Proposal to add the LP tokens of the Senior USDT Yield Tranches as a capped collateral to Interest Protocol on Optimism.
Current on-chain credit markets offer an uneven diversification for liquidity providers, resulting in a suboptimal service. That’s why Idle released in 2021 Yield Tranches: a new DeFi primitive that allows to segment yields and risks on any DeFi yield source, catering to a diverse range of users by offering two risk-return profiles, Senior and Junior:
- Senior YTs withhold part of the yield generated in exchange for funds coverage, given by the Junior class’ liquidity. The retained yield is then distributed to the Junior YT. Senior holders benefit from a full spectrum coverage on smart contracts and financial risks related to YTs themselves, underlying yield sources, and all their dependencies.
- Junior YTs, on the other hand, provide greater returns, as they are compensated by the Senior counterparty with a higher share of yield for the coverage provided.
Yield Tranches offer built-in, DeFi-oriented features such as the on-chain default settlement and the adaptive yield split across Senior and Junior Tranches based on the liquidity deposited on each side. YTs contracts are present on Ethereum, Polygon zkEVM and soon Optimism with the intention to deploy the codebase on other L2s.
|Token Address 1||0x50BA0c3f940f0e851f8e30f95d2A839216EC5eC9|
|Token Address 2||0x8552801C75C4f2b1Cac088aF352193858B201D4E|
|Capped Token address 1||
|Capped Token address 2||
|Maximum Cap||$1m for each LP token|
This section does not apply to the YTs LP tokens, being they always liquidable by withdrawing the deposits in Idle.
- Type of contract: The YTs LP tokens are interest-bearing ERC-20 tokens always increasing in price.
- Underlying asset: the underlying yield sources are two borrowing pools on Clearpool, one of Portofino Technologies and one of Fasanara Digital
- Time: The pool will be launched on Optimism in early November 2023. They have a proven track record on mainnet since April 2023.
- Value: The pool will have a base lending rate of ~10% (with 85% utilization rate). Additional OP tokens granted by the Optimism Foundation will be used to bootstrap the markets.
- Upgradability: The implementation for each Tranche can be upgraded through a shared Proxy Admin, which is
0x9438904ABC7d8944A6E2A89671fEf51C629af351. The owner of the Proxy Admin and of Yield Tranches’ contracts is the Treasury League multisig, which is
0xFb3bD022D5DAcF95eE28a6B07825D4Ff9C5b3814. The multisig is made part of 6 owners composed of 5 core contributors and 1 advisor. Any transaction requires the confirmation of 3 out of 6 signers.
Proposals to improve and update Idle’s protocols follow these steps: off-chain temperature check on Snapshot, on-chain voting phase on Tally (for the strategies controlled by the DAO, as for example Senior Best Yield). A complete overview of the Idle DAO governance processes can be found here.
Other risks connected to the Yield Tranches that should be considered are:
Oracle risk: Yield Tranches do not rely on external oracles. Yield Tranches’ LP token prices are fully on-chain. YTs prices can be found by calling the function
virtualPrice, i.e. function #43 from every
CDOcontract address, using as parameters the
AALP token address for the Senior Tranches or the
BBLP token address for the Junior Tranches specific to each Tranche.
Smart contract risk of YTs: Yield Tranches have been audited multiple times both by auditing firms, such as Consensys Diligence and Certik and by independent auditors from Code4rena and Hats Finance. A full overview of Idle’s audits is available here.
Additionally, Idle has two active bug bounty programs with Immunefy and Hats Finance.
New Tranches are first tested in beta and then released in the main Idle’s dApp. An overview of the security management policy of Yield Tranches can be found here.
- Smart contract risk of the yield strategies: Idle selects platforms for yield generation that have a proven track record, have been audited, have solid TVL and maintain a bug bounty program. Additionally, Idle DAO has established a Risk Framework to standardize analyses of new underlying markets to be integrated into Yield Tranches by quantifying and assessing the risks related to new underlying strategies. This framework comprises four sections that lead to a final rating: 3rd party review, internal security review, strategy review and coverage.
Integrating the YTs LP tokens as collateral would create a two-sided effect for Yield Tranches:
- Extending liquidity through USDi with Senior Tranche tokens would incentivize users to deposit on that side creating a solid and stable liquidity base
- The funds flowing to the Senior side will draw new Junior liquidity deployments thanks to the boosted APYs generated
Idle has already started discussing this possibility with the partner institutions and the majority showed interest in further using the YTs LP tokens. We can then expect an increase in the USDi borrowing activity linked to the YTs tokens, backed by stable yields higher than 10%.