AIP - 14: Seed UniV3 agEUR-USDC pools on Optimism and Arbitrum using protocol surplus and AMOs

Hey everyone,

This is a proposal to setup pools for agEUR on Optimism and Arbitrum with USDC on UniV3.

Context

With the upcoming expansion of the borrowing module and agEUR on different chains, it becomes important to build liquidity for agEUR on these chains.

Among the chains where agEUR should soon be natively deployed (if positively voted by governance) are Optimism and Arbitrum. There’s no agEUR liquidity in it, and to pave the way for the borrowing module to work efficiently there, it’s better if there is already agEUR liquidity available.

On top of that, as discussed heavily on Discord this week, the protocol has made significant surplus from its operations since its launch in November. As of the 8th of July 2022, this surplus is $8.5m. This surplus is mostly in USD stablecoins and one way it could be used is by investing it to seed pools in different places with agEUR.

Other thing to have in mind is that the protocol is able to mint technically unbacked agEUR in the market through Algorithmic market operations or AMOs.

Proposal

The proposal is to use 400k USDC from the protocol’s surplus, bridge 200k USDC to Optimism and 200k USDC to Arbitrum, mint a corresponding amount of agEUR on Optimism and on Arbitrum, and then seed two Uniswap V3 pools at 0.05% between agEUR and USDC on each of these chains.

Proposal is to use the following range for the UniV3 positions: 0.83€/1.42€ per dollar which seems like an efficient way to allow for a passive position management while minimizing impermanent loss.

The exact amount of agEUR to mint on each chain will depend on the initial EURUSD price at the time of the implementation with respect to the range chosen.

Note that if you want to play with impermanent loss simulation, we have built a simulator on the Angle App at Angle Protocol.

Implementation

The minted agEUR would be from AMOs. The rationale for minting agEUR that way is that the protocol could technically fetch like 600k USDC from its surplus, borrow $400k worth of agEUR through the borrowing module on Polygon and get these agEUR but there will be an opportunity cost for doing so since the USDC fetched from the surplus would no longer be invested in the yield strategies of the protocols.

With $400k worth of agEUR from AMOs, these agEUR are still backed by the USDC that are used to issue them and if the value of the USD came to decrease (meaning that a portion of the agEUR issued through AMO would be “unbacked”), then the protocol could still rely on its surplus to hedge for the “loss”.

As such, using AMOs is a way to mitigate the opportunity cost while still relying in some way on the surplus the protocol has accumulated.

The governance multisig on Ethereum mainnet would take care of pulling the surplus and bridging it, while the governance multisig on Arbitrum and Optimism would take care of minting the agEUR and then handling the UniV3 positions.

Obviously, as this goes live, it’s going to be important for the protocol to increase or decrease the size of the positions depending on volume. Note also that the USDC pulled from surplus are not “lost” as they’re still in the hands of the protocol which can pull them at any time in case of a better opportunity or a black swan event somewhere.

Value to the protocol

Liquidity pools on Optimism and Arbitrum would allow the borrowing module, if deployed there, to work efficiently from scratch, allowing people to take leverage, to repay their debt without any capital commitment, to facilitate low discount on liquidations, …
They’re also going to unleash a wide range of opportunities for agEUR in these ecosystems, allowing it to be more easily integrated in the protocols that are getting built there.

Risks

This proposal would reduce the surplus immediately available of the protocol. In case of a black swan event, it may create some delay to pull the funds back to the Core module.
There is a risk of bad debt also possible with the agEUR paired with USDC in the AMOs, but given the size of the pool proposed and the surplus, this risk is acceptable as the surplus could easily absorb it.

Anyway, super happy to hear your thoughts on this proposal, on the amounts proposed (we can always change this) and on the ranges chosen.

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With 1bp pool coming to Uniswap, it may be interesting to consider adding liquidity to the lowest fees pools possible: Uniswap Interface

Out of curiosity, how did you calculate this range ?

Based on a new tool which we’re going to announce available at Angle Protocol.

Seemed like the most optimal place to reduce IL, but haven’t written anything formal about that.

While I agree with the long term vision of expanding to L2’s, my concern is that the protocol surplus could be better used elsewhere at the current moment. The fact is that the stablecoin world revolves around Curve on mainnet at this point, and with the launch of EUROC, I think our entire focus needs to be on leveraging that launch to our advantage to secure agEUR’s spot as the “DAI of EURO stables”. Our surplus is modest, so even $400k is quite a lot. I am much more in favor of gaining momentum and getting the flywheel spinning with incentivized agEUR-EUROC pools first. If we are successful with that, our surplus will continue to grow, and we can pursue expanding to L2’s in this fashion at some point in the future. But IMO, trying to expand to L2’s first is putting the cart before the horse. L2’s are still in their infancy, and there will ample time to leverage L2’s in the coming months.

TLDR: I agree should do this, just not yet, and all of our resources and efforts should be around integrating and incentivizing agEUR-EUROC on mainnet.

Thanks for the thoughtful reply, I hear your point on this!

And I agree that we should priorize mainnet and Curve with Euroc! But the good thing with this proposal is that it only affects 5% of the surplus and funds can be pulled at anytime by the protocol.

In short, it’s not because we’re doing this now that we won’t be able to seed (very soon) a pool on Curve with Euroc, and if we see that these two pools do not give us the flywheel effects that we are counting on, then we can always shift back!

On a side note, I agree that L2s are early, but in my mind that’s the reason why we absolutely need to be here: to get a first mover advantage there and build integrations before it takes off so that we can leverage them pretty easily and soon.

I think this is a very risky thing to do @sogipec . Given the macro conditions I believe there is a good chance you may be out of range within 6 months (euro at $0.84). In that case the protocol will end up with only agEUR and it will affect the collateral ratio. I think it’s much better to let users take this kind of risk through emissions. Or at least increase a bit the fees to compensate (5bps?). I wanted to vote against but my veANGLE are on stakedao and we only had 24h to vote which I missed :roll_eyes: Discord

Thanks for sharing your concerns!
Given that the protocol controls the agEUR here and the LP, it’s going to be quite easy to adapt the position. We could also go full range as well.

In terms of collateral ratio, let’s say that there is only agEUR left in the pool, then it means that a portion of it have been really issued by the protocol: like imagine 500 agEUR - 500 USDC if we end up with 1000 agEUR - 0 USDC (inaccurate numbers because of IL and so on but still), then it means that 500 agEUR have been swapped to USDC and these agEUR must have been issued through the protocol.

In this case, the protocol ends up with a surplus swapped from USDC to agEUR and it can pull the agEUR it lost initially. I am not saying that this cannot go without a loss for the protocol, but the protocol will never lose all the agEUR it issued, and in the worth case, we’re talking here about 5% of the surplus.

In terms of 5bp pool, I in fact tend to agree with you: 1bp may be unsustainable and we could focus on a 5bp pool here. We could also go on DEXes like Velodrome to get some incentives.

Sorry for the vote btw, we’ll make sure votes are longer next time so that everyone has time to vote on StakeDAO!

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Yes, I just noticed this. Why the hell is StakeDAO putting up metavotes for 5(!) proposals all at once, with a 24 hour voting period, before Angle has even put the votes live and we have not even finished discussing them on the gov forum?? Is this something the Angle team can communicate to them, to stop doing that bullshit? Like, wait for Angle to start the vote, then give at least 3 days to vote? This is totally unacceptable.

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Isn’t it more than 5% of the usable surplus, since about half of the surplus is supposed to be reserved in case we need it to backstop agEUR (~10% reserve to outstanding agEUR)? Anyway, I’m happy to go along with this for now and see how it goes, so long as we are ready and willing to redeploy it back to mainnet for the EUROC pool support on short notice if we need it.

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Yes sorry for this we should have checked with the StakeDAO team.
We’ll extend the minimum voting period to 4 days.

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Other idea we had on Optimism was instead of launching the pool on Velodrome rather than Uniswap. It might be a good way to get VELO incentives and rewarding the protocol for its liquidity.

Curious to hear your thought on that @GTRminator!