This RFC was written in collaboration with exeggcute from KeeperDAO and @dimsome from mStable
This RFC proposes a collaboration between mStable and KeeperDAO to explore a direct integration of KeeperDAO’s Coordination protocol with an mStable AMM. The integration would create a way for arbitrage transactions to be relayed through the KeeperDAO Coordination protocol, with the vast majority (approximately 80%) of the profit generated from this arbitrage being distributed to the mStable protocol and its users or LPs.
Through the addition of a reduced- or dynamic-fee swap function only accessible to KeeperDAO Keepers, Keepers who wish to use mStable’s AMM for rebalancing and arbitrage of mAsset baskets could do so without competition from Keepers operating in the wild, who will reach arbitrage price later due to the need to pay the flat fee of the public swap function.
This small priority from the reduced fee can allow KeeperDAO Keepers to execute swaps through the far more efficient Coordination protocol, with greatly reduced settlement overhead versus the public mempool where profit is bid away to the benefit of miners.
In practice this would mean that pools with this special fee lane could be more balanced than they are today, because the more efficient rebalancing arbitrage can happen more frequently and for smaller imbalances than at present. This could make the pools more capital efficient overall.
The reduced- or dynamic-fee swap function would be restricted to KeeperDAO Keepers, because these Keepers are secured by the Coordination protocol, which protects both the interests of the Keepers and of mStable LPs. The Coordination protocol uses a just-in-time auction to discover the maximum value of any transaction executed through it, and transfers 80% of that value to the originator, in this case the mStable protocol.
So instead of fees, which these LPs are giving up to create this special swap function, the Coordination protocol will ensure that mStable receives the lion’s share of the arbitrage profits created against the mStable AMM. This would allow for arbitrage to flow back to the protocol, rather than being donated to whoever can execute the transaction or pay the most to be included in a block.
The Coordination protocol integration would require a small modification of the mStable AMM smart contract: a new function with an altered swap fee and a whitelist lookup. The rest of the function would be identical to the existing swap function. There would be a public swap and this special swap, with the only difference being that the special swap is gated by the whitelist and has a different fee, since it is only for the purpose of arbitrage/rebalancing by dedicated Keepers, and the profits generated from this are shared with the LPs of mStable.
This is a novel mechanism that creates multiple benefits for mStable, its users, and its LPs. Not only does it allow the protocol and LPs to internalize more value from arbitrage, value that would otherwise be lost, but it also allows us to improve the basket composition and weights - allowing users to mint and redeem with lower slippage. This in turn makes the basket more capital-efficient while creating an additional source of revenue.
There is no proof-of-concept demonstrating whether the returns for LPs would be similar to or even exceed returns from a flat fee. But that would be the best scenario because our markets would get more efficient, and we would be making an additional return at the same time.
This RFC asks for general comments on whether this concept is a viable venue to explore further.
- Allows the mStable protocol to internalize more value from arbitrage. Currently, the excess profit from arbitrage goes to the arbitrageurs and miners/block producers.
- Caters better to our core users, arbitrageurs are not considered core users.
- Potential to create a further partnership with KeeperDAO, namely a treasury allocation towards mStable Save.
- Creates no hard service dependency between mStable and KeeperDAO; the facility gracefully falls back to the default behaviour and the AMM would still function as intended by default.
- Better balanced basket closer to the ideal weight and therefore less slippage for users when depositing single assets.
- Rather a new concept
- Would require a smart contract upgrade
This could be a really unique value-add for both protocols. And this RFC asks for input from everyone whether this is something that we should, together with KeeperDAO, investigate further. After positive comments, this concept would be further explored and viability accessed. We would then have a better picture of the actual benefit and look further into the details of implementation.