Proposal to Add DOLA/scrvUSD Yearn LP Market to FiRM

FiRM
1

Summary

This proposal seeks to integrate the DOLA/scrvUSD Liquidity Pool Token (LPT) from Curve Finance as a collateral asset on FiRM, Inverse Finance’s fixed-rate lending protocol. The DOLA/scrvUSD 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 markets; one that adheres to the convex strategy and a market which, utilizing the same underlying LPT, aligns with Yearn’s autocompound strategy. This proposal pertains to the Yearn-aligned crvUSD/DOLA LP market on FiRM.

Background

scrvUSD is yield-bearing crvUSD, a decentralized stablecoin native to the Curve Finance ecosystem designed with advanced stabilization mechanisms to maintain its peg to the USD. Utilizing Peg Keeper contracts, oracles, and a dynamic monetary policy, crvUSD ensures stability and resilience. Peg Keepers actively mint or burn crvUSD tokens to balance liquidity pools and keep the price near $1. Additionally, the protocol adjusts interest rates on crvUSD loans to dynamically influence supply and demand. The recent introduction of scrvUSD, developed in collaboration with Yearn Finance and powered by its V3 vault infrastructure, expands crvUSD’s utility by providing a low-risk, yield-bearing alternative. By depositing crvUSD into the scrvUSD vault, users earn autocompounding interest derived from crvUSD borrowers’ interest payments.

By leveraging the DOLA/scrvUSD LP as collateral, FiRM offers its users the opportunity to capitalize on stable liquidity positions while bolstering our ecosystem’s efficiency and DOLA liquidity depth. This addition would enable liquidity providers to leverage their positions. Providing stable liquidity positions that include DOLA as collateral allows for cost-efficient lending on behalf of Inverse Finance. Typically, borrowers sell DOLA to buy other assets, impacting DOLA liquidity. Conversely, a borrower collateralizing with a DOLA LP position is likely to add the other stablecoin/s to the liquidity pool initially to obtain the LPT. They may then loop the borrowed DOLA into the LP position repeatedly to increase their reward, benefiting DOLA liquidity as it does not remove other stablecoins. This results in a 150% improvement in lending capital efficiency, as only 1 DOLA needs to be contracted by our AMM Feds for each DOLA added to the liquidity position, compared to 2.5 DOLAs for DOLA sold.

Risk Assessment

Complete Risk Assessment - DOLA/scrvUSD LP Collateral on FiRM

The RWG conducted a risk assessment linked above which explores the integration of the DOLA/scrvUSD LPT as collateral on FiRM. This report, summarized below, was compiled as an addendum to a previously issued report exploring the unique characteristics of crvUSD, the DOLA/crvUSD LP, and the broader market context.

  1. 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.

  2. Security: Curve has a strong security track record, underpinned by multiple audits conducted by reputable firms. The smart contracts governing crvUSD, Yearn’s V3 Vaults, and the DOLA/scrvUSD LP have all been rigorously tested and are subject to ongoing security reviews. Additionally, both Yearn and Curve maintain an active bug bounty program, incentivizing the identification and reporting of vulnerabilities.

  3. 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 isn’t misaligned with current regulations, any changes could affect its viability.

  4. Collateral & Liquidity: Our analysis of crvUSD liquidity demonstrates that it is both deep and decentralized. A snapshot from December shows that the total TVL for crvUSD liquidity pools was > $30MM. Furthermore, crvUSD DEX liquidity and peg stability is supported by the Curve Lend markets totalling $68.77MM 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.

  5. Competitive Edge: The integration of DOLA/scrvUSD 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.

  6. Oracle and Price Feed Considerations: FiRM will implement a pessimistic LP token oracle for accurate valuation of the DOLA/scrvUSD LP. This process uses Chainlink price feeds for crvUSD and the virtual price from the Curve pool’s smart contract and ensures a conservative and reliable estimate of the LP token’s USD value. Real-time monitoring will further support price accuracy and integrity.

  7. Liquidation Mechanisms: The liquidation factor and incentive are optimized to encourage active liquidator participation. Arbitrage opportunities with other DOLA, scrvUSD 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/scrvUSD 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

  1. Add DOLA/scrvUSD LP Yearn Market to DBR contract
  2. Set borrowController of Market to FiRM BorrowController
  3. Set market supply ceiling to 10,000,000 DOLA
  4. Set daily limit in BorrowController to 1,000,000 DOLA
  5. Set Collateral Factor to 90%
  6. Set Liquidation Factor to 100%
  7. Set Liquidation Incentive to 5%
  8. Approve DOLA/scrvUSD LP Yearn market on the DBR Helper
  9. Set Minimum Debt Amount in BorrowController to 3,000 DOLA
  10. Set stalenessThreshold for DOLA/scrvUSD Yearn LP market to 86460
  11. Set FiRM Oracle price feed for DOLA/scrvUSD Yearn LP to the deployed DOLA/scrvUSD custom LP tokenPriceFeed contract
  12. Add DOLA/scrvUSD LP Yearn Market to ALE
  13. Add DOLA/scrvUSD LP Yearn Market to CurveDolaLPHelper