FRAX Tranches - leveraged Convex yield and LP protection

Summary
Idle DAO just released Perpetual Yield Tranches (PYT) to let FRAX liquidity providers enjoy:

  • leverage on Convex APY (76% APY now)
  • built-in protection features (5% APY now)

The product provides an alternative gateway to liquidity provision via Curve/Convex and on-top vaults, enabling risk-oriented and risk-averse Frax users to pick their preferred exposure on FRAX liquidity provision.

This is a proposal for routing 2.5% of Curve AMO ($40m deployment) into Senior Convex PYT to bootstrap this new primitive, building up solid fundamentals to reach hundreds of million $ in potential liquidity. This would create an increased AMM liquidity, resulting in a more efficient trading experience.

Motivation
Until today, the deployment of liquidity was possible via direct deposit into Curve/Convex or on-top protocols (e.g. Yearn).
Users that deploy liquidity into FRAX pools can do it using 3 gateways, with different dependencies:

  • Curve, with rates between 5% and 15% (according to the veCRV held)
  • Convex, with about 18-22% APY
  • Yearn, with actually 15% APY

Idle DAO released Convex PYT to unlock two additional gateways to attract liquidity, choosing FRAX in the first batch of integrated assets.

PYTs provide two new classes of risk profiles, expanding the Frax ecosystem with those alternative solutions:

  • Junior Tranche (76% APY at the time of writing) receives a higher proportion of Convex’s yield but also takes on extra smart contract and protocol risks.
  • Senior Tranche (5% APY at the time of writing) receives a smaller portion of the yield generated on FRAX3CRV via Convex but carries a higher grade of protection against these risks.

PYT Features
PYTs are epoch-less, which brings limitless product interactions: liquidity providers can deposit and withdraw anytime, with no maturity date or locking period.

Tranche tokens are also fully fungible and easily integrable into other projects (as collateral or for on-top use cases).

Security aspects
A decrease in the value of yield-bearing tokens will trigger a pausing mechanism. Senior Tranches are first in line to be repaid in case of default, while Junior holders have a second lien or no lien at all in case of fund losses.

PYTs have been audited by Consensys Diligence and Certik. The documentation is available here.

Specifications
Currently, Frax owns $1b in FRAX3CRV LP tokens allocated in Convex, $100m in StakeDAO, and $500m non-AMO (source).

The allocation of $40m into the Senior Convex PYT - FRAX pool represents 2.5% of the total FRAX3CRV LP token liquidity held by Frax DAO, with the opportunity to make this gateway an industry-standard and attract additional TVL thanks to built-in protection features and leveraged APYs.

Simulate APY and TVL liquidity here.

Next steps
Gauging Frax community feedback for this proposal.

If the community shows to be in line with this proposal, I’d be glad to spin off a Snapshot poll to assess the consensus from FXS token holders. Next step would be to propose it on-chain and finalize the liquidity deployment.

About Idle
Idle DAO’s objective is to create a product suite for Decentralized Finance (DeFi) that provides yield aggregation, automation, and optimization while allowing to diversify the associated technical and financial risks. We work with integration partners and DAO/institutional treasury managers to simplify their yield experience. Partners don’t need to stitch together disparate protocols or spend months integrating and updating yield functionalities.

One integration, to rule them all – DeFi yields aren’t easy to manage, but Idle makes you feel like they are.

Our core product suite is currently composed of:

  • Best-Yield strategy is a lending aggregator that aims to achieve the highest yield for supported digital assets at all times. It does this by programmatically allocating these assets across several lending protocols operating on the Ethereum and Polygon blockchain. The strategy has been battle-tested since mid-2019, and it’s considered one of the most resilient in the entire DeFi space.
  • Perpetual Yield Tranches are capital pools that automatically generate and tranche yields and risks based on a range of market-neutral yield strategies, including lending income, trading fees from Automated Market Makers, and protocol incentive farming. Pools are associated to two risk-adjusted products: Senior and Junior Tranches. Depositors into the Junior Tranches receive a higher proportion of system yields but also take on extra smart contract and financial risk. Inversely, the Senior Tranches receive a smaller portion of the system yield but are protected against these risks.

Website | Twitter | Discord | Docs | Github

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FRAX Senior PYT, based on Convex and developed by Idle, is now competing to get listed on APWine!

APWine allows users to speculate on the evolution of the generated yield.
With FRAX listed on this protocol, you can hedge your risk on your passive revenue and sell unrealized gains, or trade the underlying to have full exposure on future yields.
At the same time, there would 2 new on-top gateways to onboard additional liquidity into FRAX pools.

In the first batch of selected projects, the stake of the underlying asset generated from 80% to 800% APY, while the stake of the future yield was in the range 800% - 3000% APY.
These high returns are the consequence of low liquidity (from $200k to $1.1m per pool), and the high amount of APW incentives issued by the protocol.

The competition will last for 5 days, and the 5 most voted assets on Ethereum will be integrated into APWine and receive farming incentives for 60 days.

At the moment Frax Senior PYT is among the winning assets, but the competition is still at the early stage and we need to secure that position.

As stated in their listing template, APWine suggests fortifying the candidacy with liquidity commitments, additional rewards, $veAPW holders bribes, or badges like POAP to reward the voters later.

If you are an APW token holder, vote for “AA_idleCvxFRAX3CRV” to increase the chances to get FRAX Senior PYT listed!

Given the current TVL, a $500k liquidity deployment might be a smart way to get the spot, representing only 0.03% of the Curve AMO. Remember that this initiative is time-sensitive!

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The proposal to route a small portion of Curve AMO into Senior Convex PYT is still active, and further enriched by new details :point_down:

There is an ongoing discussion in Idle DAO to route 30%-50% of the current liquidity mining into Senior Tranches, distributed using Gauges (Curve-like infrastructure).
That amount is equivalent to 1000-1500 $IDLE shared daily across the Tranches.

With this implementation, Idle DAO would reward FRAX Tranches with $IDLE farming, whose allocation will be decided by $IDLE token holders.

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