Proposal: bolt a CFAMM facility to the Y pool

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Proposal draft v2 … PLEASE VOTE BELOW :point_down::point_down::point_down::point_down:

Simple Summary

Y pool stablecoin depositors (LPs) can have an additional revenue stream in the form of trading fees from a rent-free governance-minimized stablecoin-to-stablecoin automatic market-making functionality. This is in addition to the yield they currently earn from having their stablecoins optimally rotated between Compound, Aave and DyDx. To align incentives between LPs and YFI holders: (1) trading fees are split 95% to LPs and 5% to YFI holders (2) upgrades to the trading functionality are opt-in.

Abstract

In addition to earning yield from optimized lending, stablecoins in the Y pool could also earn trading fees from an automatic market making (AMM) functionality. This is like bolting a multi-asset Balancer pool to the yEarn. A trader supplies stablecoin A (e.g. Dai) to the Y pool and receives stablecoin B (e.g. USDC) in return. The A:B exchange rate is provided by stablecoin-optimized constant function. Traders pay a fee on each trade which goes 95% to Y pool depositors (LPs) and 5% to YFI holders.

Deposit workflow: LPs deposit stablecoins to the Y pool by visiting yearn.finance and clicking on a “deposit” tab as usual. But now there is also a checkbox that says “I also would like to contribute my stablecoins for market-making and earn trading fees”. LPs that check the box earn lucrative trading fees but are also exposed to the risk of all the stablecoins in the trading pool. Depositors who do not check the box miss out on these fees but they also do not have exposure to stablecoin risks other than the stablecoin they deposited.

Trade workflow: traders go to yearn.finance and click on “trade” tab, input the desired amount of stablecoin to sell and be presented with a quote for the stablecoin they want to buy. The stablecoin sold to the pool is wrapped into yTokens (e.g. USDC → yUSDC) and begins earning interest optimized yield immediately. The stablecoin bought is unwrapped from yToken into the base (e.g. yDai → Dai) and given to the trader.

Motivation

  • Efficiency: remove intermediaries between Y pool LPs and the trading fees they earn should they opt-in to market-make.
  • Security: reduce extra-yEarn-protocol governance risks.
  • Sustainability: the fruits of network effects of the trading facilities is kept within the YFI ecosystem. This captures the value which is otherwise leaked outside the YFI ecosystem. This value comes from trading fees, liquidity network effects, and good governance.
  • Incentive alignment between YFI governors and Y pool’s LPs by (1) splitting trading fees 95% to LPs and 5% to YFI-holders and (2) enshrining upgrades as opt-in only. The 5% fee is fair compensation, not rent, fo YFI governors for maintaining the underlying yEarn machinery which LPs benefit from (interest rate optimization for now, other features and strategies added in the future).
  • Usability: better UI/UX for market-making because opting-in to the trading facility is just a checkbox, not a whole dedicated frontend which creates confusion.
  • Increase liquidity and network effects of the yEarn ecosystem.
  • Increase YFI’s moat against copy-paste clones. Clones can fork the AMM and the yield-optimizing strategies underneath it, but they can’t fork the AMM’s liquidity which results in extremely high slippage in their clone AMM.

Specification

Overview

The constant function of the automatic market making function is stablecoin-optimized in order to reduce slippage for traders. A similar function to that used in Curve or the upcoming Shell protocol can be used. A buffer of unwrapped stablecoins is kept to reduce gas costs for small depositors. The pool of AMM-participating Y depositors is the same as the current pool except for the additional publicly callable trade() function as well as backend utility functions that support it. The index token given to depositors represents a pro rata claim on of the total stablecoins in the pool. From a UI/UX perspective, LPs can withdraw to their desirable stablecoin. The withdrawal function performs the necessary swaps in the background to provide the withdrawer with the desired stablecoin. For example, suppose the pool is currently 25% Dai, 25% USDC, 25% USDT, and 25% TUSD. Suppose Alice has a 4% share of the pool, and she wants to withdraw her share into Dai only. The utility contracts unwraps (i.e. withdraws from lending protocols) 1% of yUSDC, 1% of yUSDT, and 1% yTUSD swaps each for Dai in the AMM itself. This represents 3% of Alice’s share, the remaining 1% is taken from the unwrapped from the yDai pool. The aggregate total of Dai’s which represent 4% share of the pool (under current exchange rates) is given to Alice.

The deployment admin key expires soon after deployment. Future upgrades of the AMM facility are opt-in, in a similar fashion to Uniswap → Uniswap v2 migration.

Rationale:

There are three principles: (1) modularity (2) minimalism (3) gas efficiency. The proposed approach above trades some of (3) in exchange for more (1) and (2). The inverse would have been to implement one global pool for both participating and non-participating LPs in market making. This makes the rebalancing more gas efficient Y-pool-wide. But then it’s less modular and more bloated because the pool needs to keep track of the trading fee distribution to participating LPs only. This means the current Y pool must be amended, which comes with its own risks.

The stablecoin-optimized function is designed to reduce slippage for traders. But it also assumes that some amount of de-pegging of one stablecoin should be arbitraged away by the market. The constant function becomes “concious” of a catastrophic de-pegging in a stablecoin only after a certain threshold, at which point the exponential nature of the pegged:depegged exchange rate protects the pool from further draining. This is a risk that LPs should know and understand about all stablecoin-constant functions generally.

The minimal change in UI/UX is to reduce confusion and mental overhead. Opting-in is a simple checkbox. Withdrawal abstracts away the swapping of underlying AMM shares of the withdrawer to the desired withdraw stablecoin(s). The withdraw workflow and UI/UX is exactly the same for both types of LPs: those participating in the AMM and those that are not. Note that both types of LPs earn optimized yield.

Risks:

  • Overseeing this stablecoin market-making functionality is an added responsibility to the YFI governance.
  • As with any additional contracts that get added to yEarn, there is smart contract risks.
  • Stablecoin risks: a market-making LP is exposed to the risks of all the stablecoin being market made, not just the stablecoins they supplied.

For:

The Y pool provides stablecoin-to-stablecoin automatic market-making functionality and collects trading fees. This functionality will be implemented and added to the Y pool.

Against:

The Y pool does not provide stablecoin-to-stablecoin automatic market-making of stablecoins.

Poll:

  • Yes, provide the Y pool depositors the option to market-make stablecoins swapping natively and earn trading fees.
  • No, do not provide Y pool depositors with the option to market-make stablecoins swapping.
0 voters

Copyright

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