✅ [RFC] Incentivize mStable Tranches

Summary
Support the Senior class of Perpetual Yield Tranches (PYTs) based on mStable protocol (mUSD) and Convex protocol (mUSDcrv) with MTA dial.

Abstract
Idle DAO developed 2 products based on mStable ecosystem in Ethereum:

  • mStable PYTs, tranching the “Save” vault, where users can deposit mUSD tokens.
  • Convex PYTs, tranching mUSD pool, where users can deposit mUSDcrv Curve LP tokens.

In short, Junior Tranches TVL covers Senior Tranches in case of losses, but they leverage Senior Tranches TVL to receive APYs higher than the underlying yield source.
A wider range of users can deploy mUSD in the Save vault or increase the liquidity of mUSDcrv Curve pool through Convex – with Senior/Junior Tranches, they are now able to adjust their deposit depending on their risk profile.

Motivation
Idle DAO and mStable partnered up to develop Perpetual Yield Tranches (PYTs) using mStable “Save” vault as the native yield source.

Furthermore, Idle DAO launched a “Tranches Battle” and selected mUSD as one of the contest winners. This resulted in the development of PYTs using mUSD pool on Convex.
Both integrations have been completed, and are ready to be launched. They are already visible on the Beta page.

In addition, Idle DAO approved the launch of Gauges to reward Senior Tranches with $IDLE farming (initially at 990 IDLE/day). Both mUSD and mUSDcrv PYTs will be eligible to benefit from these streams.

The support for the Senior Tranches of mUSD and mUSDcrv PYTs in MTA dial will allow mStable to increase the product offering built on top of the “Save” vault and incentivize Curve pool liquidity, enabling users to adjust their liquidity deployment to their risk profile.

PYTs features
With Perpetual Yield Tranches, LPs can earn a higher share of yield by taking more risk (with Junior Tranche), or they can hedge risk by depositing their assets into an inherently protected tranche (with Senior Tranche). Senior Tranches have a first lien on the assets — they’re in line to be repaid first, in case of default.

PYTs are:

  • Epochless, flexible, with no locking periods: you can deposit or withdraw your liquidity at any time;
  • Fully fungible and composable ERC-20: other DeFi protocols and integrators can offer tailored products based on PYTs;
  • High-quality yield-bearing collateral: the built-in fund protection mechanism available on Senior Tranches makes them more resilient against default scenarios and can benefit from higher LTV.

About PYTs
Idle launched PYTs in late December, after 4 months of guarded launch. Idle PYTs’ smart contracts have been audited by two different professional auditing firms before the release (Consensys Diligence and Certik). All the related and previous audits for the Idle protocol are available here.

About Idle
Idle DAO is a decentralized organization that builds financial infrastructure for Web3. Businesses of every size – from brand new DeFi protocols to public companies – use our protocol to optimize capital efficiency and manage their treasuries with DeFi.

We believe that everyone deserves the best for their idle funds, both in terms of returns and risks. Since 2019, Idle has rolled out the features and services that allowed us to battle-test our products throughout the years and become one of the most resilient protocols in the space.

To learn more about our products and services:

Technical Implementation
mStable whitelisting for the AA_idleCvxmusd3CRV and AA_idleMSmUSD tokens in the MTA dial.
To learn more about the PYTs protocol, please visit our official documentation.

Pros

  • Two new risk-adjusted liquidity gateways are available for “Save” vault and mUSD Convex pool on Ethereum.
  • mStable DAO and Idle DAO jointly bootstrap the pools, with the aim of making mStable-based PYTs a core part of the DeFi ecosystem.
  • Further collaborations opportunity: propose these products to mutual ecosystem partners, such as DAOs that would like to safely diversify their assets with mUSD while generating a yield or protocols that can list Senior PYTs as high-quality grade collateral.
  • Additional opportunity to deploy mUSD PYTs on Polygon, where Idle DAO can incentivize integrations with other protocols up to ~$500k in rewards (B2B Polygon Program).

Cons

  • Idle charges a 10% performance fee on generated profits.
1 Like

Thanks a lot for the detailed write-up @Davide :handshake:

I am highly in support of adding these two dials, both giving additional liquidity and utility to mUSD. About the 990 daily Idle incentive you mentioned; is it for all gauges, is it per gauge? For how much time this is scheduled to last?
As discussed, we’re thinking internally also of a framework to incentive these dials for a given period and increase PYT attractivity at launch
More on this soon

I’m really hoping these Tranches products are the inception of an extended partnership between mStable and Idle :astronaut:

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Thanks @TClochard for the feedback!
Keen to build a solid relationship between mStable and Idle DAOs, empowering mUSD to unlock new use cases :fire:

Idle DAO approved the allocation of 990 IDLE/day, distributed to listed Senior Tranches according to the votes periodically received by $IDLE token holders.
The model is similar to Curve Gauges, where each Senior Tranche receives a share of the total flow.
The program will initially last 6 months; the DAO will be able to extend its duration and increase the daily stream.

Supportive of this. Nice to see Save being integrated. The integration itself, does it deposit into the Vault or only in the Save contract, does it farm the MTA?

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The strategy stakes the imUSD position into the Vault, farming MTA

The farmed MTA gets then liquidated and the proceeds are streamed to the Tranches?

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Yes, that is correct

I think here is an interesting discussion to be had and this is good for setting precedence going forward:

Are MTA dials for products that use other Vaults to farm MTA a legitimate use case?

One could argue that this product already receives MTA rewards and chooses to liquidate those in order to increase APY for users (which is totally fine). But should it receive on top of that more MTA? In a sense, anyone could wrap the mStable PYTs in another contract then and request another dial? That would have even better Yield and still receives MTA from the dial. This can go on endlessly. What is the cutoff level here?

Very keen on hearing opinions about this.

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That’s a very good point!

Our mid-term vision is that MTA dials are vital, especially at the beginning of the bootstrap phase.
With IDLE Gauges, Idle itself will fund those products, and MTA emission can be substantially reduced. Lastly, our plan is to attract loyal liquidity (e.g. DAOs’ treasuries), thus no incentives should be needed at that stage.
This is the plan to guarantee the self-sustainability of the products, after the incentivization phases.

Very interesting discussion, and finding myself pulled between the arguments. I think this point around inception-like farming would’ve come up eventually, so it’s good to tackle it before proceeding further.

I, too, feel that it sets a great precedent for any further dial requests, and we should work out a way that is sensible for both sides.

In my humble opinion, I think that if we were to incentivize both the imUSD deposit for everyone, but then add dials that farm and liquidate these rewards for more yield for their own product, without inherently benefitting mStable further, is not a good move, and opens up possibilities that @dimsome outlined above already.

Instead, I would argue that all or at least a good portion of farmed imUSD rewards should instead be staked by IDLE and then be used to subsequently use the voting power to increase MTA rewards on the two proposed dials, in whichever way IDLE governors chose. The other dial is of course totally fine as far as I can see, as previously mentioned.

This will remove the downward pressure on MTA price and dilution of Save users that do not wish to participate in the PYT of Save, while still increasing MTA rewards on these dials over time, as the stake of MTA from the IDLE DAO increases.

Curious and keen to hear what others think about this, and sure we’ll find a way that finds a solid balance between these options.

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Thanks @mZeroNine for sharing your point of view.

While the question “Are MTA dials for products that use other Vaults to farm MTA a legitimate use case?” remains a valid point for future dial requests, we’d like to start providing an answer on the mUSD PYTs case.

Working on the smoothest way to align the interests of mStable and Idle communities, we’d like to propose the following change to mUSD PYT structure:

  • 50% of the farmed MTA will be harvested
  • 50% of the farmed MTA will be staked by Idle DAO

MTA coming from the dial would be provided as-is, using a Synthethix-like staking contract.
Senior Tranches liquidity providers will have to stake their TranchesTokens there to receive such extra rewards.

This approach would require minimal code changes while empowering Idle DAO to become a long-term strategic participant in the mStable Governance. Happy to hear your thoughts!

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Hi Davide, thanks a lot for the quick reply and for taking the said dearly to heart.

Personally, I feel a lot more comfortable with this, and we can always observe the first couple of months with this setup, and then come to a review and see how it impacts all the other save users and the ecosystem as a whole?

I’d still love to get a few more inputs from the community and team to see, as I’m definitely not an expert on big brain topics such as this one! :sweat_smile:

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Hey @davide
Thanks for taking the time to come up with a clever design.
I really appreciate the 50%/50% staking proposition you came up with, strongly emphasising smart governance synergies vs. opportunistic “double farming”
Would this repartition be valid for both vault rewards AND the additional MTA rewards obtained through the dial? Having both would be even more impactful.

I am in favour of this new proposition all the more as mStable and Idle Finance have various streams of pending partnership at the moment: Tranches Deployment on Polygon that will be a very attractive product boosted by MATIC, Gearbox partnership with imUSD-PYT integrations, and more.
This dial, even if coming at a potential cost for mStable (MTA getting sold), remains a strong signal to the Idle Community with mutual benefits for both (mUSD active utility & more attractive pools)

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Hey All, from what I understood, I don’t see how the proposal of farming Save Vault will be beneficial for mStable.

To summarise:

  • There will be a Junior Tranche + Senior Tranche on Save Vault
  • Idle will leverage the MTA rewards to increase APY
    • 50% staked on Idle DAO
    • 50% harvest for APY
  • Idle wants to create an extra dial for the PYT vaults to get MTA rewards

This idea makes our Save Vault less attractive and diminishes the value proposition to keep users using our product. Also, it would be creating a double incentive for the Idle vaults.

It would be ok if the integration were with something that didn’t have rewards, for example, Save instead of Save Vault.

Did I get everything right, or did I misunderstand something?

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I concur with @rugolini , this seems like it could create a misalignment of incentives potentially – if I understand correctly.

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Hey all,

Thanks a lot for your thoughts @rugolini
I think it would be good to remember here that adding a dial is a non-biding incentive, it is rather an opportunity to get potential rewards were MTA stakers to vote for the dial.
If I understand the concerns about MTA double farming and reading @Davide’s new proposition, I believe Idle Finance is keen on staking a part of the rewards, which is aligned with our long term thinking

If we think about resolution, three options could come to mind:

  • Idle could stake 100% of the Vault rewards, and get rewards from the Emission Controller from its newly acquired voting power + potential MTA Governors one
  • Idle PYT could integrate solely Save (not the Save Vault) and then get a dial that mStable would incentivize for a given period, to reward the flourishing mStable <> Idle partnership
  • Idle PYT could integrate solely the Save Vault

The second and third options seem to be more leaning on the community opinion. We could try to compute which is the most economically profitable
I personally am more in favour of the first or second ones.
@Davide I’m happy to get on a call soon to discuss these options more in-depth

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This is probably my favorite approach. I would be happy to then personally vote on the dials for the Idle PYT.

Hey everyone, sorry for the late chime into this thread.

It’s been very interesting following this discussion. I’m a big fan of Idle and the team has been extremely professional so thanks for this proposal and the time you have taken to consider how we can work together :handshake:

I’ve done a lot of talking on our side about this, and unfortunately there isn’t appetite within the core contributor group or community to create a dial on top of the save vault as this would create a dangerous precedent whereby projects could “double dip” on MTA rewards. The issue is that is creates double dipping structurally so even if we decide on ways to mitigate double sell pressure, it is still there as a precedent. Secondly, by creating a dial on save’s exisiting dial, Idle would be creating a product that is more attractive than mStable’s Save, but at least partly at expense of mStable.

I propose that we move forward with a single dial approach, so either by wrapping the vault or just Save with the no vault, but with a dial and an agreement that the core contributors vote on incentivising this dial for a period of 4 weeks, with a matching amount incentivised by Idle for this time.

I’m happy to hear thoughts on this and other ways we could do this if there are ideas, but it’s safe to say that the double dial approach isn’t super attractive to us right now.

Thanks again for the proposal :slight_smile:

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Hey @james.simpson, thanks for adding your contribution to this conversation.

I’d like to briefly recap the initial reasons why Idle proposed the MTA dial on the mStable PYTs, and the future we imagined.

The mission of mStable PYTs is to generate a new use case on top of your products, bringing Vault fungibility, new incentives ($IDLE) for mUSD holders, along with future integrations with other DeFi protocols (eg as yield source in Gearbox, or to tokenize future yield with APWine).
Together, Idle and mStable DAOs could join the forces to expand both ecosystems, with benefits in terms of TVL and awareness.

For each dollar that we are able to route to the Senior Tranche, the leveraged APY on the Junior Tranche would be able to attract up to 9$ (source) and maintain a higher yield for Junior holders compared to the underlying yield source. The combined Junior + Senior TVL would represent an additional inflow for mStable TVL.

I hope it’s clear for everyone the flywheel mechanism that can be generated here, mStable PYTs are not competing with the mStable Vault but rather attracting more liquidity to it.

The initial bootstrap for PYTs is a delicate phase for the success of a new pool: with no $IDLE Gauges live yet and no initial liquidity deployments from the partner’s side, there are no incentives to deploy capitals in one of the classes.

For example, we recently partnered with Lido for a 40,000 LDO/month reward program. In just 30 days we had 3700 ETH ($11m) in deposits. The bootstrap was successful and stETH PYTs are growing day by day.

In this picture, MTA Dials on mStable PYTs would cover the timeframe between the PYTs launch and the Gauges launch. Due to the Dials mechanism, we are not even asking for a specific allocation; it’s up to MTA token holders to decide the amount of rewards to bootstrap this new product and for how long.

We think the above conditions that you proposed would not be beneficial neither for mStable PYTs nor for both communities.
Those changes would require additional rework and testing, prolonging the shipping time of that product and reducing the attractiveness of mStable PYTs.

If you are concerned about the “double dial”, we can stake 100% of the MTA received via Vault. With this solution, the selling pressure on MTA would be equal to 0.
This would be an effective way to move the Vault out of the equation without changing the infrastructure, enabling Idle to re-activate MTA distribution via Vault when the Dial is closed.

With this in mind, we are open to hearing from you about other ways to incentivize early liquidity provision on mStable PYTs. Happy to jump on a call to design the bootstrap phase together.

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Hey @Davide

Thanks for your message. Nice brainstorming yesterday on the best way to align incentives.

On our side, here are our thoughts:

Save PYT

We think the best option for the Save PYT is to wait 4 weeks until the Idle Gauges are up so that no major code changes happen on your end. We cannot unfortunately incentivise the pool beyond the vault as the mStable Grants DAO already co-incentivized the development of the PYT. We recommend that idle vote on the pool when their dials are up. We’re open to taking a small position in idle to vote ourselves on these pools as well as putting an emphasis on the imUSD Vault dial to boost the rewards for a period of time.

mUSD / 3pool PYT

We’re happy to set up a dial for this as it’s not using the vaults i.e getting MTA rewards for the moment

The general reasoning behind these two decisions is the following:

  • We can’t do two dials as discussed as it creates unhealthy tokenomic incentives

  • There is a perception that it isn’t fair for mStable to incentivise the pool alone (during the bootstrapping phase) as both protocols are benefiting from it.

  • mStable GrantsDAO is not leaning towards giving a grant for incentivisation purposes as this creates another unhealthy precedent whereby the grantsDAO is used as a way to get around the emissions controller

  • The mStable Community is quite protective with MTA rewards at the moment because of the V2 design and the relatively low price of the token

We think this is a fair way to move forward taking into account both protocol interests. We’re really excited about this partnership and the incoming prospects on co-launching on Polygon where we can revisit these incentive mechanics, including dials.

See you on Twitter Spaces later today! :slight_smile:

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