Summary
Add CRV as collateral option on FiRM, setting collateral factor to ___ and an initial daily borrow limit of $______.
Business Rationale
CRV currently has nearly $700 million in market capitalization and daily trading volumes averaging approximately $100 million and it is Curve DAO’s governance token. Curve is best known for its low-slippage stablecoin AMM, and for the CRV vote-locking which has spawned a parallel industry of “vote escrow” governance token projects like Convex, Aura, Velodrome, and others. Inverse has participated actively in CRV’s vote-locking since Q2 2022, voting and “bribing” others to vote to have Curve DAO supply CRV incentives to DOLA liquidity pools. While a large portion of CRV tokens are vote escrowed (locked) for a 1-4 year period in a non-ERC-20 token called veCRV, large amounts of CRV (over 50% as of July 2022) are circulating and can be made more productive as loan collateral.
FiRM was launched in guarded mode in mid-December 2022 with WETH as the initial market and we have since added stETH and gOHM as collateral. We are gradually lifting borrow caps and raising collateral factors to increase the availability of collateral options which meet both user preferences as well as the DAO’s risk profile. The success of FiRM depends on finding product market fit and appeal to a wider set of users by expanding collateral options…
Current CRV lending markets on Ethereum mainnet include Fraxlend, where users may borrow Frax at variable rates currently in excess of 10%, and Aave v2 who maintains over $110MM in CRV TVL though new borrowing is deprecated. A proposal is live in Aave’s governance to bring CRV to Aave v3, however, we believe that at least one early stage fixed and variable lending protocol on mainnet is planning to announce CRV as collateral in the near future.
The initial value proposition for CRV on FiRM emphasizes a lower cost, fixed rate alternative to the premium priced, variable rate DeFi lending now available elsewhere. While this differs from FiRM’s core value proposition targeting long-term borrowers, the competitive price of DBR combined with the need to attract new borrowers to FiRM provides an entry point for borrowers with shorter-term use cases.
As governance voting only is possible with locked CRV (veCRV) tokens, FiRM’s unique vote delegation feature will not be available with this collateral.
Risk Working Group Assessment
The due diligence conducted by Inverse Finance’s Risk Working Group on CRV has determined that CRV is a suitable collateral for FiRM. The CRV token has demonstrated a strong track record of stability and has the necessary infrastructure in place to support its use as collateral on the platform.
The CRV token has demonstrated a strong track record of generating interest from other protocols (see: Curve Wars) and Curve DAO has the necessary infrastructure in place to support its use as collateral. We can safely assume that the Curve team has a clear understanding of the lending market landscape and has implemented appropriate risk management measures to ensure the safety and security of user funds. Their Bug Bounty program is somewhat lacking compared to peers in the space with similar TVL, with only a maximum payout of $250k and unclear amounts of total available rewards.
The Risk Working Group has evaluated CRV technical and economic characteristics and has determined that it possesses the necessary attributes to be used as collateral on the FiRM platform. The token is liquid and it is paired with other reliable tokens (mainly wETH on mainnet) in deep liquidity pools on several chains (Ethereum, Arbitrum, Fantom, Polygon), thus addressing most SPOFs. CRV also has an elegant oracle solution, making use of a Chainlink oracle for both CRV/USD and CRV/ETH feeds.
Naked CRV is subject to strong dilution from emissions. This hasn’t stopped over $110M in CRV to be deposited as collateral on Aave. Given FiRM’s target audience and “long-term” horizon, a liquid wrapper such as yCRV might make a more appropriate collateral option. However it must be stated that heavy CRV emissions pose a long-term feasibility issue for CRV or any liquid wrapper on FiRM. Emissions have historically been greater than rewards for veCRV holders, which would imply “down only” price action for CRV in the long term. This all can change with the launch of Curve’ own stablecoin, crvUSD. The launch is imminent but the rate of adoption and value-add to veCRV remains to be seen.
Overall, the Risk Working Group is satisfied with the findings of this due diligence report and is confident in the ability of CRV to serve as a reliable collateral on the FiRM platform. The Risk Team recommends we also consider liquid wrappers for alternate collaterals. While liquidity for these are thin, this might soon change and eventually qualify them as suitable options.
CRV is presently an available collateral asset on Aave’s Ethereum v2 market, CF is set at 52%, and TVL is $110M. Based on these findings, the Risk Working Group recommends CRV be made available as collateral on FiRM with an initial Collateral Factor (CF) of _____%. Setting a low CF, along with general supply caps, and daily limits, will limit overall risk exposure.
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Engineering Impact
The addition of CRV as collateral on FiRM represents a modest engineering effort and due to the lack of a vote delegation feature, no testing with third party voting systems like Snapshot is required.
On-Chain Actions:
- addMarket
- setBorrowController
- setFeed
Oracle: