AMO Proposal for the cvxFXS/FXS pool on Convex

Governance Proposals AMOs
1

Hello everyone,
I would like to present you with this strategy to subsidize the return to peg of cvxFXS.

Context:

For the purpose of partaking in the FPI airdrop, a relevant portion of the supply held by the community has been converted to cvxFXS.
This has been rapresentative of the faith that the Frax’s community had placed in both Frax and Convex but, unfortunately, it has produced a significant influx of cvxFXS into the pool, causing the cvxFXS/FXS V2 Curve pool’s liquidity to get unbalanced and the loss of the cvxFXS’s peg.
This directly harms the community itself and, indirectly, also damages both Frax and Convex as projects.

The problem:

Everyone would benefit from a return to peg but, to re-establish it, we need the liquidity to get balanced out.
Consider:

  • Excessive incentives to the pool would be inflationary.
  • Newly minted FXS supply would be created during the expansion phase but in the context of Frax’s demand and FXS’s price contraction.
  • Organic FXSs entering the pool would diluite the yeld for present LPers.
  • the majority of cvxFXS holders haven’t yet provided liquidity due to the current unfavourable conditions (130M$ vs 30M$ in the pool)
    This would mean that a lot of time might be needed to see all cvxFXS deployed and desirable peg conditions met
    A long time spent below peg could risk to undermine trust.

My proposal:

My idea to resolve this situation in the most desirable way for all parties is to run an AMO operation on the convex v2 cvxFXS/FXS pool by:

  • Direclty minting FXS into the pool
  • Bring back the peg
  • Take out Lp tokens and reserve the yeld for the Frax’s treasury
  • Redistribute the yeld from the Tresury to FXS holders (aka the pool itself)
  • When cvxFXS goes above peg (FXS < cvxFXS) withdraw the LPs as FXSs and burn them

This would produce an immediate return to the peg without impacting the market price of FXS while, simultaneously, would not diluite the yeld in any ways for every currently present or future LPer in the pool.
The yeld accrued from the AMO would not diluite LPers simply because it could be resupplied to the pool as FXSs, or even as CRVs, CVXs and FXSs.

This would allow an efficient exchange between FXS/cvxFXS, resolve the Fud, cut the losses for the community, allow cvxFXS holders to deploy their tokens to the pool and, ultimately, allow for the conversion of FXSs into cvxFXS in Convex to resume gradually as the demand to swap FXS into cvxFXS pushes the peg in favour of cvxFXS, thus allowing the AMO to withdraw liquidity as FXS and burn it.

I feel like this solution balances out the immediate injection of liquidity that Convex has benefitted from, in the form of gained governance weight from cvxFXS conversions in view of the FPI airdrop.

This kind of AMO strategy would subsidize the community losses and shift the risk from us to Convex in the sense of allowing the market dynamics to determine how long would it need for the AMO’s liquidity to be fully withdrawn and burned and, thus, the cvxFXS/FXS conversion process to gain full traction again.
All while maintaining a stable peg to the benefit of all parties.

Thank you all for your attention, time and work,
I sincerely admire and respect every single person involved with both this projects.

Hope you will find my proposal useful and might consider it for a snapshot,
looking forward to read your opinions.

Edit: Arguably the passing of such a proposal would incentivize the organic purchase of cvxFXS under peg from the pool and influx of big FXS capital to capture the arbitrage before the AMO is even deployed.
This would produce a further positive pressure on FXS’s price while drastically reducing the AMO’s expected size and time needed for the whole liquidity to be withdrawn.

2

Edit 2: thinking about it, even Convex wouldn’t have nothing to loose in terms of time required to see the conversion to cvxFXS resumed quickly.
Anyways when cvxFXS stays under the peg it’s always much more convenient to buy in the pool than to convert (arguably the more cvxFXS sits under peg, the more trust is undermined, the more people could be hesitant to even swap their FXSs into the pool bcs who knows when peg will return? Who knows if this is the max discount? Also cvxFXS holders that are waiting out of the pool get pressured as they sit underwater…etc…)
So no conversion is expected untill the peg returns and with the business model of Convex being so beneficiary to the FXS holders community I think is in everyone interest to resume it asap so that FXS holders can easily access the FXS earnings, Convex can get governance weight and so on.

While it’s true that the AMO could theoretically “steal” demand from conversions by frontrunning it and withdrawing Liquidity as FXSs to burn, the expected capital needed to get in the pool to make conversion favourable again is the same as the capital that the AMO would need to deploy to bring back the peg and subsequently would have to gradually withdraw for burning.
There would be no difference in capital required for the peg to return and conversion to be resumed.
The only difference would be that trust would be re-established faster and therefore, with less fear, I think capital would get pooled faster as well.

Another solution could be that, when pre determined price conditions for liquidity withdrawal are met, eg:

  • @ peg, when liquidity is supplied algorithmically up to -5% from peg;
  • or +1% from peg, when liquidity is supplied algorithmically up to the exact peg

when the AMO withdraws it, only 50% of the target amount is withdrawn as FXS and burned, the remaining 50% is still withdrawn as FXS and half of it is converted into cvxFXS and re-supplied with the other half (so a total of 50% burnt FXS, 25% converted to cvxFXS, 25% FXS and both 25% shares re-supplied).
This way Convex would even start to get conversions back as soon as the AMO is deployed and the first swap happens in the pool.

Also, like I said, the arbitrage opportunity presented to the community, if such a proposal would pass, would probably drastically reduce the capital required for the AMO to deploy since the community would chase the arbitrage profits and supply liquidity organically (positively impacting FXS price) when actually doing nothing would probably further exacerbate this current undesirable situation for all parties.

I won’t focus on underlining how the current dynamics negatively impact CVX, FXS cvxFXS and all the holders, but I think the cvxFXS mechanics are definitely not to balme and not the culprit of this loss of peg.
The FPI airdrop and all the blind conversions caused this liquidity event, and this is completely unrelated to cvxFXS mechanics per se.
This is why I think this solution presents itself as a good fix for that, a positive sum and, ultimately, as an opportunity for both projects and communities.

3

I beleive a bit of patience is in order regarding the cvxFXS peg (I’m holding cvxFXS bags before anyone complains). frax.convex CVX and FXS rewards have also just been added and the apy is very high. I’ve done rough calculations and 1/3 of total cvxFXS are in the curve pool right now and if all cvxFXS was deposited in the current unbalanced ratio with FXS then the apy would still be above 50% rewards in cvx and fxs tokens (the apy would still be attractive). This is BEFORE the crv rewards guage has been added and before convex allows depositing LP tokens which will use the veFXS boost (and share more fees). All these sources of yield will inevitably attract more capital to the cvxFXS pool and dilute the yield and in doing so the remaining cvxFXS will get deposited AND more FXS will come in (but the non-deposited cvxFXS in circulation will start to run out quite quickly).

3 Likes
4

I appreciate the feedback, honestly I wanted to share my idea with the community as soon as I had it, to allow devs to keep it in consideration.
I agree that we should at least see how the market forces resolves the situation once all moving parts and liquidity incentives are put in place for new partecipants to consider entering the pool.
One foot in front of the other is definitely the best approach and I admit I tend to be hasty by nature. :sweat_smile:
By the way I would also like to consider the fact that:

a) like you said, a lot of cvxFXSs are waiting out of the pool and (like myself) not choosing to dump their losses @ market or into the pool because we hold a strong faith in both Frax and Convex teams.
I feel like the more the value of cvxFXS deviates from peg the more the conviction of the holders is put to the test.

b) the solidly exchange is offering competing yelds on FXS and is probably stealing demand and attracting liquidity away from convex atm.

Just for context :pray:

5

I am a long time LP on Curve and Convex. cvxCrv peg sometime may break too. And eventually it will return to normal (< 2%). I don’t think we need to do anything about it. When you decided to convert FXS to cvxFXS to receive your rewards, you know the risk that it may take time to swap cvxFXS back. I believe the market/peg will be back to normal, especially Convex is already hinting users to do swap rather than convert. You just need to be patient if you are holding cvxFXSs. Any special handling on this may not be fair to other people.

6

I tend to agree on that probably the incident would resolve by itself in the long run, IMO the mechanics of Convex are pretty solid and I think that people will naturally chose the best yeld/free liquidity option.
Also it’s a good thing what Convex is doing by pointing at swaps.
Ofc if we can see the thing settling down on its own this might be unnecessary and atm it’s just a potential idea.
In which way do you see it being unfair though?

7

I did not do a lot of analysis. My general idea is that there is no free lunch in a zero sum game, whatever you do, if it benefit somebody, it will hurt someone else. An extreme example, what if a user cannot even read English, they don’t expect whatever you proposed and may take the wrong action.

Sorry, I know this is kind of vague and you may feel it is bullshit.

8

i see no point trying to fix an issue that will resolve itself over time.

seemed pretty clear that there would be a cvxFXS sell off as soon as the snap was done as most cvxFXS holders where only in cvxFXS to get the max airdrop without the lockup time.

give it 6 months and it will solve itself.