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