Hello,
This is a vote to accept bHIGH as a collateral for agEUR on Ethereum mainnet.
Context
bHIGH is a token issued by Backed Finance, a Swiss company issuing tokenized structured products that track the value of publicly traded securities.
Tokens issued by Backed are backed 1:1 by the underlying asset held in 3rd party licensed custodians. These tokens are always redeemable for the cash value of the underlying assets, and the overall setup enabling this relies on a compliant regulatory framework, based on the Swiss DLT Act.
bHIGH is the Backed token corresponding to BlackRock High Yield Corp Bond UCITS ETF. This ETF seeks to track the performance of an index composed of Euro denominated high yield corporate bonds. In particular, it invests in corporate high yield bonds across sectors (industrials, utilities and financials), in European companies. The current average yield in € from owning HIGH is 7.46%, and the weighted average maturity of the bonds held by the ETF is 3.41 years.
Backed will maintain an oracle, compatible with Chainlink interfaces, for the bHIGH token on Ethereum.
Currently the bHIGH token has very little on-chain liquidity but it can be minted 1:1 by KYC-ed addresses, just like it can be redeemed this way on Ethereum.
Proposal
The proposal is to add bHIGH as a collateral for agEUR on Ethereum mainnet, with the parameters proposed in this pull request and with a similar oracle implementation as the one used for bIB01.
Implementation
The Backed products must only be sold directly to qualified investors and licensed resellers. On top of that the tokens must not be made available to U.S Persons or for the account or benefit of U.S. Persons, just like the tokens must not be marketed, offered, or solicited in the U.S. or in any other prohibited jurisdiction.
To this extent, we suggest using the same implementation as what was done for bIB01. In this implementation, only whitelisted liquidators will be able to participate in the liquidation of vaults. This ensures that in an event of liquidation, the protocol will only be selling bHIGH tokens to addresses with a KYC from Backed.
The guardian (and of course the governance address) of the protocol will be able to whitelist liquidators provided that these are already KYC-ed from Backed. There are currently some KYC-ed agents with Backed with liquidation bots ready on Angle. On a side note, KYC-ed liquidators will have access to the token’s primary market liquidity with Backed and hence participate in liquidations with minimal slippage.
Suggested implementation can be found here.
Beyond that, the implementation of this new collateral asset does not differ from other collateral assets in the Borrowing module. Having bHIGH as a collateral asset will not imply any extra maintenance.
It’s important to note that, if bHIGH is accepted as a collateral asset in the protocol, front end interfaces on top of Angle will not be able to make this product available to U.S. Persons. The bIB01 vault will be meant only for qualified investors and licensed resellers that are not U.S. Persons or acting for the account or benefit of U.S. Persons.
Value to the protocol
Adding bHIGH as a collateral for the protocol is a way for the protocol to offer leveraged yield on tokens that are not purely DeFi tokens and in a fully delta neutral way.
It is currently possible to borrow against such ETFs on Flux, and almost all available liquidity is utilized.
Here people will be borrowing for cheaper than on Flux. Contrarily to the case of bIB01, they’ll be able to borrow a EUR denominated product using another EUR denominated yield product and with no exchange risk when folding.
It would enable Angle to pioneer and become the cheapest place where to leverage on non-DeFi productive tokens.
Risks
The main risk is to accumulate bad debt from bHIGH liquidations (happening after a rapid global interest rate increase leading the € value of HIGH to increase as well, or after defaults from the bonds owned by the HIGH ETF). The oracle used here for bHIGH is not a Chainlink oracle, but an oracle maintained by Backed.
The protocol will also take a counterparty risk from Backed and their custodians.
As this type of asset remains somehow new for the protocol, and to mitigate these risks, suggestion is to start with a small debt ceiling equal to 1m agEUR on Ethereum. These ones could later be increased by the guardian multisig. The liquidation discounts parameters have been set to make it profitable for liquidators to come and liquidate even after small price movements. If a position fails to be liquidated rapidly enough, parameters are also such that the protocol will not lose any money if the position is liquidated at its max discount.