[RFC] USD3 Collateral Basket Change Proposal #1

Summary

Intro to the Web 3 Dollar: USD3 is a decentralized yield-bearing USD stablecoin built on DeFi markets. USD3 is a fully asset-backed currency (“RToken”) created on the Reserve protocol. RTokens feature onchain asset-backing, revenue sharing, overcollateralization and mint/redemptions, governed by RSR stakers. This RToken’s aim is to become the native Web 3 currency.

USD3 is 1:1 asset backed by a basket of yield-bearing tokens. Given the unique design and current market conditions, it is estimated to yield 5-8% APY from the most reputable protocols using the most established assets. USD3 is overcollateralized with auditable proof of reserves available on-chain 24/7.

In this proposal the aim is to discuss options for a possible solution to improve the yield in the USD3 collateral basket

Option 1:
New Basket:
50% sDAI - 9.4% APY
50% Compound USDC - 9.7% APY

Option 2:
New Basket:
33% sDAI - 9.4% APY
33% Compound USDC - 9.7% APY
33% Aave USDT - 4.87% APY

Option 3:
Maintain Current Basket:
33% sDAI - 9.4% APY
33% Compound USDC - 9.7% APY
33% Aave pyUSD - 0.11% APY

Abstract

Currently the yield from the Aave pyUSD part of the basket has dropped to almost 0%. This has led to discussions on how to address this problem. The proposal could result in a basket change to Option 1 or 2, or, in leaving the basket as is(Option 3).

Problem Statement

Option 1:
Removing the Aave pyUSD part of the basket and replacing it with 50% sDAI and 50% Compound USDC, will lead to an increase in yield for USD3 holders. This change decreases the diversification, but remains within acceptable risk parameters.

This option lowers the cost of gas to mint which could potentially improve the demand for USD3. It also aligns with the many DAO’s common holdings of USDC and DAI.

Option 2:
By replacing the Aave pyUSD part of the basket with Aave USDT, this option will keep diversification similar. It would also result in an improvement of the overall yield profile. According to the Register App, the yield from Aave USDT is 4.87% APY.

According to Bluechip, Tether has a “D” rating. There needs to be further discussion before considering this option. Does this asset fall within USD3s mandate? Will Tether work to increase their rating? Does Tether want to be a part of USD3?

To highlight some pros as to why Tether is a part of this proposal, consideration needs to be given to the following:

Tether has a market cap of over 100B TVL, there is over 3 times as much Tether held as USDC and pyUSD combined.

Tether’s daily volume is greater than 7.5x the daily volume of USDC and pyUSD combined. Bluechip.org themselves, recognize that USDT:

  • is the longest surviving stablecoin in circulation.
  • has lived through multiple stress tests, regaining its dollar peg each time it was tested.
  • USDT’s issuer has consistently fulfilled all redemptions, despite widespread accusations of USDT not being fully backed by reserves.

Option 3:
Can Paxos or Trident be engaged to incentivize the yield for borrowing and supplying pyUSD in Aave?

PayPal is a globally recognized financial services provider. Continuing the integration of pyUSD in the USD3 collateral basket can leverage their reputation, potentially continuing to attract new users who trust PayPal’s brand and services, and by extension Paxos the issuer of pyUSD.

By enrolling outside parties into an involvement with USD3 this option will help drive awareness and demand for USD3. Scalability of the Aave pyUSD position can be interpreted as a limiting factor however. As USD3 continues to grow the Aave pyUSD supply and borrow ceiling can continuously be increased to fit our needs. Therefore, the current basket is very scalable.

Rationale

Discussions on how to improve USD3 are a net positive. If an improvement to the collateral basket and yield can happen without increasing risk, that could increase the probability that more people will want to hold USD3.

Risks

Option 1:
Removing the Aave pyUSD part of the basket and replacing it with 50% sDAI and 50% Compound USDC V3, this change decreases diversification, but does not increase the risk profile. Scalability remains unchanged, and minting costs will decrease.

Option 2:
By replacing the Aave pyUSD part of the basket with Aave USDT, this option increases the risk profile. The scalability and cost of minting remain the same. It is up to the governors to interpret if adding Tether into the collateral basket fits within the bounds of the mandate.

Option 3:
The risk here is not being able to increase the APY of the Aave pyUSD position. This will take collaboration from outside parties and engage them in the success of USD3. This seems like a big task. The risk here is not being able to engage outside parties.

  • Option 1: 50% sDAI 50% Compound USDC
  • Option 2: 33% sDAI 33% Compound USDC 33% Aave USDT
  • Option 3: No change to the current basket
0 voters
2 Likes

Heyo, Tom…

I think the idea that USD3 is made up of assets that have a B rating or higher on the Bluechip website should be respected… By including Tether in the basket the APY would increase by about 8% if I’m not mistaken but we would no longer respect that “golden rule” that I mentioned at the beginning.

By taking option A (sDAI & Compound USDC) the APY would be about 9.5%, the golden rule would not be broken and minting would be a little cheaper, but diversification would be a little affected… I prefer this while waiting for some other solution, or while we see how those in charge of PYUSD improve their relationship with DeFi protocols to offer better yield.

Then I would lean more towards option A.

2 Likes

I support a basket change given pyUSD’s (currently quite) negative contribution to USD3 APY. Taking the change ambition as a starting point, I would value and prioritize Bluechip grade over retaining current diversification levels. One of the purposes of diversification is spreading and/or lowering the risk, yet introducing USDT-based assets would actually increase the risk measured by Bluechip grading. Reduced minting costs and (relative) APY impact are considerations as well of course, but secondary to me. I vote for Option 1.

2 Likes

Agree with the comments above.

It’s a balancing act between yield, risk and diversification and while the addition of Tether to the basket improves diversification it compromises the other two more than i’d personally be willing to accept.

Also you said it yourself Tom that option one aligns with many DAO’s common holdings USDC and DAI and as it is a pillar of the GTM plan to attract DAO treasuries and SLPs, I wouldn’t want to alienate them by adding in Tether.

I do personally think a 3 asset basket would sit better with DAOs and SLPs as it ticks the diversification box but happy to wait for a more appropriate asset.

3 Likes

Agree that pyUSD is a drag and should be replaced/removed.

I don’t know that I agree with Bluechip’s USDT rating, but if it was previously implied that they would be abided by, it makes sense to keep that rule.

Another piece of info that would be helpful is the historical yields for each option. I wonder what is the best way to pull this info? Although perhaps its a moot point if USDT is out of the question.

2 Likes

I agree that USDT should not be included given USD3’s mandate and its rating from Bluechip and S&P.

4 Likes

I agree with you regarding the choice of option 1. Even if we go from 3 assets to 2 assets, there are solid collaterals which will allow not only to remain within the framework set for this Rtoken but in addition to increase profitability for stakers. I think this is a good solution while waiting for new possibilities in the future. Finally, on a personal level and being French, I will say that the USDT option does not appeal to me in view of the regulations that will soon be enforced in Europe.

2 Likes

Welcome to the Forum Aslan :wave:t2:.

2 Likes