[YIP-74] YFI Wintermute Loan & CRV Plans

[Callen_Wintermute]

(21/8/23) Updated Proposal:

Hi everyone,

thanks for all the feedback in both the forum and Discord. We’d like to reach a middle ground where both sides are relatively happy but ensure we can keep it as simple as possible.

It’s clear that the largest concern from the community is that the loan has no collateral from our side, which is fair considering the events that have happened over the past year.

So we propose this:

• We retain the same initial plan as before - use up to 3M CRV to buy yCRV, deploy yCRV tokens to the yCRV-CRV pool and stake this on yearn.

• Our CRV (whether that be yCRV, st-yCRV, lp-yCRV, vl-yCRV) will be held in a 3/4 or 4/6 multisig with wintermute folks and core yearn contributors. (No transaction can be made without at least one signature from a yearn member).

• Yearn multisig operators agree to approve anything we do as long as it’s within the Yearn + CRV ecosystem (e.g., swapping to vl-yCRV).

• We will extend our staking duration to 12 months to match the loan duration, however, after 6 months we have the option to return the YFI and receive our collateral back.

This keeps both parties’ commitments rather simple and we provide collateral for our loan.

We also want to reiterate that the loaned YFI will be used solely for our delta-neutral trading, we have no intent to sell it, and it will not be used in the YFI tokenomics ecosystem.

Next Steps

We hope to gauge the community’s sentiment on our new proposal by adding a new poll that will run for 2 days. If the poll is relatively positive with the majority of votes being in favour of the new proposal, we will look to formalise this into a YIP and go to a Snapshot Vote.

If the majority of the community is against the proposal as indicated by the poll, unfortunately, we will not move to a Snapshot vote and we thank the community for engaging with us!

Updated Proposal Poll

• For
• Against

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Old Proposal:

Description

Hi Yearn Community!

Wintermute is excited to put forward this proposal which outlines the motivation, background and terms of a YFI loan to Wintermute Trading and further explains our long-term plans with respect to CRV on Yearn to the Yearn DAO.

Specifically, we are requesting approval of a YFI loan to Wintermute Trading and authorization of a transfer of 350 YFI ($2.18M) from the DAO’s treasury to Wintermute Trading for 12 months at a 0.10% interest rate to be paid in kind at the end of the loan term.

Separately, as part of Wintermute’s continued engagement on Yearn, Wintermute plans to utilise its funds of up to 3M CRV ($1.73M) to buy yCRV and subsequently add and deploy our assets to the yCRV-CRV Curve pool (lp-yCRV V2) on Yearn for a minimum of 6 months.

We believe that this should help rebalance the pool which currently sits at 69%/31% yCRV/CRV, improve the yCRV peg, and increase the pool’s liquidity.

Motivation

The past 2 weeks have once again tested the resilience of DeFi off the back of a bug in specific versions of Vyper. Subsequently, CRV’s largest source of on-chain liquidity vanished due to the CRV/ETH Curve pool being drained. This once again raised alarm bells for the Aave community as the price of CRV went down and the probability of insolvency inched closer due to Michael’s large CRV position on Aave V2.

With little on-chain liquidity present and multiple loan positions to manage, a series of OTC trades were conducted with various parties across DeFi, including Wintermute Trading. We are now looking to deploy some of the CRV tokens on protocols where CRV is locked perpetually, including Yearn!

We strongly believe in the vision of a truly decentralized world and Yearn has played an extremely positive role in empowering and advancing this vision. Therefore, we’d love to proactively engage with the Yearn community and the DAO by utilising up to 3M ($1.73M) of our CRV to purchase yCRV, and then deploy a mixture of our assets to the yCRV-CRV liquidity pool on Curve which only has $5.25M in TVL.

Wintermute’s Basic Background:

Wintermute Trading is a leading crypto-native algorithmic trading firm, specializing in creating efficient markets across centralized and decentralized exchanges. Wintermute was founded in July 2017 by three Optiver veterans. Evgeny Gaevoy, founder and CEO, was previously head of ETFs (screen and OTC) at Optiver Europe, one of the largest ETF market-making desks. Since our inception, we have traded over $3T and expanded our presence across 80+ (de)centralized exchanges and various (non)EVM chains, continuously supporting the ecosystem for our partners and their communities.

Alongside our trading arm, Wintermute Ventures and Wintermute Governance support and work with leading crypto projects with the goal of truly adding value, enabling partnerships, and helping shape a positive outcome for the ecosystem. Importantly, we do not target large ownership stakes; decentralized ownership is an important prerequisite to transitioning to a robust future.

Specification

Wintermute’s plans:

• Borrowed YFI will be used exclusively for trading purposes. No farming, lending, voting, etc.

• Use up to 3M CRV ($1.73M) to buy yCRV (depending on the ratio of yCRV-CRV in the liquidity pool).

• Deploy yCRV tokens to the yCRV-CRV pool which we believe will help rebalance the pool and stake this on Yearn for a minimum of 6 months.

• Has the optionality to swap the lp-yCRV to vl-yCRV for active participation in the Curve Wars.

Our Ask:

Wintermute Trading is requesting approval for a 12-month loan of 350 YFI ($2.18M) at a 0.10% interest rate from the DAO’s treasury.

Loan Repayment:

Wintermute Trading agrees to return the full 350 YFI loan amount and 0.10% interest paid in kind to the DAO’s treasury at the end of the 12-month period.

Implementation

If approved by the Yearn DAO, 350 YFI will be sent from the DAO’s treasury to Wintermute’s address:

• 0xDBF5E9c5206d0dB70a90108bf936DA60221dC080

Next Steps

Following community discussion and feedback after 7 days, we will look to initiate a Snapshot Vote with voting options:

1. For - Approve and transfer a loan of 350 YFI to Wintermute Trading.
2. Against - Reject the proposal.

Previous Poll

• For
• Against

[yolau]

Why don’t you buy those 350 YFI from the open market and sell them in one year after you conduct your “trading”?

[0x7d54]

Thank you Callen and Wintermute for the proposal, and that’s awesome that you would like to use Yearn’s yCRV for your newly acquired CRV and that you see the advantages of vl-yCRV for your other initiatives. I have two suggested modifications:

1. Though it fluctuates, the yCRV/CRV “peg” at present is pretty good (i.e. quite close to 1:1) and given how Curve pools work it isn’t necessary to achieve 50/50 balance for the yCRV system to be operating at a very high level. Your proposed swap and deployment would of course still be helpful for multiple reasons… but what would really help balance things out (especially because you could exit the pool and deplete it of CRV in the future) for yearn is if you minted new yCRV with half of your CRV balance and paired it with the other half for yCRV/CRV liquidity, thus growing yearn’s veCRV stake. You would lose a small amount of positive price impact… but again, based on the current composition of the yCRV/ CRV pool, this benefit would be pretty minimal for you anyway. In exchange, I would support changing the YFI loan to be 0% interest.

2. It would be nice to see the CRV commitment extending for 12 months, to match the YFI loan duration. Though of course I hope that the yCRV/ lp-yCRV/ vl-yCRV system works so well for you that you remaing permanently in the position!

[MacMoriano]

Hi Callen! First of all, thanks for taking your time to post this!
Two important questions:

1. How was the 0.1% interest rate determined?
2. What type of collateral are you going to post as guarantee for the load to be repaid in full at the due date?

[0x7d54]

Ok, after thinking further and discussing with community members, including discord user BarryPooter, we have a counterproposal, to address several issues with the current version as proposed. Namely, that i) in the current version of the proposal there is no collateral for the loan, relying on a handshake agreement only, and ii) the benefits to Yearn are arguably too transient at present.

1. The CRV serves as collateral for the borrowed YFI, with a smart contract-based OTC exchange to the Yearn treasury.

2. Yearn converts 100% of the CRV to yCRV and deploys it from the treasury at the direction of Wintermute for the duration of the agreement. Including on voting.

3. The principal continues to serve as collateral for the YFI loan, but earnings can be distributed to Wintermute on a regular basis from the Yearn treasury, as requested by Wintermute (but bi-weekly at most).

4. At the conclusion of the 12 month period, the full yCRV (and/or CRV depending on how the position evolves) and YFI balances are exchanged between Yearn and Wintermute to close the agreement, unless the agreement is extended based on the passage of a new YIP that should be proposed at least one month prior to the completion of the original loan term.

[BarryPooter]

Thanks 0x7d54 for writing this, and indeed i agree with the above.

[MacMoriano]

This may be a good compromise but what happens if the loan becomes undercollateralized?
For exemple YFI moves 3x and CRV only 1.5x.

I’d prever a setup where this scenario (and others) are handled automaticly by a smart contract.

[0x7d54]

One correction to what I wrote, and one clarification (for emphasis):

Correction: I meant to write “bi-monthly” not bi-weekly. I.e. the income would be redistributable out to Wintermute maximum of every two weeks.

Clarification: The conversion of the CRV to yCRV would be via minting – i.e. this would directly increase Yearn’s veYFI balance and proportional share, representing a lasting benefit to Yearn.

[0x7d54]

Yeah, this could happen. But at least it is better than a no-collateral, handshake agreement? That was my thinking, at least.

I think that the use of a smart contract-based lending protocol would make impossible what each side wants to do with the tokens, in this case, unless Yearn were to develop a custom smart contract for this, which isn’t plausible. And even then I doubt that Wintermute would agree to it, as they don’t want to be needing to think about managing and topping up the collateral, etc.

For yearn: How valuable would the combination of the permanently increased yCRV plus an entity like Wintermute opting into the yCRV/ st-yCRV/ vl-yCRV system be, to justify the small risk that Wintermute doesn’t repay the YFI at the end of the term (which, then, Yearn’s treasury would own more yCRV than before, at least, but yeah that could potentially be a really bad deal depending on relative price appreciation)? I don’t know for sure, myself, but it would definitely be a boost – especially considering that other CRV liquid locker solutions have recently seen big inflows coming out of the OTC deals, beyond their own purchases.

[Bentag]

As a veYFI holder I hope to see more transparency on the usage of $YFI.

[MacMoriano]

If there is something that we’ve learned this past few years is that handshake loan agreements are a very bad idea.
When it comes to potentially undercollateralized ones there can be variations and some additional details from the requester might help make it easier to approve/deny it.

[Jahovaah]

Invest 3M CRV, then halt and hold until further instructions.

[wishful_cynic]

Hey everyone, thought I’d give more color of our thinking process and what we are trying to achieve here. Big fan of Yearn by the way:)

As part of CRV bailout of last week, we need to find a way to lock part of our CRV and ideally get yield on it. Bonus points for being able to vote with it (as I think there is good chance curve wars are coming back)

We’ve been primarily looking at yCRV and cvxCRV. Trade-offs we face:

• Best thing about yCRV is we’d be able to vote at some point in future. Slippage however is pretty bad
• cvxCRV is just yield, but very reasonable slippage
• yield is pretty much similar between the two

Slippage is big consideration for us – we don’t want to sacrifice a big chunk of the yield in future if/when we want to exit. And, to address some of the posters before, I actually think it’s a very significant problem for yearn – you need to get this critical mass of liquidity to attract more liquidity, otherwise everyone will just go to Convex

At the same time we are trading YFI across cefi/defi/otc and could really use more inventory. Buying it from the market is just not in line with our market neutral mandate – we have no opinion on where YFI is going direction wise. So, combining all this, we thought about this creative solution – exchange our liquidity for yCRV/CRV for a loan in YFI (that would be rather stupid for us not to return, given the size of Wintermute at this stage), so that everyone wins in the long run.

And maybe it can be the catalyst to attract even more liquidity in future as slippage would drop quite a bit with us entering the pool

[MacMoriano]

Hi wishful_cynic,

Thanks for your detailed response.
I hope you understand why we are a bit sceptical here. Celsius, Alameda, FTX, Voyager, 3AC, BlockFi and many others were all “reputable” companies and of big size. So I hope you agree when we like to “trust but verify”. As such I think it would be very hard for us to go for a uncollaterilzed loan, guarenteed only by your reputation.
If you are willing to lock those CRV for 12 months in a way that Yearn has full control over them I think the conversation would make a lot more sense.

In terms of those CRV helping Yearn out, that would for sure be of great importance, and you would also be getting a very good yield.

[0x7d54]

Thank you for the response, and the discussion. In terms of price impact (which I think you mean, rather than slippage - since you could simply use MEV protection and low slippage tolerance to protect against that), I understand your concern. But please consider the yield + vote-directing opportunities (for savings or increased yield elsewhere in the yearn ecosystem) in the meantime, which will way more than make up for this consideration, especially if the position is exited gradually.

Also, with yCRV continuing to be a productive asset and the value of your vote control unlikely to simply expire, isn’t there some likelihood that you would maintain at least part of the position after the expiration of the term?

In any case, at least for me, I’d like to see more balance in the benefits of this transaction so that it is a bigger win-win for both wintermute and yearn than only liquidity, and with balanced risk as well, i.e. with the CRV serving as a collateral, rather than both assets controlled by your wallets.

In my above counter-proposal, I suggested that Wintermute could still receive the income from the yCRV in the meantime under such an arrangement, i.e. you would be receiving income from both your YFI trading activities and the yCRV… therefore, then, there should be a less transient benefit for Yearn than in the original proposal, which to me seems should be the minting of new yCRV, at minimum.

Finally, could you provide more detail or at least reassurance on your plans for trading YFI in the next version of the proposal. I hope you can understand that it is important for Yearn protocol stability that the borrowed YFI are not simply sold to open a short position.

[wishful_cynic]

with regards to yearn potentially getting control one way or another of CRV - would be nice to get perspective from whoever would control it on yearn side on how much they would want to bother with moving things between yCRV/ st-yCRV/ vl-yCRV (if we instruct them to)? Just conscious of distraction this would cause on their side - we are open to this in theory

[wishful_cynic]

• agreed on semantics:)
• there is totally a possibility we would keep yCRV and not sell in 12 months - completely depends on market dynamics, how well curve is doing, how well yearn is doing, how competitors of yearn are doing etc etc
• as I mentioned just now - we might be open to this, but also would like to get color from treasury controllers about how much they want to bother with moving this CRV from one part of yearn to another (and managing voting on our behalf further down the line)
• main issue with minting new yCRV is it seems rather wasteful given we can get better exposure by buying from the pool
• Plan for YFI is to use it as inventory in our prop trading. I simply dont see whats the play for us to sell it only to have to buy it back later once the loan is due to return - we’d be taking on random market risk. If we wanted to open YFI short, there are plenty of other ways to do it

[0x7d54]

Agreed on the concern about the short being somewhat unwarranted given Wintermute’s delta-neutral approach, but it would be great to see it spelled out a bit more in the proposal, as that concern has been raised a lot.

In terms of minting new yCRV – the idea here is to ensure that Yearn receives a lasting benefit as part of the arrangement, beyond transiently-increased liquidity (which would probably not last long… outside of times of stress it is market-driven based on yield, and liquidity would simply flow from lp-yCRV to st-yCRV… it’s a feature not a bug). It helps to balance the scale, so to speak.

This can be done without much opportunity loss for the Wintermute CRV position. The current yCRV/CRV pool (lp-yCRV) is not super unbalanced. If you deposited 3M CRV at the current moment you would receive 0.68% positive price impact, which [if direct minting instead] would be earned back with fewer than two weeks of yield from the combination of st-yCRV and lp-yCRV. Of course the 0.68% is not quite the complete picture because you would be moving yCRV into lp-yCRV, but this could be done over time to achieve minimal price impact (just as you could later transition from lp-yCRV to CRV). The beauty of the yCRV design is a big advantage here.

I’ve pinged the yearn team to ask if they could comment on feasibility of the treasury management of the collateral position on your behalf, and how it would operate.

Thank you again for considering Yearn as a home for your CRV, and bringing the proposal, which we can hopefully develop into a very clear win-win!

[0x7d54]

(for some reason the reply feature didn’t work on my above post - pinging you now)

[BlockEnthusiast]

Personally view this proposal as a statement that Yearn is a docile redacted potential partner. While I typically view Wintermute as good actors, that doesn’t preclude them from making bad/exploitative proposals.

Wintermute has acquired a significant amount of CRV and needs to maximize profit. It can be assumed since delta neutral that they have some form of large CRV short open to match this new exposure.

They have acquired their bag, at a discount, too large to market make against majors and have a commitment not to dump (secured by rep).

CRV has built an ecosystem around long term locks as earning opportunities rather than low friction opportunities. Really their only options to earn outside of market making are veCRV, cvxCRV, yCRV, sdCRV, and a few other very small players which are probably off their radar due to size constraints.

If we look at CRV’s onchain trading volume we can see that it primarily trades against WETH. Then its derivatives make up the rest of the rest with cvxCRV being significantly large, followed by yCRV then sdCRV.

(Units are in CRV and exclude WETH )
May

June

July

August

cvxCRV has a total supply of 309,424,464
yCRV has a total supply of 52,253,547 (but slightly diverged from underlying CRV)
yCRV has roughly 6x less supply but maintains > 6x less volume so actually pretty decent on that front.

We see Wintermute is pressured into making plays which market make CRV LSDs but need to offset their exposure to price impact on exits on 2024-07-31.

In order to offset that future price impact, Wintermute is asking for a virtually free uncollateralized loan of YFI where Yearn inherits all the operational risk of Wintermute and would need a legal entity to deal with any unfulfilled promises.

A potentially better alternative is to loan Wintermute the underlying ycrvDAO token which is wrapped by yCRV.

If the yCRV contract can use strategies it can deploy its underlying ycrvDAO to a lending protocol or custom option contract which uses CRV as collateral. The interest rate should be set above the expected revenue earned from ycrvDAO. This allows Yearn to take a small share of profits from the MM operations of Wintermute in the form of interest to increase the yield earned by yCRV holders while having all components of the deal handled on chain.

Lending YFI against yCRV is dangerous, as CRV natively makes unsafe colllateral and yCRV is even less liquid without the ability to arb downside market price pressure.

Lending ycrvDAO against CRV is super safe since liquidation is just locking the CRV, and ycvDAO can’t really pump vs CRV since an arb is available to correct that price.