This is a proposal to scale our algorithmic market operations on Euler.
The Angle Protocol minted 1m agEUR to be invested on Euler as part of its algorithmic market operations, in order to boostrap the agEUR market here.
Yet recently, interest rates for lending and borrowing agEUR drastically increased on Euler. Current lending yield is 4.77% while it costs 7.22% to borrow agEUR.
While the protocol is generating revenue from this 4.77%, initial goal of minting agEUR on Euler was to make agEUR an easy asset to borrow, and a base asset to use to farm in other places of DeFi.
As a reminder, agEUR minted from AMOs are not technically unbacked: they only come on the open market when they are borrowed under which case they are over-collateralized by the deposits of people who borrowed on Euler.
The proposal is to give a mandate to the governor multisig to mint/burn agEUR from/to Euler to make sure that the borrowing cost on Euler remains inferior to 3%.
As such, if the borrowing cost is superior to 3%, agEUR will be minted to Euler, and if it goes inferior to 3%, the protocol will withdraw agEUR from Euler.
We also propose to introduce a cap on the agEUR minted from this medium of 10% of the agEUR circulating supply.
This will continue the efforts we have made of making agEUR cheap to borrow in multiple places in DeFi.
On top of that, it will increase the revenues of the protocol on its AMOs. Remember that the long term plan with revenues of AMO is to keep a portion to keep agEUR safe, and also to distribute it to other agEUR holders from an agEUR savings rate product.
The risk from this operation is essentially the Euler risk. If bad debt accrues on Euler, then it will reflect itself in the protocol which would have been making a loss.
Another risk linked to AMO is that if it does not scale well and get too big, then potentially too many agEUR could end up in the open market and it could empty the reserves of the protocol in case people want to burn it for USDC.
This is not a threat to the peg of agEUR per se, as there would be arbitrages possible among borrowers of agEUR to bring the stablecoin back to peg. Like if agEUR price is below 1€, then borrowers would have incentives to buy agEUR on the open market for less than 1€ and repay their debt.
On the other side, they would be incentivized to borrow agEUR for 1€ and sell it for more than 1€ on the open market.
So far, algorithmic market operations of the protocol are performed by the governance multisig which is the only address with a specific right on the agEUR contract.
Yet, we’re in the process of finishing up our AMO contracts that will enable the protocol to handle all these operations in a fully trustless and automated way.
We would however have to start by doing this with the governance multisig if this is voted positively by governance.