[RFC] USD3 allocation update proposal to include Morpho Vaults

USD3 allocation update proposal

Summary

This is a proposal to explore the addition of Morpho Protocol’s SteakHouse USDC Vault or Gauntlet USDC Prime Vault for 15% of the USD3 collateral basket. This addition will follow USD3’s mandate by diversifying into safe, stable yields from bluechip DeFi Projects. By diversifying into one of the two vaults, USD3 will diversify a highly rated stable yield.

Current USD3 Collateral Basket:

Collateral Exposure
Compound USDC V3 50%
Savings DAI 50%

Proposed USD3 Collateral Basket:

Collateral Exposure
Compound USDC V3 43%
Savings DAI 43%
Morpho USDC Vault 15%

By including Morpho yield into USD3’s collateral basket, this will further its mandate of safe sustainable yield on highly-rated stables with DeFi Protocols. Morpho stands out as an ambitious contender to help further USD3’s mandate with its recent TVL growth as well as longterm vision to be a fundamental pillar in DeFi.

Abstract

This RFC aims to diversify the USD3 collateral basket by adding either Morpho Protocol’s SteakHouse USDC vault or Gauntlet USDC Prime vault. Currently, USD3’s basket relies on Compound USDC V3 (50%) and Savings DAI (50%), providing stable but concentrated exposure. By introducing one of these Vaults, USD3 would diversify its yield sources, aligning with its mandate to secure safe, sustainable returns from blue-chip DeFi projects.

Problem Statement

USD3’s basket is currently made of two blue chip DeFi Yields (50% Compoundv3 and 50% sDai) after the removal of the AAVE USDC yield source. Safe yield is not only established through blue chip yield, but also diversification into multiple blue chip sources. By being exposed to only two yield sources, the community should explore potential yields to include that follow USD3’s mandate

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% while the average base supply rate of Compound has been 3.6% in the past month. Current yield of Morpho USDC Vaults provides an improvement to USD3 holders and RSR stakers having an average base supply rate of 4.08% over the last 30 days in the highest performing vault.

Morpho proposes allocating 15% or up to $5 millions to SteakHouse USDC or Gauntlet USDC Prime to improve the base APY by up to 13% compared to Compound. The position will also earn aproximately 57 MORPHO per 1000 USDC allocated per year. This limit will allow the protocol to improve the yield while keeping exposure to the underlying markets under a 10% for both WSTETH and WBTC. We propose to monitor at this level and increase the cap up to $10 millions once the pool liquidity allows it.

Asset Allocation APY Rewards
SDAI 50% 6% 0%
Compound USDC 40% 3.6% 0.25%
Morpho USDC Vault 15% 4.08% 57 MORPHO per year per 1000 USDC

We understand that Morpho Token being non-transferable may introduce some discount to the realized yield. However, the Morpho Dao is currently debating opening up transferability of the token, and such an event will only strengthen the case for USD3 to add these USDC Vaults. Even after a return discount is applied, the realized yield will be higher, while the risk reduction gained via diversification will continue to represent an improvement across the board.

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, Steakhouse Financial and BlockAnalitica.

To date, Morpho has $2.5B 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 a USDC Vault curated by SteakHouse Financial a market recognized risk manager. In particular, Steakhouse USDC Vault lends only against the highest quality collaterals such as WSTETH, WBTC 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 SDAI. Gauntlet is a DeFi-native quantitative research firm specializing in risk management, utilizing tools from the algorithmic trading industry to help protocols manage risk.

Risks

Smart Contract Risk:

As a DeFi Protocol, smart contract is always something to be considered. Morpho protocol followest the highest security practices in the industry.

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.

Market Risks:

Limited collateral exposure: 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 assets than Compound or Maker.

Caped exposure: following Reserve protocol practices, the allocation of up to 5m 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 6.4% of the pool with current 39m liquidity and 9.6% for WSTETH/USDC with current 26m liquidity.

usd3.png

Forum poll below:

  • Add the Morpho USDC vault to the basket
  • Need more information / Don’t add
0 voters
4 Likes

Welcome to the Forum ser, and GG for this proposal…
Just a small detail, don’t forget to put the voting pool at the end next time so that it will be easier to know how many are in favor or how many are against.

About the proposal…
I don’t think there is a plugin for the “Gauntlet USDC Prime” asset yet (I did a quick search and didn’t see it, if there is then forget I said this hahaha), so there are only three options left:

A) Go for the option to include SteakHouse USDC
B) Wait for the plugin for Gauntlet to be available.
C) Don’t choose any.

I just have one question to finish giving my vote for or against… Due to the limitation of those vaults, what would happen if USD3 experiences a wave of adoption that makes its MC rise to 70m-100m in a short time (lets say, 3-6 months)?

1 Like

Thanks for the feedback.

In regard to either Steakhouse or Gauntlet USDC Vault both are 4626 compatible contracts that are functionally the same. In case the protocol decides in favour of one or the other, the implementation will follow a similar path.

If the market cap of USD3 raises with a wave of adoption to 70m-100m then the exposure cap will still apply, limiting to the underlying markets in line with the risk parameters set by Reserve protocol.

Morpho will be more than capable to accommodate such growth, as it has shown a strong growth trajectory so far, we expect that such USD3 will be accompanied by Morpho and to keep the exposure within the parameters while producing a yield above the current allocation.

1 Like

Thanks for the well written proposal. We added the mandatory forum poll so that we can get a temp-check before going to an on-chain poll.

2 Likes

Excellent proposal. In general, I think diversifying into Morpho USDC is a generally good idea and you have made great arguements for including it.

We know that whenever new collateral is added, minting costs tend to go up. Is there an estimate on how much this proposal would impact minting/gas costs?

In favour of this. How are nontransferable MORPHO allocated to an RToken holder? How does that work in the melting process?

Also, do we want to consider offboarding sDAI for sUSDS to “get with the program” so to speak?

I voted no for the following reasons.

Minting Cost Concerns: I am not sure that the increased cost to mint outweigh the benefit of adding a Morpho Vault. In the proposed collateral basket of 43/43/15, we are lowering the overall yield profile slightly and increasing the cost to mint. This is not a favorable move for USD3 holders or RSR stakers.

Liquidity Concerns: As a general rule for RTokens, the aim is to NOT represent more than 10% of the liquidity. This has to do with allowing the RToken to trade out of the asset with as little slippage as possible(if needed). This proposal meets that 10% rule for individual markets within the vault, but not the vault as a whole.

Morpho Reward Concerns: When will MORPHO be transferable? I don’t like how there is no market for MORPHO yet. I believe this to be an overall negative for USD3 holders and RSR stakers to have them wait until there is a market for MORPHO inorder to realize those gains.

WBTC Concerns: Due to the recent drama surrounding WBTC and Justin Sun, several protocols are making adjustments to reduce risk in their protocol. We have seen SKY(Maker) as well as Compound make adjustments. Due to the uncertainty around this asset, and with WBTC taking up 60% of the Steakhouse Vault and 26% of Gauntlet Vault, I don’t think it’s in the interest of USD3 holders or RSR stakers to add more complexity surrounding this issue.

Oops, @0xTomSawyer’s arguments are definitely something to consider, especially the impact of the wBTC drama and its impact on both vaults and the decrease in the yield of USD3 in general if this proposal were to be implemented (something I overlooked in my first interaction with this RFC).

I will change my vote to “Need more information / Don’t add” until everything is a little clearer for me.

1 Like

@Lucianken this is a very tight outcome for the RFC poll… It’s up to you whether or not you want to move this to an on-chain poll. Given that heavyweights such as @0xTomSawyer are not in support, we would recommend working with the community to address their concerns first.