✅ [RFC] Continuing to provide liquidity for Coinbase mUSD listing

Request for Comments
#1

Summary

This RFC seeks input from the community and MTA governors on sourcing 1,000,000 mUSD from the mStableDAO Asset Management subDAO to maintain a 1,000,000 mUSD interest-free loan to a market maker supporting mUSD liquidity on Coinbase. The loan is currently provided on a short-term basis from pre-approved project funding in the Funding subDAO, as well as through a loan from an investor.

Abstract

In November 2021, the opportunity arose to have mUSD listed on Coinbase. This was seen as a great opportunity but came with an unforeseen requirement to almost immediately provide an interest-free loan to a professional market maker to support the liquidity of the mUSD/USD pair on the platform. At the time, the core team and Funding subDAO signers made the decision to support this listing of mUSD by lending 2,000,000 mUSD to a market maker called KBIT.

This was achieved by lending 500,000 mUSD from preapproved project funding, which was idle in the Funding subDAO, along with a short-term loan of 1,500,000 mUSD from an investor.

In February 2022, total amount loaned to KBIT was reduced to 1,000,000 mUSD and the loan from the investor reduced to 500,000 mUSD.

1,000,000 mUSD is currently seen as the minimum liquidity requirement to retain the mUSD listing on Coinbase. A short-term trial of only 500,000 mUSD led to price volatility that was unacceptable to Coinbase.

A decision to stop providing this interest free-loan would therefore result in mUSD being de-listed from Coinbase.

This proposal suggests sourcing the 1,000,000 mUSD by either liquidating 1M out of the 1.5M from our existing saave position on Convex, or converting the entire saave and alusd position, as well as a portion of our mUSD position into DAI and subsequently deposit 2M DAI into Alchemix to allow a loan of 1M alUSD to be used for this proposal.

This second option needs to be considered in light of potential future uses of treasury assets, as additional requests could require an Alchemix position to be closed to unlock the collateral for other uses.

However, the upside of continuing to earn yield on our stablecoin position in a semi-liquid state might be worth the slight overhead presented and leave us with more choices for when this time arrives.

Motivation

The 1,000,000 mUSD currently loaned to the market maker is financed through the use of pre-approved project funding and a loan from an investor, which are not seen as sustainable sources of funds for the following reasons:

1/ The 500,000 mUSD loan from the investor is borrowed at an annualized interest rate of 10%. Since this is more than is currently generated on stablecoins in the Asset Management subDAO, it would make sense to repay this loan and use treasury assets to support the loan.

2/ The approved project funding that has been used to finance the other 500,000 mUSD was available primarily because expenditure was below budget over the last year. However, to safely see the projected funded through until the end of June and allow time to plan future funding, these funds will need to be returned to the Funding subDAO before the end of June.

Therefore, to maintain the mUSD listing on Coinbase on an ongoing basis, 1,000,000 mUSD will need to be sourced from treasury reserves and shifted to the funding subDAO to allow repayment of the investor loan and replenishment of the project funding.

Pros

  • Maintaining the mUSD listing offers benefits for the mStable ecosystem as well as helps to build and maintain our reputation with Coinbase, which could potentially lead to a MTA listing in the future
  • The 1,000,000 mUSD loan could be recalled with 48 hours if the funds were required for other uses and/or the decision was made to stop supporting mUSD liquidity on Coinbase

Cons

  • The 1,000,000 mUSD would be loaned interest-free to the market maker so there is an opportunity cost in using the funds from the Asset Management subDAO.
  • There is some level of risk inherent in offering an uncollateralized loan for this purpose.

Next Steps

It is suggested that the community comment on this RFC in the coming days, and bearing no significant opposition or change in ideation, we would use the feedback gathered to create a formal draft proposal on Github to be used for review.

Meta Governors are encouraged to provide as much feedback as possible until then, so we can create the best possible outcome for mStable and its users.

2 Likes
#2

Fully support this move for the following reasons:

  • mStable DAO sheds risk from liability to DACM
  • mStable DAO saves money by not paying a very high interest rate
  • we have the money
  • market maker has proven themselves to be trustworthy custodians and are used to dealing directly with daos

Thanks for writing such a comprehensive RFC @soulsby

1 Like
#3

Fully in support, this is a good way to move forward as James outlined. Thanks Cam!

1 Like
#4

Thanks @james.simpson and @dimsome for the feedback. Particularly keen to hear thoughts from anyone on whether we should utilize Alchemix vs. using stablecoin reserves directly. This could be a great way to retain yield on treasury assets, but I am a little hesitant only because it would add some overhead if we needed to self-liquidate that position in the near future to access treasury reserves for any other purpose.

1 Like
#5

Thanks for the write-up @soulsby
Indeed, the spread between the 10% loan cost & the current APY the Asset Management Sub DAO is getting on stables is quite significant. This gap is a net utilization loss for the protocol all the more as the amount borrowed is “locked” with the Market Maker as an interest-free loan. It makes a lot of sense to repay the face value of the loan

If I understand correctly, the other $500k needed for market-making was taken out from the core-contributor funding budget and now could impede the right operation of it as we get closer to the new funding requirement date.

As you described, there are two options to move forward:

  1. Lock $2m from the Asset Management Sub DAO as collateral in Alchemix to take out a $1m loan. This gives mStable the advantage of Time Value of Money but caps the APY to whatever yield strategy Alchemix is using
    Also, we need to understand how much the collateral is needed because it’s a $1m loan, the repayment horizon might be several years so we would need to repay the loan before termination. Alchemix doc states there are no early-repayment fees but we would incur loan + total remaining interest upfront without being able to trigger the collateral

  2. From the $2m, spend $1m (Market Making+ core contributor funding) and then rotate the $1m remaining in a high yielding pool that would exceed the cost of the Alchemix loan

I would lean on:

    1. if we can afford (or it’s cost-free) to park the collateral for a decent amount of time while choosing an interesting strategy, it’s a no brainer. Also, on the flip side, we would pioneer Alchemix V2 and borrow against our Treasury assets which is an advanced move of decentralization
    1. if the actual operating cost of the loan is high and we want higher flexibility on the collateral
2 Likes
#6

Hi everyone and all the thanks to @soulsby for the throughout proposal, it’s great!

Many will already know my sentiment here, but I must totally align with @TClochard on this one and suggest we take the flexible route of offboarding 2M from the Asset Management subDAO Convex reserves and put them into the Alchemix DAI vault to subsequently generate 1M alUSD to use for paying back this loan.

I think even if we need and require further funding down the road, we can simply self-liquidate and use the remaining DAI for funding, but in case we do not, we retain our lucrative and cashflow-generating stablecoin pairing in a tested protocol that yields us significantly more than the current Convex deployment.

#7

Hey @mZeroNine and @TClochard, I’d like to add a couple more thoughts here:

  • The previous major funding request theoretically only covers project funding through until the end of June. In practice, with expenditure under budget and the 500k returned under this proposal, that funding should last through until more like the end of August. This still means that there will likely need to be another funding request from the Asset Management subDAO in less than 4 months.

  • For that reason, I would hesitate to lock up the full 2m in Alchemix, since we would likely be required to self-liquidate at that point, as I understand that this would still be the preferred source of liquidity from the Asset Management subDAO.

  • If we are confident that there are no penalties/costs incurred by self-liquidating (beyond gas costs) and feel that it is valuable to hold this position for just a few months then I’m happy to support that, but I think that consideration of this context is important.

  • Another consideration is whether we are comfortable with the risk involved in deploying $2m to a single protocol and strategy.

  • An alternative approach could be to deploy a smaller amount into Alchemix (perhaps $1m collateral for a 500k loan). The other 500k could be sourced directly from the stablecoin reserves, leaving a pool of stablecoins reserves which could be used for future funding needs, without affecting the Alchemix position.

1 Like
#8

Thanks for your sentiment here ser, and that does make sense to me. I am arguably a bit biased about this position, and probably attach too much sentimental value on the stables, so going the middle way and sacrificing a portion while retaining another healthy portion as a perpetual funding machine for the future does make sense to me, and I’d be inclined to agree that it be the best way forward without leaning too hard in either direction :slight_smile:

Thanks a lot for your thoughts here!

#9

Hey @soulsby,

If I understand correctly once this $1m is found, we’ve secured funding till the end of August when we’ll need another proper funding request? And this new funding request would for sure trigger the loan self-liquidation?

I like this idea of not putting 100% of the Asset Treasury in the same basket, for obvious contract-risk reasons. We would then need to find an extra $500k from the Convex positions of the AM. DAO. It’s really about assessing the cost/ROI of these two scenarios:

  • Getting $1m now from Alchemix by locking $2m as non-earning collateral which would amount after liquidation & a period of 4months (august) to a net total of $2m (collateral collection)-$1m(loan repayment) -100$ gas cost (self-liquidation) = $999,900

  • Putting $1m in collateral to get a $500k loan and putting $500k to work on Convex on say a 10% pool would amount after liquidation & a period of 4months to a net total of $1m(collateral collection)-$500k (loan repayment)+$500k*(1+(10%/365))^(3/12*365) -200$ gas cost (self-liquidation + deposit/withdraw from Convex) = 1,016,745$

From this, option 2 seems better on the safe side (diversifying) with a financial premium ($16,845 gain)
I’m therefore definitely leaning towards this :slight_smile:

#10

Thanks Théo. In your calculation for using Alchemix, the 1m (loan repayment), it would actually be less than $1m (by 90% of the amount of yield earned on the 2m) as the loan would be partially paid down. This is assuming that I have understood the product correctly and that there are no hidden penalties for self-liquidation. So from a pure numbers point of view Alchemix could be better. But from a risk management perspective it seems sensible to be a little more conservative.

To your first point, your understanding is correct. There are of course other assets in the treasury that we could look to for funding after August, but the Convex stablecoin positions seem to make the most sense. Access an additional 500k doesn’t guarantee that the Alchemix position wouldn’t need to be touched in the future, but certainly helps to leave a little more flexibility.

2 Likes
#11

You’re right, that should be taken into account in both repayment figures. I still believe it will be marginally inferior to what we would get in putting liquidity in an aggressive Convex farm(even if Alchemix says it’s entirely configurable with V2)

I’m really excited about the DAO Treasury leveraging DeFI primitives to fund its core contributor spending need :fire:

#12

Since there has been an overhwelming positive and thoughtful input from everyone, I think it’s save to say that enough traction has been reached, and we’ll be moving this forward to a TDP soon! :+1:

#13

I’m late to the party, sorry. Been head-down over the last couple of weeks.

TL;DR: I think the split convex/alchemix route is preferrable…that said:

I do question whether or not Coinbase listings are worth the trouble in 2022. I don’t recall where I read it, but I saw a chart showing that the ‘coinbase bump’ phenomenon wasn’t really a thing anymore and hadn’t been for awhile. I don’t think mUSD’s current metrics hinge much, if at all, on Coinbase.

Further, (and I admit up front that this is entirely a personal preference/feeling) I really dislike the cartel-ish nature of “give us a loan to market-make on your behalf, and we keep the fees.” Reminds me of a protection racket from 60’s Chicago and the Italian mafia. It feels like participating in something unsavory/unclean for (IMO) unclear gain. Everyone just shrugs and says “This is how it is…”

What’s the cost of simply withdrawing that mUSD, letting Coinbase close the market, and using that mUSD in a farm? If it’s “optics,” my response is that you can’t manage what you can’t measure. Nebulous “future opportunity” isn’t concrete-enough guidance, IMO. Without metrics, we can’t determine the success or lack thereof of continuing to be on Coinbase.

Note that I’m not saying those metrics don’t exist, but I’m not seeing them discussed in the thread. Maybe it’s extremely obvious and thus wasn’t in the discussion, but I’ve still got ?? over my head on the whole thing.

I think V2 will make any positive effects from Coinbase look like a rounding error in comparison.

1 Like
#14

Hey @trustindistrust , apologies for the slow reply here. Thanks for your comments - you bring up some really good points.

Most of the other comments here only really addressed the suggestion to move funds over from the AM SubDAO to restructure the loan, rather than actually discussing the merits of maintaining the Coinbase listing.

I will say that continuing with this proposal and sourcing the funds from the AM SubDAO to continue to provide this loan in the short term would not indicate a commitment to continue it long term if the perceived risk/reward does not add up.

In saying that, I’d encourage more discussion here so that we can align on the value of continuing to maintain this position and agree on how that decision should be made in the future. I see the following options:

1/ make a decision now to put a fixed timeframe around when the loan should be recalled
2/ require another governance proposal to recall loan and delist mUSD
3/ give discretionary power to the TreasuryDAO to recall the loan and delist mUSD in the future

#15

Sorry for the thread derailment. I’ll admit up front that my concern/criticism should have been in its own thread really.

Of the 3 options, I’d like to give control (and coordination burden) to the TreasuryDAO. I feel like this is in their wheelhouse, and if the consensus in that group is that maintaining the position there is worth all of these gymnastics, then I’m satisfied with that. I trust they’ve got the metrics (‘the receipts’ as the young people say) to back up the move.

Option two seems reasonable, but of course kicks off a lengthy process.

Anyway, I’ll stop whining about Coinbase now. :slight_smile: