Summary
This publication presents the Sturdy Finance community the opportunity to onboard the new Aave Boosted Pool as collateral to the Stablecoin Market deployment.
Abstract
Onboarding the new Aave v3 Boost USD Pool is expected to drive meaningful TVL and adoption to Sturdy Finance. Early BPT integration partners will benefit from elevated yields and are likely to gain market shared relative to peers via the first mover advantage.
Users who deploy yield maximising strategies are expected to generate material borrowing demand for stable coins. Due to Sturdy’s yield-sharing mechanics, this is expected to lead to a boost in stable coin deposit yields.
Motivation
The Balancer Boosted Aave v3 USD pool is a market weighted liquidity pool consisting of three individual linear pools, BB-A-DAI, BB-A-USDC and BB-A-USDT.
At its peak, the Balancer Boosted Aave v2 USD pool had over $150M and currently has around $44.6M in liquidity. The new Boosted Aave v3 pool is expected to receive a gauge and be integrated by Aura Finance in the coming week. The new Aave v3 pool is expected to receive a higher yield relative to the current Aave v2 pool, 7.53%.
The primary difference between the two Aave Boosted pools are as shown below:
- Aave v2 protocol migrated to Aave v3,
- New Static aToken Wrapper
- Amplification increase from 1,472 to 2,000
Both Aave Boosted pools utilise Balancer’s ComposableStablePool which contains three linear pools. The Static aToken wrapper was developed by Aave Companies and is used within the Linear Pools to deposit liquidity into Aave protocol.
Based upon past experience, the majority of liquidity is expected to migrate within two to three weeks of rewards commencing on the new pool and finishing on the v2 pool.
This migration process grants Sturdy Finance a window of time to progress the Aave v3 BB-A-USD pool proposal and create new liquidity pools. Users will be able to capitalise on the early incentive rewards and yield maximisation strategies will further enhance user’s returns.
Use Case
BB-A-USD serves as a great collateral due to its intrinsic and extrinsic productive yield features.
Intrinsic Yield Sources
- Aave v3 Deposit Yield
- Balancer v2 Swap Fees
Users can deposit the BPT into Sturdy Finance deposit contract, borrow each stable coin interest free and overtime the appreciation of the BPT will enable the repayment of the loan.
Extrinsic Yield Sources
- BAL Rewards
- AURA Rewards
Furthermore, the BAL and AURA rewards can be used to accelerate the repayment and reduce the payback duration.
This repayment cycle can be further enhanced by applying yield maximising strategies to capitalise on the delta between deposit and funding rates. Alternatively, external yield sources outside of the recursive strategy also act to reduce the pay back period.
Similar to other strategies built on Sturdy, users are able to create and manage Alchemix style self repaying loans.
Risk Considerations
Like other tokenised liquidity positions on Sturdy, the risks associated with the Boosted Aave v3 Pool are multifacet in nature.
Counterparty
Protocol risk exposure includes, decentralised exchange smart contract risk, the linear pool contract risk and exposure to the underlying lending protocol, which happens to have an insurance fund.
Users are exposed to Sturdy Finance, Aura Finance, Balancer and Aave v3 smart contract risk surface area. The BB-A-USD pool introduces Circle, Tether and Maker DAO risk exposure via uSDC, USDT and DAI respectively. Given recent market events, the market has demonstrated that widely trusted and even regulated stable coins can encounter unanticipated off-chain risk events.
Market Volatility
Sturdy Utilisation <80%
Through having exposure to Aave, when markets are volatile and borrowing rates are elevated, liquidity providers within the BB-A-USD pool capture a portion of the Aave v3 deposit rate.
When borrowing costs on Sturdy are zero, utilisation <80%, the main risk exposure is counterparty risk. This can be expressed via a mismatch in the composition of the underlying asset and debt, plus the smart contract risk across the various protocols.
Sturdy Utilisation >80%
During periods of volatility, stable coins can trade above $1 and borrowing rates can increase materially as utilisation across various lending liquidity pools often exceeds optimal borrowing ranges.
When utilisation on Sturdy exceeds 80%, the borrowing costs can offset the yield generated within the strategy. This risk is amplified through the use of leverage and is not unlike other assets already listed on Sturdy Finance.
Unlike other collateral types on Sturdy, the yield generated from the Aave v3 deposit rate will act to offset the Sturdy borrowing rate.
However, the BB-A-USD pool is a core pool at Balance and 50% of the yield derived from Aave v3, goes towards either bribes or to Balancer as revenue. This means only 50% of the yield from Aave v3 accrues to BPT holders. This means there is a fractional capacity efficiency within the linear pool and the Balancer fee that leads to a divergence in value accrual derived from Aave v3 and borrowing costs on Sturdy.
Importantly, by incorporating lending derived yield into collateral positions on Sturdy, holistically this leads to more correlated intrinsic yield relative to existing collateral types. Do note, swap fees may also increase during periods of volatility.
BB-A-USD Composition
The risk for users is the composition of BB-A-USD changes over time to be underweight one stable coin whilst users have active positions, like USDT, when USDC lost its peg.
When unwinding the strategy during periods of volatility there may be limited liquidity of the underweight asset in the underlying liquidity pool. For example, if the pool is majority concentrated in the asset that has lost its peg, users will redeem the BPT for a composition different to the debt position on sturdy and thus need to perform a swap transaction to rebalance the asset composition enabling the loan to be repaid. This can adversely affect the return of the strategy which is amplified via leverage.
Specification
This section defines the intial parameter configuration to support listing BB-A-USD as collateral on the Stable coin Market.
Contract Address
BB-A-USD: 0xfeBb0bbf162E64fb9D0dfe186E517d84C395f016
Gauge: 0x0052688295413b32626D226a205b95cDB337DE86
Aura Finance: Coming Soon
Oracle
Via the pool.getRate() function on the BB-A-USD Contract.
The pool.getRate() function returns the exchange rate of a BPT to the underlying base asset of the pool accounting for rate providers. For example:
bb-a-USD will return a rate relative to USD. This is calculated as a weighted average of the underlying stable coins (DAI, USDC, USDT) in the nested linear pools (bb-a-DAI, bb-a-USDC, bb-a-USDT).
Each Linear Pool has a pool.getRate() function that returns the exchange rate of a BPT relative to the underlying base asset (mainToken) of the pool.
Risk Parameter Configuration
Sturdy can unique configure the leverage strategies to match the initial composition of the BPT.
LTV: 90%
LT: 93%
LF: 2%
Supply Cap: 22,000,000 units
Due to the intrinsic yield derived from lending protocols, the BB-A-USD is able to offer marginally higher risk parameters relative to just swap fee and incentive rewards derived yield source collateral types.
The Liquidation Fee is set at 2.5%. This takes into consideration the possibility of elevated gas costs and potential swap price impact when the underlying liquidity pool and users debt composition on Sturdy diverge. This is intended to enable liquidators to clear positions when the health factor gets to low prior to Sturdy incurring any potential bad debt or hoping for the peg to be restored.
An initial Supply Cap has been included which is representative of 50% of the Aave v2 Boost Pool. This acts to reduce the concentration risk to Sturdy Finance assuming the liquidity from the Aave v2 pool migrates rather quickly.
Disclosure
This proposal is the work of @TokenLogic who is a contributor to Llama which has a Service Provider Agreement with Aave.
Copyright
Copyright and related rights waived via CC0.