After thinking about it for a while, we believe it is now time to move forward with adding ETH as native collateral in the protocol. This means that, if approved by veANGLE holders, users could:
mint agEUR from ETH directly
long perpetuals on ETH/EUR exchange rate without funding cost
deposit ETH in the protocol to earn yield.
ETH holders could also benefit from the protocol and be a source of demand for agEUR by minting while keeping their exposure to ETH through the perpetuals.
This would also benefit agEUR and veANGLE holders in multiple ways:
Increasing demand for agEUR
Increasing funds in the protocol, which would increase revenues for veANGLE holders
Strengthen agEUR by adding a decentralized non-correlated token as collateral
Expanding the protocol user base to ETH holders
ETH being a more volatile token than stablecoins, the protocol would have to make sure that the parameters are set in a conservative way to ensure that it’s not exposed to too much risks. This include:
Higher minting, burning, opening, and closing fees than on stablecoins collaterals
Starting with a cap on agEUR that could be minted to gauge demand for perpetuals
These parameters are not set yet but will be discussed and detailed in the coming days.
As always, the goal of this discussion is to get the community’s thoughts and opinions, so feel free to share yours here! What do you think about adding ETH as collateral?
I believe that adding ETH as a collateral would add some more risk to the protocol. But if it’s well capped this is IMO acceptable. Like adding a $5m worth cap for agEUR minted by ETH could be a nice way to experiment with our perps without funding rates while mitigating risk to the protocol.
Not sure however whether ETH related contracts should have a gauge: it could lead to an ANGLE war for the few elected ones which managed to open a perp.
And a Lido strategy should be more than enough to get more SLPs within the protocol.
Overall, it’s here just about making a deployment script and making sure parameters are well set.
Adding ETH to the Angle balance sheet would be a great step. ETH is the more pristine asset of Ethereum. Moreover, I assume most of us are bullish on ETH meaning that even not fully hedged it’s still good (but risky as @sogipec pointed out).
I have doubts that the implementation would work well. The proposal highlight that there will be “higher minting, burning (…) fees”. This makes sense as there is a strong oracle risk. Yet, from a user perspective wouldn’t ETH<->USDC<->minting/burning agEUR be more efficient? The ETH<->USDC step is only a few bps.
Therefore, 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.
PS: The same reasoning also works for DAI <-> agEUR. It’s cheaper to go through USDC. Obviously, the UX friction is quite important.
Good to see that the ANGLE Team is always looking for ways to improve the protocol.
On this one, I would be inclined to run a test period with a very small amount of ETH without any ANGLE incentive. This would help us understand better:
the risks we are taking
how much the fees and the risk controls need to be so that it is profitable.
if including ETH as a collateral improves demand for the coin.
here are my overall thoughts-please do not hesitate to comment !
ETH/EUR Perpetuals are not really common in DeFI (unlike ETH/USDC !) so the protocol would be offering an interesting product for traders. But is there demand for such a product and can the protocol benefit from it?
Users can get EUR out of ETH which potentially opens a great market. However, has the ANGLE Team done any study regarding how much volume this would generate?
In a small amount ETH reserves can lower the overall risk to the protocol but given its volatility, this amount would be relatively small.
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.
How good is ETH as a collateral for the protocol? Does it have a certain strategic value?
higher minting fees is a good idea need to be realistic to compete with competitors and alternatives. At the moment, Uniswap V3 is offering a 30 bps to exchange agEur vs ETH. Can we give better value for users, lower fees or less slippage? Do we have a better risk management than the yield farming?
Risk Management Consideration
The risk management with stablecoins is much easier than with tokens like ETH. So we need to think carefully about what can go wrong and remediation strategies.
The ETH/EUR pair is way more volatile than the USDC/EUR pair so there should be a limit on how much unhedged amount the protocol can be. Volatility is probably 10x so a 95% hedge on ETH reserved is probably equivalent to a 50% USDC hedge!
Limits on the amount one can deposit would also be beneficial. You do not want someone dumping $10m of ETH in a bear market. That is why there is slippage in AMM. Unless we have something embedded in a smart contract or an automatic process.
The dynamic fees and the maintenance margin need to be very well thought out. I would also put them conditional to market parameters like ETH volatility and cost of hedging. During volatile times, HA might be liquidated or close their hedges suddenly leaving the protocol at risk. We need a mechanism to put some hedges automatically to protect the SLPs when a certain level of risk is reached. SLP will bear a higher illiquidity risk on ETH pools and they might be reluctant in this.
I would like to see more quant study on the implementation of this. I am conscious that it might be easier to do a live trial so we can better sense whether this opportunity is viable.
With the router going live in the next few weeks (UI should follow after), we will already have ETH<->USDC<->agEUR going live and available.
The rationale for ETH is more to see in a real life setting whether our perpetuals can work, and show that Angle remains an innovative protocol in it design.
As for @Defi_Scientist points, I agree that ETH should be accepted with some risk mitigation measures. The first one I see is a cap on the amount of agEUR that can be minted from ETH.
As for demand for ETH/EUR perpetuals, let’s remember that Angle will be the first protocol to offer perpetuals without any funding rates which is huge.
It’s not obvious how this would increase demand for the coin (you’ve mentioned that we already have ETH/agEUR liquidity on Uniswap), it’s more a way to battle test the protocol’s perpetuals with a really interesting asset.
In terms of ANGLE incentive, I also think that we should not have any and keep this as an experiment in the first place.
The strategy for the protocol to get yield would consist on a Lido strategy: we have ready the strategy to get stETH either from Lido or from Curve and then swap it back to ETH when needed.
Besides the cap on the amount of agEUR issued through ETH, we could also put high fees for everything and then slowly lower these fees to see what’s the most profitable moment for the protocol at which we can start getting demand.
Overall, hearing all the comments, and I agree that the path on this lies on the quant study implementation of this. We’re here to discuss it!
Just to add on all that has been said.
As both you and @Sebastien, if we only consider a minter economical point of view, Angle stablecoins could work with only 1 collateral. As long as, the whitelisted tokens has an unlimited supply and is liquid enough (USDC can be close to these prerequisites).
But the added value of ETH as collateral, is toward a more decentralised instead of better economical conditions IMO. So I would add in the Pros decentralization.
Risk is indeed larger on ETH and the goal of the protocol is to be volatility neutral, at genesis there may be a lack of hedge, but as @Sebastien said I guess we are kind of all bullish on ETH.
Your last 2 points can be answered in one. Dynamic fees are designed for these specific cases. If you move too much the volatility market on ANGLE you should bear the cost of it → larger fees when you make the market more unbalance (which can be seen as a slippage fee as you said on AMM). This is a design similar to what you can find on Aave, Compound, etc…
As for defining demands for these markets, it is a pretty tough question as you said there is no market for it right now. And best way to find out is testing it live, while limiting potential loss.
@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.
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.
@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
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!
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.
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.
To recall why it would be interesting to have ETH as collateral.
A vote to accept ETH as native collateral in the Angle Core module is live! This would open the ability to ming agEUR using ETH, to open long ETH/EUR positions up to the quantity of ETH the protocol has received from minting, and deposit ETH to earn yield from strategy.
The main benefits for Angle and the agEUR is to decentralize the collateral tokens backing the protocol, and to see how well the protocol can be used with a volatile collateral.
Beyond minting agEUR from ETH with no slippage, some new interesting use cases will be available:
Leverage long ETH/EUR with no funding rate
Native ETH yield from strategies
One interesting way to use the protocol would be to mint agEUR using ETH, and directly open a leverage long ETH/EUR position of a desired leverage. This effectively allows users to keep their ETH exposure, while still being able to dispose of their capital as they want in the form of agEUR.
The initial fees are setup as low as possible while making sure the protocol is protected against any exploit, including oracle deviations. We have written about this in a series of blog posts: Part 2 about mint & burn fees, and Part 3 about open & close fees.
This puts the fees to mint or burn agEUR using ETH between 0.55% and 1%. Opening or closing ETH/EUR leveraged positions would cost between 0.2% and 0.8% of the position size.
The goal of ANGLE rewards is to incentivize the use of the protocol and its stablecoins, and to make sure that there is a proportional amount of each type of agent needed to balance the protocol. To summarize, the two main goals of the protocol right now are: 1) incentivize liquidity in agEUR pools, and 2) incentivize the presence of Hedging Agents and Standard Liquidity Providers to have a sustainable equilibrium of stakeholders in the protocol.
However, this is very costly for the protocol, and Angle needs to be able to maintain this equilibrium between the different stakeholders without distributing ANGLE rewards indefinitely. This is why we want to propose deploying ETH as collateral without any ANGLE rewards to begin with.
We believe that with the more volatile nature of ETH, Hedging Agents would still be interested in opening leverage long positions to cover the protocol if needed. On the other hand, SLPs could benefit of a higher share of the interest generated by the protocol through strategies than other collaterals.
Cap on stable minted
When launching a new collateral, we can put a cap on the quantity of stablecoins that can be minted to make sure that enough Hedging Agents come in the protocol and cover the reserves.
We propose launching ETH with a limit of 5,000,000 agEUR, limit that can be raised if the cap is reached and the protocol is in a safe state.