BIP 000X: Selection of Protocols for Generating Yield

We need to decide which defi protocols we will use to generate yield with the stablecoins backing xUSD.

Topics to Cover:

  1. Which protocols do you think we should use (merits and risks associated)?
  2. What qualities do you think are most important for the protocols that we select?
  3. How many protocols should we be diversified across to start?
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I understand the concept of generating yield, but I am newer to the crypto game. I looked up a couple things regarding protocols and it looks like Aave is at the top of the list as of this moment. Generally speaking, we can select multiple protocols (4-5) which would potentially speed up the rate that we build up the account that will be used to back xUSD, but that would increase our exposure. Conversely we could narrow it down to 1 or 2 protocols but it would just take longer to build up that account. Some qualities I would be looking for are what protocol token they use, which blockchain they work with, how much supply they have locked, and when the last audit was performed on their company. I think to start we could try 1-2 to see how it goes unless someone with more experience thinks otherwise as again, I am newer to this. These are just my thoughts…Hope some of this makes sense.

Decentralized - that is sure. Maybe once our DAO will be much bigger, mature and amount of XUSD issued will exceed couple of hundreds millions of dollars - we could cooperate with some centralized as well.

At this moment I think that AAVE, Compound and maybe Venus could be taken into consideration.

Decentralization, reliability, transparency, security, yield.

I would go for even 10 - just as a form of diversification. But we won’t be able to pick up that many anytime soon.

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I did a quick overview on AAVE and Compound based on the parameter that you mentioned (though I am a little unsure about defining reliability).

AAVE

Decentralization: Yes

Reliability: There is this safety module mechanism in AAVE that is supposed to help with liquidity, but I am not sure how it works.

Transparency: Very frequent audits and an active discord, suggest that it is transparent

Security: Last couple of audits show that major issues have been solved.

Yield: USDT: 3.1%, USDC: 7.4%, Dai: 4.0%, BUSD: 3.7%

Compound

Decentralization: Yes

Reliability: Recent news on compound is about how there recent upgrade is buggy, which is causing problems for the platform

Transparency: Last security audit I found was from 2019

Security: Last audit is 2019 showed 4 issues with the protocol marked as highly severe. (not sure if there are updates on this) Recent news on Compound is also problematic.

Yield: USDT: 6.4%, USDC: 5.0%, Dai: 3.0%

Generally, AAVE looks very promising, but compound is a bit worrisome with recent news. I need to read more into the compound news to understand have it will effect the platform.

I hope to do a similar overview of Venus as well.

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Venus

Decentralization: Yes

Reliability: I could not get the dashboard for the dapp to work on several devices, but found out that the website will only work if you have metamask installed and connect to the binance smart chain. According to reddit, you can also use trust wallet.

Transparency: Most recent security audit about a year ago

Security: Last security audit showed 4 minor issues, but 2 had been resolved

Yield: BUSD – 2.91%, USDT – 3.91%, USDC – 3.75%, DAI – 2.82%

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Also, has anyone heard of Certik. It is a company that does security audits and their website has a bunch of metrics for various protocols. Their review of AAVE and Venus are pretty positive, but I don’t think they have covered Compound.

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It seems like the bug in Compound has been fixed through a new proposal that was executed on Oct. 9th, but I think we should hold off for a couple months to make sure things are stable before investing in their protocol. Do you have a timeline for rolling out the governance and stablecoin investing?

Also, are AMM liquidity platforms also worth considering? Maybe a one-sided liquidity provision that pays back in the same stablecoin put in?

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Check Barnbridge and their products like Yield Farming and Smart Alpha. BarnBridge

They are on multiple networks, maybe they would like to add also RSK network. They have 2 audits already and some forks like Universe.xyz for NFT market generating yield.

Blue chip protocols like AAVE and COMPOUND are good choices, even though there was a bug in compound protocol upgrade when only rewards were affected, not directly funds.

It’s nice to see the conversation started over here! I’ll add some considerations that are important from my perspective. Let’s keep it simple & use the big players. Even since the initial discussions, there have been serious developments with several of the largest stablecoin farm protocols.

DeFi is such a dynamic space which presents the enormous challenge of having awareness of best options which change by the minute. It’s also full of risk, so we’re determined to use trusted protocols to earn more modest yield (as compared with chasing extra yield points in untested BSC protocols and so forth).

A word on fiduciary responsibility and mechanics of XUSD collateral withdrawal… One benefit of operating as a cross-chain clearing house for stablecoins (as compared with volatile cryptocurrencies), is that we can reasonably assume we’ll be able to provide liquidation of XUSD (burned upon conversion back to stablecoin) in any stablecoin desired… but that introduces a greater degree of potential for stablecoin arbitrage traders to use the protocol in a way that’s not intended (although we could find ways to provide stablecoin arbitrage within our suite of services??? that would be so epic!).

Basically, every additional ounce of complexity multiplies challenges, so ease of communication & implementation are fairly significant priorities for me… especially in this early phase. We need to consider the fiduciary responsibility and clarity of communication with regard to the value proposition. Users need to understand the scope of our collateral management practices… ideally, as a DAO, our community should be making these decisions as they come to fully formed BIPS.

Let’s stick with the top 5 protocols by AUM for 90% of the collateral farming? Perhaps we could propose to allocate 10% towards less battle-tested options, but which provide unique yield opportunity for lower market cap stablecoins on smaller chains. Some of the collateral we’re holding can’t be farmed anywhere that I’m aware of. Is there a farm for DOC? In those smaller use-cases, we may discuss whether we’d like to dabble in taking a more active approach in managing our collateral basket. It certainly introduces a lot of entropy and challenges with record keeping and accountability. Simplicity to start. Complexity over time.

We’re holding a mountain of USDT at the moment, which makes me uneasy. I’d like to see us diversify the collateral, but I’m not comfortable with us doing that without a very well-written BIP. Nonetheless, dependent upon how actively we intend to manage our collateral basket, we may find that the protocols we use will be somewhat defined by the collateral we receive.

Let’s shop around for top USDT farm yields on Ethereum network, but let’s also discuss converting some of this USDT in order to diversify our basket. That seems imperative at this point. Alternatively, we could temporarily pause receiving USDT deposits and/or initiate FISH rewards for deposit of currencies we need for dynamic rebalancing, and pay 0 FISH rewards for USDT deposits, while incentivizing deposit of preferred stablecoins with FISH rewards.

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Nice @Hyde! I’m in agreement with your thoughts here.

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Dang! That yield spread between USDT & USDC on AAVE right now is interesting. The prudent move seems to me to swap some of our heavy USDT for USDC & DAI. Stake USDC & DAI for a period on AAVE. We could stake USDT on Compound… but it doesn’t look like the best play in my assessment. We also need to discuss liquidity of our farmed collateral. Do we intend to stake for a specified period & what percentage of XUSD collateral should be retained liquid for withdrawal/reconversion to underlying collateral? We should never have any issues with liquidity. That is an absolute confidence killer… no matter the reason.

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I think it may be best to keep high liquidity in the collateral to start, even if it means yielding less from the aggregated coins, since we may be in a market bubble, which when pops could lead to mass liquidation. If we get caught in a market collapse it would be very hard to get back a good reputation, but if we manage to be stable through a market collapse it would make us look good.