Bringing back volatile assets to back USDS with

Product feedback
1

Author:
Konijntje - Sperax Community Manager.

Created:
April, 19, 2023

Simple Summary [TL;DR]

We have seen a “bankrun” that even caused a depegging of the most used stablecoin in the world of DeFi: USDC, and making other stablecoin’s, even USDS, also lose it’s peg for a short period of time. This topic is meant as a discussion to bring back volatile assets to the equation to back USDS, which holds several advantages, but also disadvantages.

Making USDS backed ~5% by volatile assets, such as ETH, and 0.5% by SPA.

Motivation

Volatile assets bring new yield opportunity’s for USDS, and provide USDS with a more broader collateral portfolio, because even stable coins have not proven to be fully “stable”.

Furthermore, requiring a -very- tiny percentage of SPA to mint USDS, drives more value to SPA. Due to the volatility of SPA, 0.5% is chosen as a start and can always be changed by the DAO at a later stage.

Positives

Are stablecoins really that stable? With the central banks worldwide running at full printing speed, higher inflation seems impossible to prevent, therefore the main currency’s currently in circulation get diluted more and more, giving you less value for the same dollar/eur as time goes on. This proposal is to partly back USDS by assets that are meant as a save haven, even though they can be highly volatile. That means that we are adding, for example, 5% of the collateral of USDS in ETH. This is a good starting point that can always be increased or decreased in the future.

Not only does USDS benefit from this strategy, value will also be driven to SPA as it is once again part of the USDS collateral. Furthermore, various yield opportunities are available for ETH, giving USDS holders a extra source of income.

Negatives

It must be clear for the DAO that the negatives are obvious. In case of a big selloff of the assets we add (ETH), USDS may depeg. However, with only 5% of the collateral being ETH, the depegging risk is low, especially after the crypto market took a huge beating already and seems it is in recovering shape, even though it will always remain speculative what the market is doing.

Technical Specification
Add ETH and SPA to USDS collateral.

Voting

No snapshot yet, please discuss in this forum.

4 Likes
2

I agree with the proposal.
Sometimes “being too stable” is boring, especially in the volatile crypto world.
Definitely, this kind of strategy will make USDs even more attractive, collateral strategies can be further diversified and decentralized, and SPA gains additional utility.
I’m in favor, the risk is small and sustainable, and the potential benefits are significantly higher.

1 Like
3

I am for this.
USDs has held more than 102% collateral ratio before the USDC depeg and is as of SIP36 protected from collateral drainage due to collateral depeg. The ratio now appears to be slowly recovering and again going towards 101%. In my opinion we should discuss options that grow collateral value for eth and spa for times when their price is decreasing. In particular, I am proposing that the redeem fee (ratio to be determined; also can be different for volatile and stable collaterals) could be kept for bolstering collateral reserve instead of being used for buyback. That way the protocol can sustain having a small portion of volatile collateral. Volatile collaterals bring value to the Sperax ecosystem.

4

Support, as the earliest person to propose this suggestion, I hope the team can further improve the plan. This portion of capital expenditure serves as a reserve to support high selling and low buying under certain price fluctuations, such as when the $ETH price in the Mavericks market reaches $3500 and automatically sells $ETH, and automatically buys inventory below $1800. This strategy can be adjusted according to market dynamics, and the returns can be transferred to the returns of USD.

1 Like
5

We think introducing risk-on assets such as ETH + SPA as backing for USDs will ultimately lead to the value of backed assets falling below the USDs circulating supply, resulting in a depeg. The risk of depeg can’t be understated and for a stablecoin maintaining peg is the most important value proposition, failing to maintain peg can undermine the USDs product as a whole. It would be more favorable if it is possible to hedge the exposure of risk-on assets on-chain and still generate greater yield. Alternatively if introducing risk-on assets as backing for USDs the collateralization of USDs should be increased in turn. So if the goal is to introduce 5% of the backing as risk-on assets then the collateralization of USDs should be increased to 105% to prevent any possible risk of depeg. In the proposals current form we would be inclined to vote against it.

6

Imposing a tiny requirement of other assets like SPA/ ETH imposes risks which the current USDs protocol doesn’t have any solutions for. In case of SPA if we are talking about moving back to the algorithmic design where SPA is burnt there were majorly two challenges - 1. UX issues with users required to keep a very minuscule amount of SPA. 2. No one was willing to burn their SPA, hence low retail adoption. Overall Frax is certainly successful so we cannot completely reject that model, but more detailed proposal and analysis will be required. The original model/whitepaper is not sufficient in my opinion. I would also be voting against this proposal for now. Now, having said that to scale USDs, the team is working on a CDP version of a stablecoin which would work in tandem with USDs. That will allow users to mint USDs against overcollateralized positions. We are in the early stage of our research. More information on that will be shared soon.

7

I agree with the proposal.