I’d like to open a discussion on algorithmic market operations for the Angle Protocol!
Essentially, as we are working on the new module, we are thinking of ways to increase liquidity for agEUR on different markets.
One such way consists in just minting agEUR for them to be lent to protocols like Aave V3. It would also help the protocol earn yield on its treasury.
To make this clear, let’s write an example: the protocol mints 1m agEUR on Polygon, and deposits it on Aave V3: the agEUR are here minted out of thin air, but they are not really in circulation: it’ll only be the case when they will be borrowed, in which case the agEUR borrowed end up being backed by the deposits/collateral of those who borrowed agEUR.
It is a way to leverage an existing lending market to mint agEUR just like we could leverage the minting module we are working on to allow people to borrow agEUR against collateral.
This is in a way similar to what many other protocols are doing:
- Maker is doing this with DAI on Aave
- Andre Cronje did this with all his ibTokens: he for instance pre-minted 1bn ibEUR for them to be borrowed
- QiDAO is doing this to seed markets on Market.xyz
- And Jarvis has just done this for jEUR on Aave
This obviously does not go riskless.
First we do not have a smart contract ready yet to perform such things in a fully trustless manner. Multisig signers implementing these operations could collude and leave with the agEUR.
The protocol could decide to stop this at anytime, by simply withdrawing lent liquidity and then burning it. But we may not be able to do it in a single transaction as some agEUR may still be borrowed. In this case, we may need several withdraws (to increase the borrow rate) and wait for borrowers to come to repay to decrease it.
Last, the risk of the agEUR lent is the risk of the protocol in which we are lending. If there is a failure or a problem in the Aave protocol, and liquidations fail to work well, then in this situation the bad debt for Aave will also be bad debt for agEUR, and some agEUR may end up being unbacked.
The way to mitigate the risk for Angle as a whole is simply to limit the amount of agEUR we put in such strategies. What we expect also is that if someone borrows all the agEUR then it will increase the lending rate (and hence revenue for the protocol) and therefore attract more people.
When doing this, the protocol also makes some yield which could have been made by other agEUR holders: in some sense it reduces opportunities for real agEUR holders which would have been minting from the protocol helping the protocol make additional revenue (from the USDC brought to mint for instance)
There is obviously a chicken and egg issue here: people won’t come to borrow unless there is sufficient liquidity and there won’t be sufficient liquidity if people don’t come to borrow. This strategy is a way to seed the market.
Note also that revenue made with this could technically be distributed to veANGLE holders.
It would also come in parallel with the new minting module (if voted positively). Technically, people would be able to borrow agEUR from Angle or from Aave: the protocol should be making more revenue when agEUR are borrowed from its module than from Aave (as Aave has a reserve factor and keeps a portion of the interest in reserves and as borrowing interest are split between all lenders). It’s the role of governance to make sure that both would work hand in hand (like it is the case for Maker) and that overall utility + opportunities for agEUR holders are maximized while the protocol optimizes its revenue.
With all that in mind, I think we could try to mint 1m agEUR to be put on AaveV3 on Polygon to seed the market and simply take it up from here.
There is a governance multisig on Polygon which can grant the minting right to an address.
This multisig could grant itself the right, mint 1m agEUR, lend it on Aave and keep the aagEUR.
In parallel, we should work to be able to generalize these operations in a fully trustless manner through smart contracts.
While Aave V3 is a first step, we could think of repeating this on other markets on mainnet: like on Euler, Rari.
Mainnet markets would require upgrading the agToken contract which we won’t be able to do after the audit of the new module in May.
Each new algorithmic market operation should obviously be voted by veANGLE holders as while it creates new opportunities it also adds extra risk to the protocol.
Let us know your thought! I will also create a Discord channel for this!