Urgently diversifying the PCV into stables till reweights and DIs are reinstated

Proposals
1

As the team had previously mentioned, the current roadmap is something like this:-

  1. Reinstate reweights
  2. Audit code and reinstate DIs.
  3. Work on integrations and ways to diversify the PCV.

While I previously did not have any issues with this approach, I realised that this is a new protocol and bugs will come up quite naturally. Whether we like it or not, the situation is also quite time sensitive given the volatility in secondary markets. With the current roadmap, I believe the fastest way to pass the first 2 fixes and then move onto integrations and PCV diversification will take atleast a week to 10 days. That exposes us to a risk of violent moves in ETH, since we have essentially been in an ETH ‘long’ trade since genesis.

When we voted for FIP2 we were ready for the PCV to go down to ~$500m. However it is now at ~$1.2B. Let me stress on this, this is not a small feat for a protocol that is a month old and shouldn’t be overlooked. We need to defend it and not gamble it away till the protocol is fixed and for that I propose to urgently diversify 100% of the PCV temporarily into a stable/basket of stables till the team reinstates all other features of the protocol.

On how it can be done, there are better minds than me as I do not have a technical background. One way that @arcology came up with and @joey both agreed on was to repurpose the PCV ETH drip to DCA into stables. @Eswak has mentioned he has already been working on the code and it can be audited and voted on. This seems like the ideal solution unless someone has a better idea.

I would request everyone to understand that the issue here is very time sensitive and preserving the PCV value will give us a whole lot of benefits in the long run.

  • YES (Diversify the PCV into stables using the repurposed PCV ETH dripper)
  • YES (Diversify the PCV but use anothe method)
  • NO (Let things move according to the current roadmap)

0 voters

3

Hi @siddharth,

Thanks for continuing and formalizing the proposal here. I am in support of this with the exception of 100% diversification.
The Drip method also requires some time to transfer/swap assets and it also contains inherent arbitrage risks. This will need to be factored in. I will defer to the PCV Working Group to post their recommendations on the percentage of assets to be diversified and also the timeframe of which this should be done. I don’t think 100% immediately is possible for both risk management and technical reasons.

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4

Hi @siddharth,

We have been discussing this topic in the PCV Diversification TRIBE, and our recommendation is not 100% polished at this stage, but let us share what we came up with so far.

  1. We agree that the risk is very concentrated atm, and that action needs to be taken in the short term to diversify the PCV (that is why the working group was founded so early - we have that feeling of urgency).
  2. The community feeling seems to be OK in the short term to acquire stablecoins.
  3. Risk shall be managed properly, and shifting 100% of the PCV to another asset is probably a bad idea - diversification is key. Additionally, providing liquidity to FEI/ETH pairs brings value to FEI users and it is key to reweights and direct incentives.
  4. While there is a sense of urgency, moving 1B$ is not a trivial task, so appropriate care must be given & a lot of mechanisms that work at small scale won’t work for managing the PCV.
  5. Integration with other protocols is next on the roadmap, so if we can, we should make PCV diversification a first step towards that.

One of the key features of Fei protocol is to use the PCV to market-make (defend the FEI peg on the market & improve liquidity). Knowing this, Fei protocol could market-make on Curve and Balancer (and other “swap” exchanges) in addition to Uniswap.

Balancer seems to have an interesting V2 coming soon with stablepools, but it is not ready yet. It could also be used for portfolio management, we’ll further look at that feature in the next few weeks. Uniswap v3 has some promising features for stable pairs too, but it’s a topic for later.

Curve is already running and has a mechanism of pool factories that would allow us to provide liquidity for FEI against DAI, USDC, and USDT. We think it is a good target for an early integration.

We think that PCV diversification (and stablecoin acquisition in the short term) should be compatible with a possible Curve integration in the next few months.

For those not familiar with Curve, here is what is important to know :

  • The Curve “3pool” holds a mixed basket of DAI / USDC / USDT and allows anyone to swap between these 3 stable coins at very low slippage.
  • When supplying liquidity to the 3pool (either DAI, USDC, USDT, or a mix of these), we acquire LP tokens informally known as “3crv”.
  • The Curve metapool pool factory allows anyone to create a pool between 3crv and any other token. We could create a pool of (3crv, FEI) to allow low-slippage swaps between DAI, USDC, USDT, and FEI, which will immensely help to stay close to peg & allow arbitrage with a secondary, non incentivized market.
  • Because 3crv is a LP token, PCV will earn yields from the 3pool swap fees, in addition to swap fees between FEI and these other stablecoins.
  • 3crv is an interesting token to hold when diversifying the PCV, because it represents a mixed basket of the 3 other biggest (most liquid) stablecoins on the ETH network.

Here is the current content of the Curve 3pool :

Looking at that pool, we see that depth is large enough for us to allocate part of the PCV without disrupting it. We are analyzing the alternative, therefore, that the protocol acquires DAI, USDT and USDC (33% of each) in the short term, with the possible goal of depositing those in the Curve 3pool (to get 3crv, and later create a metapool with FEI).

That deposit on Curve is an action that needs further discussions and risk assessments (and code, and audits). Possibly, the protocol could acquire coverage on Nexus Mutual for that operation, but there is only ~15M$ coverage left today (at 2.6% risk premium) out of a total cover of $100-$200M for Curve, and it’s not sure yet how the DAO would pass KYC to gain membership on Nexus Mutual. Nexus Mutual has a capital pool of around $550M that collaterizes their insurance contracts. They can also inflate their governance token as a backstop to claims as well. To date they have paid out $10.6M in claims from failures in Yearn Finance and BzX. We are in contact with their team to see what is possible to do in this case, such as buying an “OTC” cover, or something else.

In the meantime, swapping ETH out of the PCV to acquire DAI, USDT and USDC will address the short term volatility risk. Acquiring a relevant amount of stables over the course of 1 month could be a good target and is feasible regarding liquidity / daily trading volumes on the Uniswap ETH-DAI, ETH-USDC, and ETH-USDT pools. Code for it is in the works, and we will ask for audits that could be done by the end of may.

The working group will propose a draft Investment Policy Statement (framework for diversification actions and risk management) in the next few weeks. Before that, in order to reduce time-to-deployment of buying stablecoins, we will share some analysis and suggest a good target volume for stablecoins, bringing to discussion with the community.

One of the objectives of PCV management is protecting the peg. To address the concern of the peg in the short term we need to consider that the User circulating FEI is now 455M. Buying 360M stables would result in a hedge of 80%. Actually, the situation would be even better when considering that within this User circulating FEI there is staked FEI in the FEI/TRIBE pool. PCV management certainly has more objectives, such as preserving and growing its reserves. We also need to think about stables allocation with these objectives in mind.

The questions we are exploring right now besides preparing the Investment Policy Statement are:

  • How much should we buy in stablecoins?
  • What are the important financial metrics to be considered in deciding PCV allocation? What would be the target for each metric? (eg.: allocations% related to user circulating FEI, collateralization level of FEI Protocol, FEI/TRIBE staking level, volatility/VaR risk of PCV, etc)
  • What are the risks of providing liquidity with the stables on Curve and how could we become protected against them?
  • How can we automate this for the future?
  • What is an adequate Benchmark to use to compare and evaluate PCV returns?

We had just started to work as a PCV diversification Tribe, so we have a lot to do. We will continue to share with the community our priorities and the main questions we are exploring. Feedbacks and contributions are welcomed!

PCV Diversification Tribe
@Bruno @Eswak @countvidal @Matthew_Graham

5 Likes
5

Great post and love the ideas. A few thoughts / questions…

  1. What would the yield be for the pool of stables on Curve compared to yields on Aave? The reason I’m asking is because let’s say yields are roughly similar. If that’s the case, would it make sense to have an allocation to Aave/Compound to liquidity mine for governance tokens of those protocols? That in turn would give us the opportunity to take part in governance votes for something like a Fei integrations. If yields are roughly the same, why shouldn’t we prefer an allocation to Aave/Compound? What would be the reason not to do that (e.g. liquidity depth, opportunity cost to earn higher yield elsewhere, etc)? The other option is to do a combo of both but not sure how difficult that is from an implementation / code standpoint. Doing both has some benefits. First, it creates more pairs to trade for Fei. Second, it creates a reason to actually trade for Fei besides LP’ing - you can deposit it into a lending protocol and earn yield

  2. I’d be careful to assume that Fei would be 80% hedged. That’s assuming the other stables are riskless which is a dangerous assumption in my opinion.

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I agree with Ferdinands point above regarding the mine of governance tokens of Aave and compound. My opinion is that the PCV should prioritize stability and using the size of our asset pool to take an active role in governance of quality protocols across the defi space. If used the correctly the funds we have available can not only lead to deeper fei integration across defi but also have a “war chest of voting power” can be a great asset when utilized correctly.

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7

Tks for the questions, interesting points to discuss!

I think the two options (lending protocols and curve 3pool) have the advantage of bringing stability and earning yield. We did not make the calculations yet about the returns on these options and the volatility in yields. In the option of curve 3pool we would also need to consider the cost of insurance.

It seems to me that providing liquidity on Curve has additional operational benefits for the functioning of Fei Protocol.

A stable liquidity pool is a great way to help FEI keep the peg as it reduces the cost of swapping FEI with other stables. It is easier for traders to arb when the price slips off the peg. Another advantage is being more oracle resilient as it would not depend on the oracle price of ETH/USD.

These are just some initial thoughts on the cost/benefit of each option.

Another alternative for the future could be creating new bonding curves with Aave and Compound, holding their tokens and providing liquidity with minted FEI.

Agree, each stable has its own risks and is also important to diversify. We will analyze in more detail the numbers. It was just an example to show that an important metric can be User circulating FEI or the “liquid FEI” (nonstaking user circulating FEI).

8

@Bruno, great post and analysis of the objectives, and I support this proposal.
A few comments and questions:

We think that PCV diversification (and stablecoin acquisition in the short term) should be compatible with a possible Curve integration in the next few months.

I agree that holding baskets of tokens adds further diversification and hedges risk. But what can we do with the accrued yield? Would this be compounded into the initial Curve investment or will be converted to other asset to be absorbed into the PCV?

  • How much should we buy in stablecoins?
  • What are the important financial metrics to be considered in deciding PCV allocation? What would be the target for each metric? (eg.: allocations% related to user circulating FEI, collateralization level of FEI Protocol, FEI/TRIBE staking level, volatility/VaR risk of PCV, etc)

I believe this would be affected by some metrics:

  • how quickly do we need to buy the stables? A large transaction or a series of smaller ones (eg the drip-feed system)?
  • is there a target collateralization ratio if an extreme event which collapses the price of ETH?
  • is there any consideration for arbitrage?

How can we automate this for the future?

I think that this cannot be fully automatic but will require periodic review. However, can you consider whether it is feasible to initiate a ‘circuit-breaker’ drip-feed buy process when there is extreme volatility in ETH or other assets (eg a drop of more than 5-10% in ETH) over a period of time and program target weighting scenarios for PCV diversification when it needs to be ‘defensive’ vs a more ‘normal’ stance? This will need to be carefully calibrated so that it will not transfer assets constantly.

What is an adequate Benchmark to use to compare and evaluate PCV returns?

I think that this will be similar to a multi-strategy Yearn vault, so perhaps start there?

I think that we should separate the issues here. The PCV is more for hedging risk, not to engage in meta-governance. These 2 objectives require quite different investment strategies, IMO.
Having said that, the interests of meta-governance and integration will be aligned - I would ask the partnerships/integration WG to comment on that.

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I have the same thoughts! I understand the need for PCV diversifiying, but I do not really understand why it is clever for our algorhytmic stablecoin to diversifiy into collateralized stable coins? This would make FEI more dependant and similar design

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10

Thanks for the reply @Bruno and good explanation on why Curve. And I like the idea of new bonding curves with Aave and Compound.

However, I think it would be important to inform the community on the following: 1) return / volatility expectations of potential options being considered, not just Curve 2) understand why Curve seems to be the only option legitimately considered by the team at this moment - you lay out great options as to why Curve and dive into cost/benefits for the curve option but in my opinion you do not touch on the cost/benefit of any other option, instead only saying that bonding curves with Aave in the future is an option 3) understand why doing a combo strategy like depositing X% of stablecoins to Curve and Y% of stablecoins into a lending protocol cannot be done. I totally agree with your comments on why Curve makes sense but not following why concurrently depositing into a lending protocol cannot be done (code implementation?)

  1. If PCV risk can be adequately hedged and we can engage in meta-governance at the same time, why do those issues need to be separated? Wouldn’t it be more advantageous if we were able to adequately hedge and engage in meta-governance if we have the option to do so? We have $1B of PCV and we should use the power of that PCV to its full extent, which in my opinion includes using it for meta-governance. Also, it’s mutually beneficial for whatever protocol we’d deposit into because: 1) if we initially deposit stables to earn yield, TVL of the lending protocol increases and token holders benefit 2) if we vote for a Fei integration in the future with our liquidity mined tokens, that will also increase TVL of the lending protocol.

@Tokeno I’m a proponent of the WG’s initiative to rotate some PCV into stables

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11

On acquisition of governance tokens from other protocols :

Maybe we don’t have to include that “strategy” as part of PCV management. We could organize OTC trades with other DAOs and trade some TRIBE from the DAO treasury for governance tokens of other protocols.

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This is a completely open discussion. Many possibilities for the future: compound in the initial curve investment, being used to invest in other assets, support new FEI bonding curves, transfer to a smart treasury to buy back TRIBE…I think we are two steps behind this discussion. But for sure it will be very interesting.

I like this more automated approach. The benefit is adjusting the portfolio quickly under changes in market conditions. But to get there it is important to calibrate the model and test it.

We were thinking about a more general benchmark considering a basket of cryptos to try to simulate a S&P500 for crypto. A market cap weighted index. But it is open for discussion.

@Ferdinand_Fuzzgellan
Tks for the points! We just shared our initial thoughts, but we will need to make this more comprehensive analysis as we advance, considering the cost/benefit of potential alternatives (Balancer v2, Uniswap v3, just lending in Compound/Aave, just holding stables). When we have this, we will be in a better position to say if a combined strategy is better or not.

I see meta-governance more as a good externality than as a goal. The main operational objectives are protecting the peg and provide liquidity to FEI pairs IMO.

We need some less risky assets in our portfolio to protect against a downside as we are a new stablecoin. For the future, I would also prefer to abandon the centralized stablecoins if possible and use some Put options or future contracts to hedge crypto risk.

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:+1: def agree with your comment on meta-governance being a positive externality and not the operational goal.

I really like where this discussion is going. It’s flushing out a lot of questions for which you have thoughtful answers in response.

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BOOM! Awesome idea and plenty of DAOs with fat treasuries to do this with.

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Thanks for your comment! I think your proposal will make things more clear, I am just trying to understand what we are doing :slight_smile:

I understand the need to manage pcv risk, but centralized stable coins should not be the main strategy imo. As long term agenda is to replace them, we can focus on different strategies.

Why not include put options / future contracts from the beginning?

Personally I am looking forward to borrow Fei against Eth on Aave to manage risk :stuck_out_tongue_winking_eye:

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16

Read the post thoroughly & agree with the urgency of diversifying the PCV to balance the risk on the backing of the collateral. However have a few considerations.

+1.5B (in today’s numbers) for PCV is a big amount and largely unnecessary for the current size of the protocole to treat with “urgency” (above 150% collat rate is really really not necessary)

I suggest we define a budget cap for the “needed amount” for the “needed urgency.” Before starting to play hedge fund managing, we need to be clear on what is the goal of this PCV to be spent for beyond the collat rate. Without having some information on the roadmap of the protocole & operational costs which are not disclosed in whitepaper or medium articles this alignment on a joint goal is not possible. This money might be needed elsewhere and jumping into yield farming strategies might not be the best use of it.

The amount & opportunities in the marketplace might sound lucrative, but jumping to pools & yields might end up being unnecessary for the long run, money earned with no purpose might become a bigger burden than needed.

We should have more visibility into the roadmap of the protocole, understand what is budgeted so far (either thru tokenomics or VC funds into FeiLabs for operational purposes) And start bucketing our budget first.

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We are exploring this idea, but it seems that the current protocols working with it do not have enough liquidity. If anyone have an idea about it, we can further explore. Anyway, having stables also help on the operational goal of PCV of providing liquidity to FEI Pairs. Increasing the liquidity for FEI and other stables will help to keep the peg.

I see the goals of PCV as peg maintenance, liquidity providing/market making and enabling a sustainable and growing DAO.

I agree with your next point that the PCV management should be closely related to the product roadmap. It makes a lot of sense as PCV could be funding the creation of new bonding curves. The core team said they would provide this product roadmap soon.

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100+ and there lies the urgency that this thread focuses on. Insuring short - mid term future of the health of the protocole thru necessary new bonding curves. Which should give enough breathing room for the team & wg’s to focus on longer term visions like R&D etc.

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