Summary
This proposal seeks to integrate the DOLA/crvUSD Liquidity Pool Token (LPT) from Curve Finance as a collateral asset on FiRM, Inverse Finance’s fixed-rate lending protocol. The DOLA/crvUSD LP offers unique advantages due to its stable composition, providing a unique opportunity for capital efficient lending by offering stable liquidity positions that include DOLA as collateral.
We plan to deploy two distinct crvUSD/DOLA LP markets; one that adheres to the convex strategy and the market which, utilizing the same underlying LPT, aligns with Yearn’s autocompound strategy. The two markets will help us gauge demand for each strategy and potentially help prioritize future LP market deployments. This proposal pertains to the Yearn-aligned crvUSD/DOLA LP market on FiRM.
This integration will not only provide users with a new exotic collateral option but also strengthen the overall stability and utility of FiRM. The DOLA/crvUSD LP is uniquely positioned to offer low-slippage, stable swaps, and its addition as collateral will further solidify Inverse’s partnership with Curve, as well as FiRM’s reputation as a leading platform for innovative and reliable DeFi solutions.
Background
crvUSD is a decentralized stablecoin native to the Curve Finance ecosystem, designed to maintain its peg to the US dollar through several stabilization mechanisms. These include Peg Keepers, oracles, and a dynamic monetary policy. The Peg Keeper contracts actively monitor the price of crvUSD in liquidity pools, minting or burning tokens as needed to keep the price near $1. The protocol’s monetary policy adjusts interest rates on crvUSD loans to influence supply and demand, further supporting the peg. This system, combined with the ability to earn rewards by providing liquidity to Curve pools, makes crvUSD an attractive stablecoin with built-in risk management features like soft liquidations and oracle manipulation prevention. Furthermore, these innovations are supported by Curve DAO’s transparent governance, ensuring crvUSD remains a robust and reliable stablecoin in the evolving DeFi landscape.
The DOLA/crvUSD LP on Curve Finance represents a pivotal integration between Inverse and Curve Finance; facilitating efficient, low-slippage swaps between DOLA and crvUSD, rewarding liquidity providers who stake their assets in the LP, and, with this proposal, providing users with a new way to leverage their liquidity positions without needing to sell their LP tokens. As of September 5th, 2024, the LP holds $1.2MM in TVL.
When FiRM borrowers leverage up their LP positions using ALE, single-sided DOLA is pumped into the liquidity pool via the flashminter, creating an arbitrage opportunity due to the pool imbalance. The 200 A Parameter of the Curve pool allows the pool to level off as crvUSD is added by arbitragers. This approach enhances DOLA liquidity without removing other stablecoins from the pool. As a result, lending capital efficiency is significantly improved. For example, typically for every 1 DOLA lent out and sold, the AMM Feds need to contract 2.5 DOLAs to counteract the impact on liquidity. In contrast, when 1 DOLA is lent out and added to a DOLA liquidity position, only 1 DOLA needs to be contracted, resulting in a 150% increase in lending capital efficiency.
Risk Assessment
Complete Risk Assessment - DOLA/crvUSD LP Collateral on FiRM
The RWG conducted a risk assessment, which explores the integration of the DOLA/crvUSD LPT as collateral on FiRM. This assessment combines both quantitative and qualitative analysis, summarized below, considering the unique characteristics of crvUSD, the DOLA/crvUSD LP, and the broader market context.
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Governance: Curve Finance is governed by the Curve DAO, with decisions made by veCRV token holders. While the DAO ensures decentralized governance, an emergency multisig can temporarily pause pools and liquidity gauges if necessary.
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Security: Curve has a strong security track record, underpinned by multiple audits conducted by reputable firms. The smart contracts governing the DOLA/crvUSD LP have been rigorously tested and are subject to ongoing security reviews. Additionally, Curve maintains an active bug bounty program, incentivizing the identification and reporting of vulnerabilities. The Peg Keeper mechanisms that support crvUSD are designed to mitigate risks associated with liquidation and price stability. Despite these measures, the crvUSD component of the LP carries inherent risks associated with its algorithmic stabilization, particularly during extreme market volatility.
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Regulatory Risks: As with any stablecoin, regulatory scrutiny is a significant consideration. Both DOLA and crvUSD are subject to global regulatory scrutiny, especially regarding stablecoin issuance and trading. While Curve is aligned with current regulations, any changes could affect its viability, particularly concerning its reliance on stablecoins like USDC, USDT, and USDe.
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Collateral & Liquidity: The DOLA/crvUSD LP demonstrates limited liquidity, normally a crucial factor for its use as collateral. However, the market’s design is such that crvUSD liquidity is what’s pertinent to the collateral’s viability as well as parameter setting. Our analysis of crvUSD liquidity demonstrates that it is both deep and decentralized. A snapshot from August shows that the total TVL for crvUSD liquidity pools was $33.27 million, with the top 10 addresses holding just 36.68% of the total, and 22 unique addresses making up 50% of the pool. Additionally, there were 89 addresses holding more than $100,000 and 150 addresses above $10,000, highlighting the broad distribution of liquidity across a large number of participants. Furthermore, crvUSD DEX liquidity and peg stability is supported by the crvUSD markets totalling $71.4M debt / backstop support, protecting against downward peg movement. Continuous monitoring of the pool’s TVL and performance will be necessary to mitigate risks tied to market operations.
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Competitive Edge: The integration of DOLA/crvUSD LP as a collateral option on FiRM distinguishes it from competitors. While other platforms like FraxLend have introduced liquidity pool tokens as collateral, FiRM offers distinct advantages, including a fixed interest rate of unlimited duration and the ability to leverage up/down through ALE. This stable pair LP is not currently available on other lending platforms.
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Oracle and Price Feed Considerations: FiRM will implement a pessimistic LP token oracle for accurate valuation of the DOLA/crvUSD LP. This process uses Chainlink price feeds for crvUSD and the virtual price from the Curve pool’s smart contract. First, the Chainlink price feed is pulled for crvUSD to get its USD value. Then, the lowest price between DOLA (fixed at $1) and crvUSD is selected. The LP token value is calculated by multiplying this lowest price by the virtual price from the Curve pool’s smart contract. Since we assume DOLA price to be $1 always in FiRM, essentially we use crvUSD price * virtual_price when crvUSD USD price is under 1, and when it is over 1 we just use the virtual_price, ensuring a conservative and reliable estimate of the LP token’s USD value. Real-time monitoring will further support price accuracy and integrity.
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Liquidation Mechanisms: The liquidation factor and incentive are optimized to encourage active liquidator participation. Arbitrage opportunities with other DOLA or crvUSD LPs will ensure that large liquidations do not lead to a liquidation cascade. The liquidation process will pull vault tokens, convert them to LP tokens, and then allow liquidators to realize value through balanced withdrawals, ensuring efficient liquidation routes.
The DeFi landscape is dynamic, and the RWG is committed to continuous monitoring of the DOLA/crvUSD LP’s performance as collateral. Regular updates to risk models, market parameters, and liquidity metrics will be made to study any changing conditions. This proactive approach will ensure that FiRM remains a resilient and adaptable platform, capable of managing new risks as they emerge.
On-Chain Actions
- Add DOLA/crvUSD LP Yearn Market to DBR contract
- Set borrowController of Market to FiRM BorrowController
- Set market supply ceiling to 10,000,000 DOLA
- Set daily limit in BorrowController to 250,000 DOLA
- Set Collateral Factor to 90%
- Set Liquidation Factor to 100%
- Set Liquidation Incentive to 5%
- Approve DOLA/crvUSD LP Yearn market on the DBR Helper
- Set Minimum Debt Amount in BorrowController to 3,000 DOLA
- Set stalenessThreshold for DOLA/crvUSD Yearn LP market to 86400
- Set FiRM Oracle price feed for DOLA/crvUSD Yearn LP to the deployed DOLA/crvUSD custom LP tokenPriceFeed contract
- Add DOLA/crvUSD LP Yearn Market to ALE
- Add DOLA/crvUSD LP Yearn Market to CurveDolaLPHelper