RFC Proposal to add alUSD-FraxBP Convex (Frax Wrapper) as collateral

Governance
#1

Summary

Proposal to add alUSD-FraxBP Convex (Frax Wrapper) as collateral.

Overview

alUSD FraxBP Convex (Frax Wrapper) is a liquidity pool token consisting of a standard Curve alUSD-FRAXBP (so alUSD + FRAX + USDC) wrapped in Convex’s liquidity mining program. The Convex LP token is then wrapped again to Frax’s liquidity mining wrapper, earning rewards from both Convex and Frax. As of today, this earns 13.5% APR with ~$50.6M TVL. All collateral assets involved are stablecoin LP tokens.

Technical Challenges

Onboarding a token such as this has a few technical challenges.

  1. The Frax wrapper requires creation of a custom per-position vault to receive rewards
  2. Liquidation of this per-position vault may require a specialized liquidator capable of unwinding the vault (despite it being liquid)
  3. To my knowledge an oracle does not exist for this token

I would like to work constructively with the community to help discover what is the correct way to onboard this LP as collateral for IP so USDi can grow with the attractive APR offered by alUSD-Frax BP Convex (Frax Wrapper).

Realistically the Frax Wrapper only offers 1-2% extra yield (depending on how much veFXS the user has locked) so it would not be necessary to add the Frax Wrapper if it adds too much technical complexity. It would still be superior for leveraged LPs to borrow USDi and earn a 10% bonus yield on borrowing at the current borrow rate of 3% than to choose no leverage with the Frax Wrapper.

#2

Is there a real interest in using this collateral? the main benefit of being able to list this is the possibility of continuing to profit, with the token already deposited in IP vaults?

#3

Yes. I for one would LP if I could get leverage. There already is ~$50M deposited into Convex without leverage. I could see a significant amount of those users getting leverage using Interest Protocol, as long as IP offers low rates as it does now.

It is correct the main benefit of this collateral is profit, which is fine. Whatever drives demand and grows the USDi supply while maintaining safety is good for IP.

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#4

Great to hear that, do you think it is possible to implement some group with that for trading, maybe in Curve? Seems like a strategy beyond just minting USDi.

#5

hey @Fishy the underlying tokens arent as liquid as it seems and i doubt if there will be enough demand to justify the time and effort needed to add this as a collateral

#6

hey @Fishy the underlying tokens arent as liquid as it seems

FRAX and USDC are two of the most liquid stablecoins in DeFi. alUSD less so, but the fact it has $50M of liquidity shows that we can afford to add it as capped collateral perfectly fine with a $1-5M cap.

i doubt if there will be enough demand to justify the time and effort needed to add this as a collateral

Fundamentally there should be a lot of demand, getting double digit interest on USD stables is pretty desirable and comes at little additional risk if a healthy collateralization is kept. There already is a high level of demand for the non-leveraged position, as shown by the $50M of liquidity.

#7

Define what goes into this 13.5% APR. One thing I tend to look at with any liquidity is difference between fees derived from liquidity in the pool via trading and ‘incentives’ via Convex liquidity mining…

The requirement of a specialized liquidator is a big negative for me. We already saw what happened to Maker when 1 bidder was allowed to take auction collateral and already know having less bidders for collateral gives worse bids. Oracles are always a challenge and a potential weakness in any lending protocol.

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