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.
- 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).
- The community feeling seems to be OK in the short term to acquire stablecoins.
- 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.
- 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.
- 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