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.
Forum poll below:
- Add the Morpho USDC vault to the basket
- Need more information / Don’t add