• General
  • RFC: Deploy LUSD & ETH to LUSD/ETH LP

Summary

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.

Background

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.

Motivation

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 πŸ¦„ 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.

Proposal

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.

Forward-thinking considerations

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.

Proposal Authors

This proposal is written by TokenBrice and YuliyanDeFi, both employees of Liquity A.G.

Which LUSD-LPs seems the best fit?

    Thanks for posting!! I shifted this over to General so that we can have it flow through the RFC process and get community feedback/comments before the proposal stage

    hOHMwardbound changed the title to RFC: Deploy LUSD & ETH to LUSD/ETH LP .

    Hey TokenBricexyz

    Thanks for taking the time to write this up and I appreciate the discussion.

    As you mention, the Stability Pool has been a great, low risk places for us to both hold LUSD as well as make it productive. As such, we can use it as a baseline to evaluate alternatives.

    Looking to the recommendation for removing liquidity from the stability pool and putting it into LP Pairs, the two main questions that come are:

    What does the net return look like after IL compared to baseline?
    What gap does it fill that we're currently missing out on?

    To me, it feels like LUSD/wETH would share many of the same characteristics as our existing OHM/wETH pools. Looking at the volume, it seems like it's fairly low (~37k on Mainnet and ~33k on Arb One) so there would probably need to be some more DD comparing baseline to this option.

    To the second consideration of the LUSD/wETH/LQTY Pool, being on balancer does it give us access to that IL Data seen here:

    https://app.apy.vision/pools/balancerv2_eth-WETH-LUSD-LQTY-0x5512a4bbe7b3051f92324bacf25c02b9000c4a50

    The net IL on this pool has been fairly substantial on virtually every horizon and makes it way more risk on than the baseline.

    When we had talked earlier, I had made the recommendation of exploring a OHM/wETH/LUSD 3 Pool and you said there might be interest though it was a different animal, to which I agree. That said, it does bridge both of our ecosystems and could have a interesting place on Arb One where we are in need of additional non-centralized pairs. I think this could be a really interesting play and have more upside to all parties involved.

    I'll work on putting some numbers together qualifying the baseline return in our existing environments so that everybody has shared numbers.

    Thanks again for the engagement and the partnership!


    I am very supportive of the LUSD/ETH pool.

    Regarding the Balancer pool, based on our current deployed POL - I would be more keen to see a LUSD/ETH/OHM pool at that venue. If we see great desire/traction, we could aim for a gauge, but I believe the routing/swap strength of our POL is the value add here.

    Im in full agreement with Relwyns assessment.

    LUSD/WETH pool does not bring significant benefit to our treasury comp.

    A LUSD/WETH/OHM pool on the contrary could be very interesting, not only in terms of being able to offer a "decentralized" pool where all assets have this common characteristic. But also this might be useful for better pricing of LUSD. LUSD is constantly over-peg and maybe more arbitrage opportunities can somehow support better pricing.

    That being said we are always on the hunt to acquire more LUSD when prices are favourable. We love everything that Liquity team has build so far and looking for further collaboration πŸ™‚

    Hello, and thanks to all for your valuable input. So we have a bit of a double topic now, I'll address each separately.

    Regarding πŸ¦„ UNI LUSD/ETH

    I've read some concerns about the IL or returns on such positions, and I understand where they come from. However, this is missing the point, similar to the one where MakerDAO is aping into offchain gov bonds, thus utterly destroying any benefit of the stablecoin in the process for a few % of yields.

    Here, the pitch was more about the overall benefits for the long-term resilience of OHM:

    • It's a price exposure currently not present in the backing, although I agree, similar to OHM/ETH.

    • All services/tokens used are immutable.

    • The position will dynamically rebalance to USD as ETH price appreciates, you know, the IL - which is, in this case, a neat added benefit to balance OHM exposure.

    Besides, it proves very synergetic with Liquity's objectives, as the UNI LUSD/ETH is a critical element for LUSD price stability and helps ensure liquidity is maximally available when needed. I am not the most familiar with your treasury policies, but I'm confident the Ohmies can understand that while returns are neat, they always have an associated cost and context that must be assessed too.

    The amount envisioned ($2-6M) is enough to have a real impact. Along with other ongoing initiatives, it will improve liquidity on LUSD, allowing OlympusDAO to scale up its LUSD exposure easier if desired.

    Regarding βš–οΈ LQTY/ETH/LUSD or LUSD/ETH/OHM

    On Balancer, I initially mentioned the LQTY/ETH/LUSD pool as it's already existing, has a gauge, and provides yet another different & interesting price exposure.

    However, a LUSD/ETH/OHM pool appears more consensual. It would be a neat addition to indirectly improve LUSD/ETH liquidity while further diversifying the LUSD-LPs exposure.

    Such a pool could also be structured using a LUSD linear collection, harnessing the stability pool yields when possible (~7% APY) to improve the returns further.

    Finally, I'd like to consider the best way to proceed format-wise: should we split the discussions into two separate topics/proposals or keep assessing them together?

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