Summary:
This proposal seeks to integrate the DOLA/FRAXBP Liquidity Pool Token (LPT) from Curve Finance as a collateral asset on FiRM, Inverse Finance’s fixed-rate lending protocol. The DOLA/FRAXBP LP offers stable liquidity positions that include DOLA and FRAX, making it a strong candidate for capital-efficient lending within FiRM.
The proposed DOLA/FRAXBP LP market will help expand FiRM’s offerings in line with previous successful LPT collateral integrations like DOLA/crvUSD and DOLA/FRAXpyUSD. We plan to deploy two distinct DOLA/FRAXBP markets; one that adheres to the convex strategy and the market which, utilizing the same underlying LPT, aligns with Yearn’s autocompound strategy. This proposal pertains to the Convex-aligned DOLA/FRAXBP market on FiRM.
This integration is another step in Inverse Finance’s broader strategy to deepen its collaboration with Frax Finance and Curve, while enhancing the capital efficiency of FiRM and increasing borrowing opportunities for users.
Background:
The DOLA/FRAXBP LP is hosted on Curve Finance and represents a strategic collaboration between Inverse Finance and Frax Finance. The LP is designed to support efficient, low-slippage trades between DOLA and FRAX, allowing liquidity providers to earn competitive yields while maintaining stable liquidity in the pool. FRAX, through the approval of the sFRAX market, the FRAXpyUSD Fed, and the recent FRAXpyUSD LP markets had been thoroughly assessed by Inverse Finance’s RWG prior to this latest proposal.
As of October 16th, 2024, the DOLA/FRAXBP LP holds $4.43 million in TVL, with Inverse Finance’s Convex Fed being the largest liquidity provider, contributing $2 million to the pool. The DOLA/FRAXBP via the Convex Fed has played a key part of Inverse’s liquidity strategy, offering a balanced mechanism to support DOLA’s liquidity.
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 FRAX and/or USDC 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 1 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/FRAXBP LP Collateral on FiRM
The RWG conducted a risk assessment (linked above) which explored the integration of the DOLA/FRAXBP LPT as collateral on FiRM. This assessment combines both quantitative and qualitative analysis, covering governance, security, liquidity, and competitive factors, and considering the unique characteristics of FRAX, the DOLA/FRAXBP, and the broader market context. These are summarized below:
- Governance: Frax Finance operates under an increasingly-decentralized governance model, controlled by veFXS token holders who vote on protocol parameters and integrations through on-chain mechanisms. This governance structure has proven resilient, with multiple risk management tools and a strong track record in handling liquidity, market changes, and external integrations. USDC, on the other hand, is issued by Circle, a fully regulated entity overseen by the NYDFS.
- Security: Security is paramount for Frax Finance. Frax Finance has undergone multiple independent security audits by reputable firms such as Trail of Bits, and it also runs one of the largest bug bounty programs in DeFi, offering significant rewards for any vulnerabilities found. At the same time, the Curve-related smart contracts governing the DOLA/FRAXBP have been rigorously tested and are subject to ongoing security reviews and bug bounty programs. Overall, despite these measures, the LPT and the FRAX component of the LP carries inherent risks users must be aware of.
*** Regulatory Risks**: As with any stablecoin, regulatory scrutiny is a significant consideration. DOLA, FRAX and USDC are subject to global regulatory scrutiny, especially regarding stablecoin issuance and trading. While Circle, as a regulated entity, is aligned with current regulations, any changes could affect USDC viability. At the same time, Frax’s increasing integration with RWAs could attract more regulatory attention in the future.
*** Liquidity and Collateral Stability**: The DOLA/FRAXBP LP holds $4.43M in TVL, and is comprised of three highly liquid stablecoins. DOLA’s peg stability is further supported by Inverse Finance’s AMM Fed. On-chain liquidity for FRAX and USDC is well-established, making this LP a stable and reliable source of collateral.
*** Competitive Edge**: The integration of DOLA/FRAXBP 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.
*** Oracle and Price Feed Considerations**: FiRM will implement a pessimistic LP token oracle for accurate valuation of the DOLA/FRAXBP. This process uses Chainlink price feeds for both FRAX and USDC and the virtual price from the Curve pool’s smart contract. First, the Chainlink price feed is pulled for FRAX, USDC to get its USD value. Then, the lowest price between DOLA (fixed at $1), FRAX and USDC 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 the lower between FRAX and USDC price * virtual_price when either FRAX or USDC 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.
*** Liquidation Mechanisms**: The liquidation factor and incentive are optimized to encourage active liquidator participation. Arbitrage opportunities with other DOLA, FRAX and/or USDC 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/FRAXpyUSD 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/FRAXBP Convex 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/FRAXBP Convex market on the DBR Helper
- Set Minimum Debt Amount in BorrowController to 3,000 DOLA
- Set stalenessThreshold for DOLA/FRAXBP Convex market to 86460
- Set FiRM Oracle price feed for DOLA/FRAXBP Convex to the deployed DOLA/FRAXBP custom LP tokenPriceFeed contract
- Add DOLA/FRAXBP Convex Market to ALE
- Add DOLA/FRAXBP Convex Market to CurveDolaLPHelper