Add ETH as collateral for agEUR

[tuta]

Thanks for your thoughts and comments @Sebastien @Defi_Scientist !

Protocol VS User perspectives

@Sebastien very good point on the difference between the protocol and user perspectives. As I see it, most demand would come from ETH holders looking to hold agEUR while keeping their ETH exposure over time. As an example, these users would be able to mint agEUR with half of their ETH, and open a x2 leverage ETH/EUR position. Costly in fees, but an increase of 50% in terms of capital, without much risk of liquidation.

On another note, I think what you point out with USDC is already the problem we’re having today in the protocol, and that this is precisely why we need to push for the adoption of ETH as native collateral: so agEUR doesn’t just become a meta-USDC.

@Sebastien

I think there should be a separation between what the protocol wants to hold as an asset and which one will be used as a peg mechanism.

This is an interesting point that I hadn’t thought of. As a first thought, I’d say that introducing a difference here would add another layer of complexity. Moreover, the most important reason to add ETH as collateral in my opinion would be to, as @gnrv said, decentralize the backing of agEUR. As you said, ETH is still considered by many as the most pristine collateral on Ethereum.

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Demand

@Defi_Scientist, the most honest answer to most of your concerns is: I don’t know. We can’t really know if there would be demand for ETH/EUR leverage perpetuals before we create them. However, I do know that if I were bullish on ETH and bearish on EUR versus USD, I would rather long ETH/EUR than ETH/USD if possible!

Then, as @sogipec is saying, a well calibrated cap on agEUR minted from ETH is a good safeguard and risk mitigation measure the protocol can use.

Yield on ETH

@Defi_Scientist

• More difficult to generate income using ETH on DeFI versus USDC. ETH is not really an asset that is borrowed ( look at the utilization rate in Compound). We can stake it on LIDO Finance. Apart from that there are less investment strategies than for USDC. This would produce lower yields for SLPs and protocol but with a higher risk overall.

Yield on LIDO is at 4.5% currently, which would rank it just after USDC right now. Important that this yield is not influenced by supply and demand dynamics, but by the total ETH staked, which makes it naturally decreasing.
On the other hand, there are other ways to generate yield on ETH. One good example is the Covered Call Strategy from our friends at Stake DAO, which has been generating returns above 15% in ETH for a few months already, despite the current market conditions. However, it does require some manual maintenance.

Dynamic fees & slippage

As @gnrv points out, Dynamic fees have been made to solve most of your concerns. Being aggressive on their value depending on the collateral and hedging ratio of the protocol will be a good way to stress test their design, and see how well we can handle and cover a volatile collateral as ETH. As you say, having ETH hedged at 96% is not the same than USD!

@Defi_Scientist

We need a mechanism to put some hedges automatically to protect the SLPs when a certain level of risk is reached.

About this, I’m not sure I would agree. Yield is redistributed to SLPs because they are exposed to this slippage risk in the protocol, protecting agEUR collateralization in volatile times.

ANGLE incentives

While I understand the reasons for not distributing ANGLE incentives too much too soon, I think starting without incentives would not make it attractive enough for both HAs and SLPs. As I see it, the experiment is bound to fail without making sure to attract enough of those agents.

An option might be to begin with a pre-defined amount of ANGLE depending on the cap on stable minted chosen and paid out of the 5% spare tokens we have from weekly emission. Doing this would allow us to calibrate the APRs in an optimal hedging & collateralization scenario, and not put the protocol in an corner if it doesn’t work.