generate additional protocol surplus.
All of this before DEUS v3 is fully rolled out.
The underlying idea and principle of this proposal are simple. The approval would allow the DEUS team to develop additional tools to use DEIs underlying backing to generate yield, offset DEUS inflation, generate additional surplus and bring the collateral ratio to 100% long term.
Examples of similar implementations are plenty:
Frax’s CurveAMO/InvestorAMOs & https://sperax.io/
As soon as the DEUS team gets the approval, it would begin looking for options & implement the tools that could be applied in a decentralized way to use underlying USDC backing of DEI to generate additional protocol surplus
Profits would be used to:
- pay off debt faster
- buyback DEUS to $250
- distribute yield to xDEUS
- bring DEIs collateral ratio to 100%
DEUS is in a unique position
The DEUS protocol is currently primed in a position to implement a similar system as Frax’s Curve AMO. The DEUS protocol now owns 906,453.92287 veTHE (3.42%) & 4,479,955.68351 veSOLID (6.46%), which means we can use these votes to redirect emissions to our own POL USDC-DEI pool and earn the yields for the protocol itself instead of giving it to mercenaries.
We could also set up similar AMOs for other bribe-based DEX platforms, which give us an emission return above one on bribes & we will continue to acquire solidly / veCRV-based voting power.
Whats the Curve AMO model?
The curve AMO uses underlying USDC and pairs it with POL DEI inside of a Liquidity Pool like Thena’s DEI/USDT allowing us to farm with 2x of our underlying backing while deepening our liquidity on DEXs.
Whenever someone sells DEI into the POL liquidity pool the AMO rebalances the portion by burning 2x the DEI amount sold.
read more about it here https://docs.frax.finance/amo/curve
Improving the Curve AMO model further
Before using the current FRAX curveAMO, we should add a ” refinance” mechanism, which would be very similar to the “recollateralize” model that FRAX used in v1 but discontinued recently:
Recollateralizing means that if the real backing deviates from the desired Collateral Ratio, the Frax protocol auctions FXS to increase backing again.
We can further improve the Recollaterlize model of frax by implementing the value creation theorem already described in Mazetts latest article series: https://medium.com/deus-finance/a-value-creation-destruction-theorem-and-its-implications-6dd04ca286a0
The core principle of algorithmic value creation theorem:
- Burn DEI & auction new DEUS at high DEUS prices.
- Mint DEI & burn more DEUS at low DEUS prices.
The motive behind improving the CurveAMO is simple.
In the current FRAX Curve AMO implementation, as we already learned from DEIv1 is that the real Collateral Ratio or the actual backing declines with every sale & rebalancing of the AMO pool:
Fig 1 A simulation of constant 33M FRAX sells into the CurveAMO without refinancing.
Also explained in detail in this thread: https://mobile.twitter.com/MonetSupply/status/1545491370592198656
The solution to this problem is simple:
To improve the current Frax v2 Curve-AMO model, we will bring back an improved recollatralize model and refinance the underlying USDC backing.
Every redemption done in the Curve AMO should be refinanced 1:1 on the protocol level; the perfect time to refinance can be individually chosen, but sells into the Curve AMO should not unwillingly diminish the collateral ratio.
As we can see, the Real Collateral Ratio stayed flat throughout the whole period of TVL contraction.
Because the right amount of DEUS is being issued for every sale into the AMO pool that can be auctioned off or sold into the market to “refinance” the backing ratio of all outstanding DEI.
In simple terms:
Refinancing stabilizes the system by only handing out the exact USDC amount the backing allows.
This is currently in a similar form already being done in DEIv2, and it impacts peg stability positively:
AMOs are very profitable and can long-term increase the collateral ratio & protocol health. DEUS inflation could also be eliminated & become deflationary before v3 is implemented.
At the present rate of 1000 DEUS inflation per week (xDEUS excluded) and a DEUS price of $60, that’s ~$3.3m inflation per year, the market rate APR of DEI is around 10–20%, and our potential POL via an improved CurveAMO is 16m. This means the yearly buyback volume on DEUS would increase up to 4m. If projected APRs and DEI supply stay constant, DEUS could become deflationary as soon as xDEUS stops emitting, just by this proposed new DEI AMO implementations.
To improve the CurveAMO, we should combine those core principles.
Every DEI redemption currently gives you $0.91 USDC and $0.09 worth of DEUS; the only way to implement a sustainable CurveAMO is by keeping this process at play and only deviating to ensure that overall, DEUS is minted (and sold) at a higher price than burned (and bought back).
We are essentially using Frax innovative tools, ensuring that the wealth generated accrues to the protocol (see the value-creation theorem and Mazett’s Frax in-depth analysis) while providing that the actual Collateral Ratio never deviates too much from desired Collateral Ratio.
So with every sale into the AMO pool, the correct amount of backing gets removed from circulation, and the right amount of USDC backing gets returned to the protocol.
More straightforward Implementations but not less impactful would be using part of the USDC backing for farming with it in venues like Yearn Finance, like being done in Sparex.
The allocation to the different AMO types would be made based on their security & estimated or actual profitability.
Every modified implementation of an AMO should be individually approved, peer-reviewed, and supported by the community. Therefore, this proposal should only outline the possibilities and approve using the improved CurveAMO model.
From frax documentation:
The Collateral Investor AMO moves idle USDC collateral to select DeFi protocols that provide reliable yield. Currently, the integrated protocols include Aave, Compound, and Yearn. More can be added by governance. The main requirement for this AMO is to be able to pull out invested collateral immediately with no waiting period in case of large FRAX redemptions. The collateral invested with an instant withdrawal ability does not count as lowering the protocol’s CR since it is always spontaneously available to the protocol. Nevertheless, the decollateralize function in the specs pulls out invested collateral starting with any time-delayed withdrawals (there are none currently and not planned to be).
Decollateralize — Places idle collateral in various yield-generating protocols. Investments that cannot be immediately withdrawn lower the CR calculation. Investments that can always be withdrawn at a 1 to 1 rate at all times, such as Yearn USDC v2 and Compound, do not count as lowering the CR.
Market operations — Compounds the investments at the CR.
Recollateralize — Withdraws investments from vaults to free up collateral for redemptions.
FXS1559 — Daily revenue from investments over the CR will be used to buy back DEUS.
The execution of this proposal would dictate the following actions:
- Set up a team under the supervision of one of the DEUS lead developers.
- Move the DEI minter pools & AMOs to BNB, ETH, and potentially Arbitrum
- to develop the audited CurveAMO and let them utilize the underlying DEI backing.
- Deploy additional tools on top of the CurveAMO that will handle refinancing.
- Mint protocol-owned DEI into said AMOs
- use refinancing to keep real & desired CR constant.