[FIP - 398] Frax AMO Integration on Morpho with USD0++/FRAX and Curve LP USD0/USD0++/FRAX as available markets

[Adli]

Authors

Usual, 0xloth (Morpho), MEV Capital Team

Summary

This proposal seeks to establish an Algorithmic Market Operation (AMO) utilizing Morpho for lending and liquidity management. Specifically, it aims to first integrate USD0++ (0x35D8949372D46B7a3D5A56006AE77B215fc69bC0) and Curve LP USD0/USD0++ (0x1d08e7adc263cfc70b1babe6dc5bb339c16eec52) markets as collateral on Morpho to support Frax as borrowing assets, enhancing the utility and stability of both assets in the DeFi ecosystem.

Background and Motivation

Morpho is a decentralized, non-custodial lending protocol that optimizes yield for lenders and reduces borrowing costs for borrowers by having new rate computation functions. This integration aligns with our commitment to decentralization, transparency, and financial empowerment.

MEV Capital is a DeFi asset manager that already has more than $300M in assets under management and is already curator on Symbiotic and Mellow. Their knowledge in DeFi is now clearly established, making them a natural choice to curate Usual’s Morpho vaults. As such, MEV Capital will be at the disposal of Frax to co-curate the Frax AMO.

Usual is a new decentralized stablecoins issuer that accepts RWAs as collateral (USYC by Hashnote). USD0++ is a liquid bond token that represents locked USD0, accruing pills (the points of Usual) over time. The USD0/USD0++ Curve LP market provides deep liquidity and low slippage for stablecoin swaps while also accruing pills and fees. By leveraging these assets as collateral within Morpho, we can create a more dynamic and robust lending environment, attracting larger borrowers and creating growth across our ecosystem.

Usual Materials:

Usual Audits: Usual employs a multi-phased audit program to achieve the highest level of protocol security. Code auditors are industry leading Spearbit and Cantina.

Usual Website: All resources and links

Usual Docs: Full explanation of the protocol

Usual Backers: See all company and individuals that back Usual

Usual Collateral: See Usual collateral and its specs

Usual Risk Policy: See Usual risk policy and guidelines
Usual X: To see latest integration and news

Live Usual Integrations:

• Morpho
• Pendle
• Balancer
• Curve

Proposal Details

This proposal involves minting FRAX and depositing it into a designated Morpho lending market (i.e USD0++/FRAX and CurveLP(USD0/USD0++)/FRAX). The goal is to provide sufficient liquidity for FRAX in order to overcome supply-side shortages in lending, thereby fostering growth on the borrowing side. By kickstarting the market for larger borrowers, we aim to create a more dynamic and robust lending environment for FRAX on Morpho and deeper connection in the short term with Usual. Oracle choice will be decided with the Frax team.

Usual will incentivize the FRAX side with the same conditions as all other lending markets. (USD0++/USDC and CurveLP (USD0/USD0++)/USDC) Those pills will be given to the Frax Treasury. (1 pills per dollar + 5 bonus pills for each newly USD0++minted).

The markets have not been created yet and will be established in collaboration with the Frax team. The default parameter applied is a maximum of 86% LTV. After the integration, Usual will also create a FRAX/USD0 pool on Curve to simplify the loops.

Voting

• For: Approve the Frax AMO integration with a max authorized allocation of 50,000,000 FRAX on MetaMorpho Vault. Also, initiating the vault as a borrowing source for the to be created USD0++/FRAX and CurveLP(USD0/USD0++)/FRAX Morpho-markets when those would be created.

• Against: Do not proceed with the proposal.

[chudlite]

Fully supportive of the proposal, and I think $50 million is a good place to start - it unlocks lots of liquidity for Usual users, and generates a lot of profit for Frax. The numbers can always ramp up if it proves to be a success for both parties and sufficient demand is demonstrated.

[nikiel]

Against

1. USD0++ Redemption Risk: Proposal seeks to mint $50m FRAX (net new) which would be borrowed against USD0++ (collateral).

• USD0++ represents an underlying claim on USD0 that is locked
• As of 08/01/2024, USD0 has a market cap of $141.5m (USD) and is partially backed by USDC & USYC (Hashnote)
• USYC is underpinned by USDC but is limited to a redemption capacity of $2.8m USDC and $15.7m in PYUSD.

2. Proposal also allows a third-party asset manager (MEV Capital) to ‘curate’ these lending facilities but does not go on to explain what this would entail.

• Introduces alignment risk between Frax and the third-party agent which has different incentives and LPs
• Frax would expose itself to the underwriting of a third-party asset manager outside of a LP-GP relationship. Underwriting quality could decline over time.
• Frax having to mint $50m FRAX would bear the lionshare of risk in this arrangement. With the non-fiduciary asset manager having no downside, they might increase the risk profile of curated lending pools under its management.

[Adli]

Hello,

Thank you for you answer. I will answer points per points because there are some false informations I will correct.

@nikiel

• USD0++ represents an underlying claim on USD0 that is locked

True, but the DAO has an unlocking right that could be use in case of liquidity crunch.

@nikiel

• As of 08/01/2024, USD0 has a market cap of $141.5m (USD) and is partially backed by USDC & USYC (Hashnote)

USD0 is solely backed by USYC that is composed of rolling reverse repo. Not a single USDC backed USD0 and USD0 has no direct fractionnal banking reserve exposure, that is the whole purpose of the product.
See docs here with more info about USYC : RWA Collateral | Usual Docs
See treasury adress here : USYieldCoinUSYCTokenTracker|Etherscan

@nikiel

USYC is underpinned by USDC but is limited to a redemption capacity of $2.8m USDC and $15.7m in PYUSD.

USYC has an instant liquidity buffer with the amount you mention. We also have already 10M+ liquidity on curve and elsewhere against USD0. USD0 is always redeemable for USYC, then you have access to the instant liquidity buffer and after you could always redeem at T+0 as reverse repos are very short.

@nikiel

• Introduces alignment risk between Frax and the third-party agent which has different incentives and LPs

As stated in the proposal, it’s not mandatory. It’s at the discretion of Frax team if they want to not curate the vault themselves. Sparks have done that but we prefer to let optionality for more flexibility. So this is not relevant.

@nikiel

• Frax would expose itself to the underwriting of a third-party asset manager outside of a LP-GP relationship. Underwriting quality could decline over time.

Same, MEV as curator is “at the disposal” of Frax Team if wanted and needed.

@nikiel

• Frax having to mint $50m FRAX would bear the lionshare of risk in this arrangement. With the non-fiduciary asset manager having no downside, they might increase the risk profile of curated lending pools under its management.

Again, not mandatory to be MEV. And on the amount, it’s a maximum and Frax team can choose to allocate or not.

I hope this answer some doubt, happy to deep dive more if you want to.

[amirnader]

This proposal is up for voting here: Snapshot

[MichaelHenry]

Looks good to me and I hope this passes. Thanks for your responses Adli!