Diversify and strengthen the collateral exposure of OHM by moving treasury funds to the LUSD-ETH Uniswap V2 LP and/or Balancer LUSD/wETH/LQTY.
Liquity is an immutable protocol offering interest-free leverage on ETH. The LUSD stablecoin, the system's output, offers some genuinely unique features, the leading being the trustlessness of the whole Liquity protocol. The Liquity protocol is geared for sturdiness: dual oracle system, various fallback mechanisms, recovery mode, and more, making LUSD the most resilient and credibly decentralized stablecoin available on the Ethereum network.
The Liquity Protocol received 4 security audits, additional risk assertions, and economic modelings before launch. All can be found in the Liquity documentation.
The OlympusDAO is already a sizeable holder of LUSD and is well aware of its benefits and the opportunities the Stability Pool offers for resilience and yields. The Liquity community appreciates and values the early support Olympians provided. Yet, there is more to do with LUSD than the Stability Pool, and I believe another option, in particular, could be of interest here: LUSD/ETH LPs on highly resilient DEXes such as Uniswap or Balancer.
Why 🦄 LUSD/ETH LP?
The LP token of a pair such as 50% wETH / 50% LUSD is **a form of volatility-dampened ETH** that could help to **further stabilize the OHM backing**. Indeed, such an LP offer a new type of exposure currently not represented in the OHM treasury, halfway between stable and volatile backing. While such an LP is subject to IL, its patterns fit Olympus' needs, as the position would be accumulating ETH when the price lowers and reducing its ETH exposure when the price appreciates.
Despite its age, UniswapV2 still has strong arguments for such a pair (using the 0/+∞, x*y=k):
Uniswap v2 offers **full immutability**, which means that the liquidity pool will be secured from any future changes or upgrades to the protocol. This is important as it ensures the long-term stability of the protocol and minimizes any potential risks to the liquidity pool. Furthermore, Uniswap v2 being almost 3 years old, the smart contract risk has been tested and minimized in time. While Uniswap v2 does not offer liquidity concentration, it is not needed in that case. Indeed, if the goal is to dampen the volatility of ETH, then a standard UNIv2 distribution on LUSD/ETH is ideal to achieve this objective already, v3 would provide no benefit in that regard.
Finally, Uniswap v2 offers the benefit of **auto-compounding fees**. This means the DAO does not need to claim or harvest fees, as they are automatically reinvested into the liquidity pool. This makes the Uniswap v2 pool more efficient and easier to manage as it’s passive collateral.
To summarize, you will benefit from the LUSD-ETH Uniswap v2 LP with as little risk as possible. The three components of the equation are LUSD (the most resilient and decentralized stablecoin), ETH (the safest volatile crypto asset next to BTC), and the pair is on top of Uniswap v2 (the most battle-tested immutable DEX that will be efficient for the need). The Olympus DAO will get essentially more stable ETH and still be fully unstoppable from end to end.
Treasury Framework Alignment
The proposal aligns with OIP-137: Treasury Framework. In light of the USDC de-peg, the Olympus DAO Treasury team will work towards decreasing reliance on stablecoins with centralized backing. Increasing ETH exposure plus increasing exposure to purely decentralized stablecoins such as LUSD. Potentially the treasury funds could be acquired by selling some of the treasury DAI (mainly backed by USDC), the biggest holding of the DAO.
Diversifying the collateral exposure of OHM through the LUSD-ETH Uniswap v2 LP will improve the stability and security of the protocol treasury and benefit all members of Olympus DAO. We urge the governance members to consider and support this proposal which would be a great addition to the Treasury RFV.
Alternative on Balancer
On top of Uniswap v2 LUSD/ETH, Olympians could also consider the Balancer LUSD/wETH/LQTY pool which shares the same characteristics (fully immutable) and provide additional rewards in strategic assets (BAL & AURA). Since Olympus is already active in the Balancer races, further opportunities could also be harnessed on this pool.
Allocate treasury funds to LUSD-ETH Uniswap V2 LP and/or Balancer LUSD/LQTY/wETH according to how much funds the DAO members decide to allocate.
Since Olympus owns ETH and LUSD in treasury already, they could be supplied as such to the LP. However, to further diversify away from the still sizeable DAI exposure, they could be swapped to ETH and/or LUSD and supplied to the LP.
If this proposal is supported by the community, then it might be worthwhile to discuss adding a fourth category, **volatility-dampened assets**. This category could host assets less volatile than ETH, but more than stablecoins, such as LUSD/ETH LP, RAI, AMPL, SPOT, FPI, etc.
Growing this asset class could help the Olympus treasury diversify away from centralized stablecoin exposure and reduce its direct exposure to the dollar, which could be a prescient move.
This proposal is written by TokenBrice and YuliyanDeFi, both employees of Liquity A.G.