Proposal to add sUSD

Governance
#1

Proposal to add sUSD as a capped collateral

Proposal to add sUSD as a [capped] collateral to Interest Protocol.

Overview

sUSD is a decentralized stable coin over collateralized by the SNX token. There is significant liquidity for sUSD on both Mainnet and Optimism. I am proposing for it to be enabled as collateral on Interest Protocol on Mainnet

The steady demand for decentralized stable coins has contributed to sUSD growth. sUSD is highly over collateralized by SNX, the governance token, and backstop for the Synthetix protocol.

The rise in its liquidity on major dexes has contributed to sUSD stability over the past year, and allowing collateral use would promote its liquidity in Interest Protocol markets.

Parameters

Token Address: [0x57Ab1ec28D129707052df4dF418D58a2D46d5f51]
LTV: 97%
Liquidation threshold: 97.5%
Liquidation incentive: 5%
Maximum Cap: 10 million
Oracle Address:
Primary oracle: SUSD / ETH | Chainlink
Secondary oracle: sUSD / USD | Chainlink
Price deviation: 1%

Liquidity

Market Cap: ~50 million
Liquidity: sUSD has deep liquidity. sUSD/3crv curve pool - TVL [$71M/14.3M] sUSD
sETH curve pool- TVL [$18.8M / $8M sETH]
sBTC curve pool- TVL [$5.2M / 2.3M sBTC]
[Coingecko] 7-day avg 24hr volume: 7.05 Million
Notable exchanges: Uniswap, Sushi, Curve, Binance, Kucoin, Kwenta

Technical risks

SNX stakers are incentivized to actively manage their debt relative to their SNX stake and sometimes cause spikes in demand for sUSD on markets including AAVE (especially when there are other Yield generating opportunities with sUSD), this may cause small deviations from the peg but with low volatility.

From a counter-party risk perspective, all underlying functions in relation to sUSD are fundamentally the same as that of SNX.

The SNX and sUSD contracts are fully upgradeable. Still, all changes must go through a formal governance process from SIP to deployment, which would be announced well before the upgrades are made and thus does not present a substantial counter-party risk.

The sUSDv2CRV pool has deep liquidity on L1.

In addition to sUSD, there are other synth pools on Curve with emission gauges to supplement sUSD liquidity (sBTC, sETH ). All synths are redeemable at their dollar value in sUSD at the ChainLink quoted price through the Synthetix protocol or Curve (via cross-asset swaps); thus they help facilitate the arbitrage sUSD peg deviations.

Supplemental Information

sUSD is already listed on Aave, Euler, Compound, Silo Finance, Sonne, Granary, and a few others.

#2

I really have issues with these synthetic stablecoins that have backing based on a single instrument. I see this with CELO and cUSD etc. SNX with sUSD, and we saw the same with LUNA.

We see how horribly bad things can go when the underlying value to the stable drops.

Maker for good reason NEVER has (and probably NEVER will) take MKR as collateral as DAI (they may do this in some pool with MKR, ETH, etc.) but to date Maker never has used its backing collateral to mint its stable. The ONLY way to get stables was (previously) to deposit collateral and borrow DAI against it. This position was significantly overcollateralized.

Lately with the advent of the PSMs this ‘overcollateralization’ of the backing collateral vs. DAI minted is in effect bifuricated. Perhaps 1-2B DAI is backed by significantly more collateral, another 3-5B DAI is backed solely $1 value for $1 value of one stable against DAI (GUSD, USDC, USDP, etc.)

I personally want very stringent caps on the amount of these synthetic coins to be no more than 10% of the backing on USDI. This is particularly true when the LTV is set to 97%. Basically it means someone with $1M sUSD could lever their position up almost 33x by depositing sUSD, borrowing USDi, selling USDi for sUSD and repeating. I am decidedly against having this kind of leverage capacity for these synthetic stables. Even 10x or 90% LTV is pretty much as my - risk I can stomach limit.

I want to see the total cap on this collateral never to exceed 10% the total available USDi cap, and this cap to be further limited by the amount of USDi borrowed. So if we only have 1M USDi out there this cap should be $100K. As to the LTV I’d rather us back off from 97% and start with 90%.

My problem here isn’t just the nature of these synthetic coins, it is also the relative usefulness of having them added relative to network tx costs. I’d be much more interested in seeing this added on OP btw where SNX and sUSD seems to have much more use and network access fees are significantly lower than mainnet.

I am still deciding if I will oppose this due to the high starting Maximum Cap at 10M.

Literally only 50M out there and we are going to allow 20% of this to lever up a factor of 33% by using USDi?

The more I think about the details here the more I am leaning to rejecting this

#3

IPTman nailed this one.

There is potential value in the benefits of increased demand for USDi given the ~$750m market cap of SNX and degens wanting to use USDi to lever up further but we need to weigh this against the risks mentioned above. It’s nice that there is liquidity and the potential for some increased demand but the underlying risk of it being backed solely by SNX is incredibly dangerous.