FIP-55: Shifting resources away from the Convex AMO

Author

Mechanism Capital

Summary

Pause the de-collateralization strategy of minting FRAX into the FRAX3CRV pool in the Convex AMO. Instantiate an FXS TWAMM AMO to increase FXS buy pressure through seigniorage and burn. Deprecate buyback and re-collateralize for the v1 mechanism.

Background & Motivation:

The Curve AMO injects FRAX and USDC collateral into various Curve pools – primarily the FRAX3CRV pool through Convex. Every AMO follows 4 laws: de-collateralize, market ops, re-collateralize, and FXS1559. The existing Curve AMO operation is largely done through Convex Finance. It attempts to use excess collateral to continue growing overall Curve TVL, according to the first principle of AMOs. This is the part we propose changing.

This Convex AMO is placing millions of idle collateral and newly minted FRAX (when needed, to lower the CR) into the already massively liquid Frax Curve pool. Right now, over 1,200,000,000 FRAX can be sold into the FRAX3CRV pool without moving the price down by more than $0.01. We believe Curve is now sufficiently liquid in FRAX. The FRAX supply floor is now at least 1.2 billion FRAX because of this pool, a major success. This liquidity should be maintained, and the accrued LP fees and CRV rewards can continue to operate in the market operations of the AMO to attempt to keep the pool balanced. Excess LP profit can continue going toward FXS1559 to drive value toward FXS.

With the upcoming launch of the 4pool, this governance decision also sets the stage to free up resources for a) minting FRAX into the 4pool and b) shifting existing liquidity from FRAX3CRV to the 4pool.

The FXS TWAMM AMO can utilize Fraxswap to best execute the buying operations without having to buy at spot price and be constantly frontrun by arbitrageurs. Ideally, this AMO can run indefinitely, but initially, it could be set to a period of 60 days to have a measurable effect on the overall system. The FXS here should be burned, which begs the question: should FXS be minted by this new AMO to be sold for collateral during a re-collateralization period? This would be a requirement to fit the properties of an AMO. This functionality would be redundant to the existing re-collateralization functionality of the v1 system, so it would make sense to deprecate the v1 functionality in favor of all buybacks and re-collateralization through the TWAMM on Fraxswap.

A rough specification for limiting the functionality of the FXS AMO to not overallocate resources toward burning FXS should be prioritized as newly minted FRAX is valuable in many other places at the moment. Also, excess market operation on FXS can have unwanted adverse effects on FXS price volatility. These parameters could look something like this:

  • The FXS AMO cannot mint more than 10% of the newly issued FRAX a week.
  • The FXS AMO cannot have buy orders totalling more than 20% of the outstanding volume on the TWAMM.

For:

Keep the current TVL in the Convex AMO, but do not inject any more FRAX into the FRAX3CRV pool.

Buy FXS with seigniorage via FraxSwap: the FXS TWAMM AMO will mint FRAX during de-collateralization to slowly buy FXS. This AMO will be limited to ~10% of excess reserves as collateral.

Deprecate buybacks and re-collateralization for the v1 protocol.

Against:

Continue increasing the FRAX3CRV TVL.

3 Likes

A few points to lead the discussion:

  1. This could probably be broken out into three separate proposals

  2. No hard proposition regarding 4pool, should part of this proposal be to commit a portion of FRAX3CRV to 4pool?

  3. Technical parameters → to those that have spent more time with the frax protocol code, what is the feasibility to fit these changes into either a new AMO or updating the existing ones’ parameters?

I think, per your point, that these should be broken into separate proposals.

There will be some pushback on allocating too much of the Curve AMO to the 4pool, given concerns expressed over potential UST depeg. I think a proposal to allocate a certain max limit to the 4pool would make sense.

This also beggars the question of where Frax is voting/bribing. If we keep most of our asses in FRAX3CRV, but have publicly stated that we will be voting the 4pool, then we’re in a tough situation (i.e. voting for a pool where we have significantly less assets).

2 Likes

Definitely CR is not as important a narrative as it used to be, while much more complex than before. It would be great if we could know how the CR number in the Dashboard is calculated, being broken down by numerator and denominator, by different AMOs, by pools, etc.

1 Like

Not much time for an indepth response now, but this could be a major gamechanger… Intrigued…

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There will be some pushback on allocating too much of the Curve AMO to the 4pool, given concerns expressed over potential UST depeg. I think a proposal to allocate a certain max limit to the 4pool would make sense.

Agreed, I think that should be left to a different proposal. I think this proposal sets the stage, but also maintains “This liquidity should be maintained, and the accrued LP fees and CRV rewards can continue to operate in the market operations.” This liquidity is referring to FRAX3CRV.

If we keep most of our assets in FRAX3CRV, but have publicly stated that we will be voting the 4pool, then we’re in a tough situation

Yes, but I think timeline matters. Depending on the success/demand for 4pool, that can inform how aggressively (if at all) we migrate FRAX3CRV liquidity.

I believe it already is:

The “algorithmic” portion of the chart is the unbacked, the rest shows you the collateral that makes up the numerator of the CR.

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If we keep most of our assets in FRAX3CRV, but have publicly stated that we will be voting the 4pool, then we’re in a tough situation

That could be. My read, and perhaps I was mistaken, was that Frax was going to instantly start allocating all of our vlCVX votes to 4pool, in which case the FRAX3CRV AMO would become far less profitable.

Hey @brianfakhoury could you give an example of this would work?

wont that profit be recovered by the rewards from the new pool tho?

It’s clear that a lot of Fraximalists fear UST and don’t want to see large-scale AMO allocation to the 4pool; and if I’m not mistaken, Sam made it sound like Frax itself will be protected as we won’t have significant FRAX at risk. If I’m correct on that, then we won’t be major participants in the pool and therefore we won’t be receiving a large amount of the rewards we’re directing towards that pool as we currently do with the FRAX pool.

i think its fair to say the Team are more keen to get involved with UST then the average FRAX investor is.

some of this will be related to having the mindset “we are better and they are gonna fail” when looking at other stablecoin protocols, but some will have valid reasons for avoiding UST

personally i would not be shocked to see proportional voting, eg if we have $1.2b (86%) in the main pool and $200m (14%) in the 4pool , then we would use 14% of our vote/bribes for the 4 pool as it holds 14% of the liquidity . i guess it depends if we are looking to move liquidity or create a 2nd massive pool to operate alongside it.

That is not a bad idea, save for the fact that when this 4pool was announced it was said that FRAX, UST, Tokemak, Redacted, and some others were going to use their substantial holdings to direct rewards to the 4pool. Perhaps it was a misperception on my behalf, but I don’t think so.

I hope you’re right though, because if Frax continues to operate in size in the FRAX pool, but not in the 4pool, it would be a shame to see rewards getting disproportionately skewed to the new pools. The other argument could be that by helping boost the 4pool, a lot more FRAX will come into existence, and every new pool that uses the 4pool as its base pair (i.e. TOKE+4pool) would help expand FRAX, which yields more to FXS, thus it’s a net positive.

Would be great to get the core team’s input.

Is there any available analysis of how a depeg of UST would affect Frax as a protocol. My understanding is there are two primary risks, and then a series of unknown risks depending on how the market reacts (potentially irrationally)

  1. UST Depeg leads to 4-pool LPs taking huge losses as the pool becomes almost entirely comprised of UST. If Frax has an AMO directing significant Frax into 4-pool, in an effort to capture some of it’s own CRV rewards, then Frax incurs significant losses from the AMO.
  2. As UST depegs, 4-pool is no longer useful to maintain Frax peg stability. For the health of the protocol I think it makes sense to also keep a significant amount of liquidity in the 3pool-FRAX pool, so that we can continue to defend the peg in the case of a UST depeg.
  3. How the market chooses to react to a UST depeg, particularly if Frax is closely aligned with UST is unknown. Even if Frax continue to remain appropriately backed and stable, there may be significant selling pressure/reputational risk to FRAX arising from a depeg of the other large algo stable (UST).

I’m not an expert on Curve and am almost certainly incorrect in one of the above statements. Very much feel this warrants further debate.

imo , if UST went to $0 now then FRAX would only see a very small amount of loses and it would not be affected in any major way.

If the 4 pool is fully up and running, all rewards have been moved over and most of the liquidity has been moved to the 4 pool and its now the biggest liquidity pool, then FRAX goes to $0 if UST does.

By what mechanism does this occur? 4-pool LPs incur losses, and peg stability would be effected, but UST would be sold for some combination of USDC, USDT and FRAX.

right now, if i swap USDC for FRAX on Curve then i am putting USDC in to the pool and removing FRAX. the USDC i put in to the pool is now used to back the FRAX i took out.

if i swapped a worthless coin for FRAX in a pool then the FRAX would be backed by the worthless coin.

So if UST became worthless and people swapped it for FRAX, then that FRAX would be backed by a worthless asset, in turn this will give reason for frax to loose peg.

FRAX would not go to 0. While it’s not an ideal scenario, the CR would drop below the ideal CR, and the AMOs would attempt to re-collateralize. The Curve AMOs aren’t completely naive and measure the price of the pool’s collateral assets. That means as the price starts to go down, the AMO will already begin the re-collateralization process by pulling out FRAX and burning it, essentially taking a loss in protocol assets before taking a loss in circulating FRAX collateral. Ideally, the 4pool stays small enough that there isn’t any contagion risk in the short to mid-term.

Anyway, this is outside the scope of this proposal. Here we only aim to curb FRAX3CRV growth. We’re not recommending any parameters around 4pool seeding, and for that, we trust Sam and team to find good middle ground.

2 Likes

Very supportive of this proposal - it is the logical next step for maintaining the value of FXS and thereby our bribes and gauges.

We are very lucky to have such great VCs making proposals!

1 Like

That is correct, would you please break these to separate proposals, otherwise for/against voting is misleading.