very established, but we have seen recently with the Aave, rsETH contagion that sometimes the chain of exposure runs a lot deeper than initially meets the eye.

How are you thinking about due diligence on composability risk here?

I am aware this can be very labor intensive, especially as many curated strategies shift allocations themselves.

The reason this comes to mind, is that for a fintech like UC, the idea of having funds inaccessible for even a brief moment of time, would probably come at a much more significant cost than having to subsidize yield, which can be modelled as a customer acquisition cost.

[pmckelvy]

the protocol team has reviewed the morpho v2 vaults and determined they are not a great fit for the yield protocols.

1. Per-vault pausable issuance gates — distinct from a full-protocol pause; transfers stay open, so auctions could clear at terrible secondary-market prices precisely when you’d want to sell during a collateral default.

2. Curator-flippable management fees — curators can turn fees on at any time. Only 1 of 8 vaults has it on today; flipping it on any of the other 7 drops ref-per-tok and triggers an immediate nuisance default, causing the protocol to go into unnecessary re-collat auctions

3. Reward yield doesn’t stream through exchange rate — yield is claimable, not embedded. Worse, several reward tokens (notably MORPHO itself) have no on-chain oracle, so you can’t even materialize the yield by trading it out. i think this is only relevant for 2 of the vaults, so for those 2 you need to essentially discount the morpho part of the yield unless they get an oracle

   (2) is the major issue here, essentially making defaults unpredictable and unavoidable to some degree. (1) technically exists in other protocol integrations like aave, but the per-vault mechanic causes increased risk. (3) is a yield issue

[ham]

Hey @Raphael_Anode, thanks for the comment.

I think this is a very fair concern. I don’t think composability risk can ever be fully eliminated, but one of the goals of the methodology is to force governors to consider it directly through the collateral approval process, bucket classifications, dependency limits and diversification requirements.

The more difficult question is ongoing monitoring. As you point out, strategies can evolve over time and hidden dependencies are often only obvious in hindsight. I don’t think there is a perfect answer here, but I do think it reinforces the importance of maintaining a large allocation to highly liquid, conservative Core strategies while being selective with allocations to Enhanced and Opportunistic opportunities and only allocating there when the risk / reward is appropriate.

I also agree with your point regarding UGLYCASH. For a fintech, temporary loss of access to capital is likely a much bigger problem than a yield profile that doesn’t beat DeFi’s risk-adjusted rate. That’s one of the reasons the methodology places such a strong emphasis on liquidity, diversification and dependency risk, while requiring the majority of the basket to remain allocated to Core strategies where the risk of lock-up is lower. The intention is not to eliminate these risks entirely, but to ensure exposure to more specialised opportunities remains measured and proportionate to the additional risk being taken.

[ham]

Thanks for this in-depth review of the proposed Morpho collaterals @pmckelvy.

It’s obviously disappointing that we won’t see Morpho V2 vaults on the Yield Protocol given their potential to improve both the yield and diversification profile of eUSD. However, if relatively small changes at the curator level can create significant downstream consequences for Yield DTF holders, it makes sense to be cautious about onboarding them as collateral.

I do think this raises a broader question for eUSD. If many of the most attractive lending opportunities are ultimately incompatible with the Yield Protocol architecture, we should consider whether the Yield Protocol remains the most appropriate long-term structure for products such as eUSD.

It would be interesting to understand how UGLYCASH weighs the benefits of eUSD’s overcollateralized design against the potential opportunity cost of being unable to access an increasingly large portion of the available stablecoin yield universe and the engineering burden and subsequent lead time of collateral plugins as they enter eUSDs collateral universe.