Proposal to Add DOLA/sUSDS Convex LP Market to FiRM

FiRM
1

Summary:

This proposal seeks to integrate the DOLA/sUSDS LPT from Curve Finance as a collateral asset on FiRM, Inverse Finance’s fixed-rate lending protocol. The DOLA/sUSDS LP offers stable liquidity positions that include DOLA and sUSDS, making it a strong candidate for capital-efficient lending within FiRM.

The proposed DOLA/sUSDS LP market will help expand FiRM’s offerings in line with previous successful LPT collateral integrations like the DOLA/crvUSD LP, the DOLA/FRAXpyUSD LP, the DOLA/FRAXBP and the DOLA/sUSDe LP. We plan to deploy two distinct DOLA/sUSDS LP 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/sUSDS LP market on FiRM.

This integration is another step in Inverse Finance’s broader strategy to deepen its collaboration with Sky Protocol and Curve, while enhancing the capital efficiency of FiRM and increasing borrowing opportunities for users.

Background:

The DOLA/sUSDS LP is hosted on Curve Finance and represents a strategic collaboration between Inverse Finance and Sky Protocol. The LP is designed to support efficient, low-slippage trades between DOLA and sUSDS, allowing liquidity providers to earn competitive yields while maintaining stable liquidity in the pool. sUSDS, through the approval of the sDAI market, had been thoroughly assessed by Inverse Finance’s RWG prior to this latest proposal.

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 sUSDS 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/sUSDS LP Collateral on FiRM

The RWG conducted a risk assessment (linked above) which explored the integration of the DOLA/sUSDS 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 sUSDS and the broader market context. These are summarized below:

  • Governance: Sky Protocol incorporates a decentralized governance model that builds on Maker’s well-established framework. Its innovative SubDAO structure, now termed “Sky Stars,” allows for parallelized operations and delegation of responsibilities, such as collateral management and innovation. This decentralization streamlines governance while reducing systemic risks, ensuring decisions are made efficiently and transparently. However, Sky’s current governance setup retains some centralized elements, including key roles for managing deployments and adjusting critical parameters. This ensures operational stability while the ecosystem transitions fully to decentralized decision-making.
  • Security: Sky Protocol inherits MakerDAO’s rigorous security practices, including extensive private audits, competitive audit contests, and a robust bug bounty program. Notably, Sky has collaborated with ChainSecurity for over 50 private audits across its modules and integrations, and recently concluded a $1.35M bug bounty contest hosted on Sherlock. Sky also boasts a $10MM Bug Bounty Program, amongst the largest in DeFi, and has a history of paying out whitehats for vulnerabilities identified.
  • Regulatory Risks: Sky faces potential scrutiny due to its operation as a decentralized stablecoin issuer. However, by leveraging over-collateralization and maintaining robust on-chain transparency, Sky may mitigate key regulatory risks. The protocol’s partnerships with regulated real-world asset facilitators further diversify its collateral base, providing stability while aligning with evolving compliance standards. Although the regulatory landscape remains uncertain for DeFi, Sky’s proactive measures and emphasis on transparency position it well to navigate potential challenges.
  • Competitive Edge: FiRM’s inclusion of the DOLA/sUSDS LP marks its fifth stable LP market, showcasing a competitive edge by offering fixed-rate borrowing for liquidity providers. While competitors like FraxLend have integrated LPs, FiRM’s fixed-rate loans and ALE leverage mechanics present a distinct advantage in capital efficiency.
  • Oracle and Price Feed Considerations: The DOLA/sUSDS LP relies on a robust oracle mechanism leveraging Chainlink’s DAI price feed, a fixed $1 DOLA price, and Curve’s virtual price to determine the LP token value. This pessimistic pricing model, already in production with the other stable LP FiRM markets, ensures stability and mitigates manipulation risks while maintaining high reliability.
  • Liquidation Mechanisms: The liquidation factor and incentive market parameters are optimized to encourage active liquidator participation. Arbitrage opportunities with other DOLA and/or sUSDS 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/sUSDS 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/sUSDS Convex 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/sUSDS Convex market on the DBR Helper
  9. Set Minimum Debt Amount in BorrowController to 3,000 DOLA
  10. Set stalenessThreshold for DOLA/sUSDS Convex market to 3600
  11. Set FiRM Oracle price feed for DOLA/sUSDS Convex to the deployed DOLA/sUSDS custom LP tokenPriceFeed contract
  12. Add DOLA/sUSDS Convex Market to ALE
  13. Add DOLA/sUSDS Convex Market to CurveDolaLPHelper