• General

  • Draft OIP# Deploy treasury FRAX & DAI to Univ3 FRAX/DAI pool for FXS farming?

I think this proposal is a good way to support our partnership with FRAX. This fits in nicely with our existing treasury assets and doesn't give additional exposure to centralized stablecoins like a 3CRV pool for example. My perception of risk is fairly low on this given it's primarily UniV3 plus the Frax staking contract. Based on the 24hr fees vs. TVL in the pool it looks like trading fees work out to roughly 2% APY but I imagine that will shrink once TVL increases. A few points of clarification:

  • My intuition for deposit size is to match total Aave allocation of $1M, so $500k FRAX + $500k DAI
  • Given that we tend to hold our allocations, it might make sense to lock the LP for longer than the 7 day period to get the boost
  • Given the above, do you know what size veFXS position we would need for additional yield on this size allocation? Would we be able to use veFXS to boost this FRAX/DAI V3 deposit and also gauge vote FRAX/OHM rewards?
  • Can you give us any insight into the primary motivation for Frax launching this pool?

    FluctusLux it looks like Frax has a recommended price range and fee tier (0.05%) to set in order to be eligible for staking rewards:

      Hey FluctusLux thanks for your feedback - to answer your questions:
      1) The range is set by FRAX Finance in order to be eligible for rewards (it is pretty close to $1 see @tex post below)
      2) So the gauge vote just provides rewards to the pool voted for - the pool we would gauge vote would be our own Uniswap v2 FRAX/OHM pool and then we could just eat the rewards allocated by our boost
      3) The amounts are meant to be totals for example 500K FRAX/DAI is meant to be total $500K USD of value (I edited to clarify in the OP)

        Hey tex thanks for your feedback - you make a good case for a longer locking I am coming around to it.

        1) So with the boost for Uniswap V3 FRAX/USDC: it is 4 veFXS to 1 FRAX (1 FXS locked for 4 years is 4veFXS) e.g. if we had 10K FRAX and 10K DAI in the pool, in order to get the full 2x boost we would need 40K veFXS (which is 10K fully boosted FXS locked for 4 years).

        2) With the gauge voting it is just something extra you can do with your veFXS whether you do it or not doesn't effect your LP positions - obviously you would want to gauge vote pools you are in but everyone in those pools gets their proportional percentage of the extra FXS allocation.

        3) In terms of their motivation as I understand they are trying to get more liquidity across popular trading pairs and will be adding more and more pools as they go along (for e.g. there is a governance discussion about adding FRAX/SUSHI pair)

          Thanks for the clarification @Mark11 .

          I voted for 2-3M FRAX/DAI as it represents approx 10% of the treasury, which I think is the perfect amount to put in for starters. Anything less imo is non-substantial, while anything more, is too much risk.

          I agree with @tex 's suggestion. If we're locking the LP anyway, might as well extend the locked period. I think its a non-issue and definitely less risk to explicit USD stablecoin exposure compared to putting the money in a curve Frax-3pool. At least with a longer lock, we stand to gain more veFXS. I imagine that we'll be swallowing FXS in perpetuity.

          I am curious what other benefits does veFXS give its holders, aside from price volatility, and the ability to gauge vote?

            FluctusLux Yeah so fully boosted locked FXS as veFXS:
            1) earns 45% apr claimable as additional FXS
            2) allows a boost to your yield farming pools up to 2x rewards - for Uniswap V3 FRAX/USDC: it is 4 veFXS to 1 FRAX (1 FXS locked for 4 years is 4veFXS) e.g. if we had 10K FRAX and 10K DAI in the pool, in order to get the full 2x boost we would need 40K veFXS (which is 10K fully boosted FXS locked for 4 years).
            3) gives increased governance vote 1 fully boosted FXS as veFXS gives 4x voting weight
            4) allows you to proportionally vote on allocation of gauge rewards to your choice of pools

              Thanks for the clarification @Mark11 . Definitely on board with this proposal. IMO we need to be more aggressive to low risk allocations.

              I would be in favor of a single sided provision of FRAX to the pool (understanding this would not qualify for FXS rewards) but would be strongly against any provision of DAI. Adding DAI would expose our treasury DAI to FRAX price - if FRAX were to lose peg, we would quickly sell all DAI and end up with FRAX only.

              Our treasury already has a strong interest in FRAX and, IMO, it would be imprudent at this point to increase exposure.

                Thanks for the feedback JaLa - I discussed this risk in the risks section above - it also would work the other way with DAI, that is, we would be left with either undesired asset in the pool because of the mechanics. I think the best way to manage this concern would be determining an acceptable size rather than provision of single-sided liquidity - which exposes us to holding valueless DAI in the case of a DAI peg failure and not much in trading fees. I imagine there is some number, however small, that would be acceptable? I think that number is around 500K each side

                  I agree with @JaLa here, I don't see a reason to expose our DAI to FRAX risks, we lose the diversification aspect. I'd rather deploy FRAX separately.

                    FluctusLux

                    I had the same thought regarding 10% of treasury allocation to this pool, but due to our current RFV growth rate I voted for 3-5m FRAX/DAI. If we carry on with only linear growth in the RFV pool we'll cross $50m in about 2 months.

                      shadow @JaLa

                      Other than their own unique smart contract risks, I don't think FRAX and DAI off much (if any) diversity in net asset exposure or performance. They're both primarily collateralised by ETH and USDC. If either one of the those collateral assets falters, then every unit of FRAX and DAI in the Treasury is exposed to that same risk, whether they've been paired together in an LP or not.

                      IMO, for this reason, I think the proposal creates only a small amount of additional risk to the Treasury, and we should support it.

                        I think it comes down to, in my mind, FRAX being more risky than DAI today. We own an outsized % of the FRAX supply and don't think we should further expose our treasury to FRAX risk by co-mingling the assets. We love FRAX and have a great partnership but our treasury needs to be very careful in allocating assets. Agree that the risk goes both ways and that if DAI loses peg, we would end up with more DAI, but I view that as orders of magnitude less likely.

                        So, if the primary concern here is ensuring that we don't expose our DAI reserves to the various risks of FRAX then what about deploying this strategy and only using FRAX? This would mean we would need to swap half of the FRAX to DAI first.

                        This would obviously mean we would incur the slippage and fee cost when it is done. I wouldn't have originally proposed this idea for that reason, but the 333,333 FRAX+Convex OIP which has passed will incur the same costs to create the LP position. As such, maybe this is okay?

                        If so, that would allow the FRAX to be deployed at no risk to our DAI at some cost.

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