[AIP-14] Saddle d4 ALCX Reward Allocation

scoopy

Recently, saddle.finance launched the d4 stable pool, which consists of alUSD, LUSD, FRAX, and FEI. Each of our teams have been in talks about this pool and all four protocols are agreeing to supply their governance tokens to incentivise liquidity for this pool.

Each protocol has differing emissions schedules for their tokens, so to make it fair for each protocol, we have all agreed to match the rough dollar amount of the tokens at the present time and use that budget to incentivise the pool for one year. This value is looking to be around $1.1m from each protocol. For ALCX that would equate to 3,300 tokens for the entire year. To put that in perspective, we currently emit ₂₈₀₀ ALCX a week to incentivise the alUSD3CRV pool. This would be just over a week's worth of emissions from our farm to incentivise a farm that also receives tokens of similar value from other projects as well. It isn't a whole lot in the grand scheme of things. Since each protocol is contributing equally, we all end up having a reduced cost for liquidity.

LP's will stake the d4-LP tokens using a staking contract created by the FRAX team, which allows for multiple reward tokens. This staking contract has some nice extra features. The coolest being the ability to lock your tokens for up to one year in order to boost your rewards in the pool. So long term stakers can maximize their rewards being in this pool the longer they lock up their tokens.

Each of the tokens in this pool have strong pegging mechanisms on their own, but when combined with all 4 protocols, each system can lend its strength to the pool to help stabilize it. alUSD has the Transmuter, which is a deep backstop to the peg, LUSD can be redeemed for the underlying ETH, FRAX has an AMO module that has an algorithmic supply that can deposit and withdraw FRAX from the pool to stabilize it, and FEI has a massive backstop with their PCV module. Individually, each protocol is robust, and when combined in the d4 pool, it will stabilize our assets even further. It will also drive volume to other pools with alUSD because there will be more arbitrage opportunities (and this is good for LPs).

In order to supply these tokens, the DAO would supply tokens from its treasury at first, and then via the farming contract, have it repay the ALCX back to the treasury -- which is the same thing we do in the Sushi Onsen and Curve farms. By the end of the reward period, the DAO will have been repaid via inflationary rewards.

I am asking the DAO to authorize 4000 ALCX for this pool. A little extra is added as a buffer in case of any price deviations our respective tokens have in the coming days before the launch of this pool. Any unused tokens will be returned to the treasury.

A vote "For" authorizes us to incentivise the pool
A vote "Against" rejects this proposal

thenursegreg

For

0xFelix

While I fully support the creation of this pool plus the incentivization - especially to move away from all the tether-backed pools - I think we also need to address the risks of the underlying assets of this D4 pool.

Personally, I feel very comfortable with LUSD and alUSD since they have performed well in both boom and bust periods. FRAX I'm less familiar with, but it seems it held its peg during the last major selloff (as the only algo stablecoin?), and what I've heard from the protocol/devs does inspire confidence.

FEI to me is a bit of a different story. I'll be fully honest by saying that I've not delved too deeply into all the details, but from what I've read and from what I can see on the charts, it performed terribly during the last market turmoil and it took a while for it to return to peg. From the discussion in our Discord server I think I'm not the only one with some reservations about FEI in this pool (starts here: https://discord.com/channels/738480789464940634/826152864837140492/858863560951988264)

One additional element is that while ALCX/LQTY/FXS clearly provide (or will provide) utility as a token, TRIBE seems to fall more into the category of valueless governance tokens. So also in terms of incentivization, FEI/TRIBE is the least interesting asset of the four.

Now that all being said, I just want to stress I'm not against the creation of this pool (in fact, I fully support it). I just think we need to highlight to the community that LP'ing this pool is not without risks. If there's more market turbulence to come it's entirely possible that FEI will lose its peg again, and LPers will end up footing the bill. I'm sure the FEI team has considered their past performance and hopefully put in place some countermeasures but their past performance is something to consider for everyone looking to join this pool.

hekmat

0xFelix

100 % agreed with felix. Great post to highlight that LPing for this pool has exposure to FEI which had its share of problems. I've heard people talking about changes they made but have 0 ideas about the efficacy.

That said, even if FEI (or any of the other coins in the pool) were to fail at peg maintenance... it really only affects the LPs. There will be plenty of LPs with high enough risk tolerance and you shouldn't if you personally aren't comfortable with the exposure.

Big picture-wise, it seems like a great play. For the 4 projects (+saddle) it increases visibility, reduces depegging risk and encourages collaboration with eachother. There is a ton of room in the stable coin market and competition with USDT is healthy for crypto as a whole.

Any one project failing would be sad, but wouldn't be a huge impact to the survivors.

If the pool and projects are successful there could be the potential of treasury swaps or acceptance as use of collateral in the mid-distant future

Anyway, I'm for the pool obviously and will probably LP too. There's not much downside if you're not planning on LPing and the upside is substantial.

IMIMIM

I don't necessarily have a problem with this, but I can't say that I'm particularly interested in it, either. Sure, I'll collect the other tokens, but I'll probably just cash them out.

inhibitor128

I don't have a warm and fuzzy feeling over FEI. They look like they have made some major changes since genesis (FIP-4 June 20, 2021) and I would like to see how those changes work. Direct incentive I think was a major part of the protocol. I have starting to go through their docs and discord to get a better understanding of how the protocol works.

danylostefan

Generally For, but FEI appears to be getting the best part of this deal

ImYourHodlberry

A key selling point of this new token is that this will be the most decentralized stablecoin vault on the market. Not enough is being said about that. I think the weak link is FEI and I think the same thing could be achieved without it. If there were two proposals on the table, one with FEI and the other without, I think the "D3" would get the most votes. Even the TRIBE token is the weakest among the four. We could have a D3 (sort of like the 3-pool) and then add a D4 later. This seems to have lots of inertia behind it and will be pushed through quickly. I hope we don't regret that. TBH, I am undecided about whether to vote for this.

coinmonk

ImYourHodlberry healthy thought 👌🏻

yuyoman

I think we should let our developers and operations team do their research and due diligence about the protocol and if it is Ok and secure for us we can do it

idrealistic

As someone who was heavily invested with FEI and deeply involved in all the discussions in their discord and discourse post-launch, I can say that the concerns about FEI today are based on a lack of knowledge about how and why FEI lost its peg. The main issues for FEI's launch were that: (1) as part of their initial sale, they awarded anyone who exchanged ETH for FEI with a proportionate share of airdropped TRIBE and (2) their original (now replaced) mechanism for keeping the peg involved something called "direct incentives" in their pool, which penalized folks for selling FEI the further it was from the peg.

First, because of the airdrop, the FEI launch was oversubscribed because many folks saw it as a low-risk way of getting a free airdrop (send eth, get equivalent amount of a stablecoin named FEI, get airdropped a proportionate share of TRIBE, sell your FEI back to ETH, profit). Problem was that everyone had the same plan so, immediately after launch, when everyone tried to sell their FEI back to ETH, the FEI price began to drop below the peg. Here's where the second issue arose. Because of the "direct incentives" mechanism, if you tried to sell FEI when it was below $1, the pool would automatically penalize you based on how far away from the peg you were selling. If it was 1% away from the peg, it would penalize you 2% when you sold; if it was 2%, the penalty would be 4%; 3% = penalty of 9%; and 5% off from peg would equal a penalty of 25%. Obviously if you sold when it was 10% off the peg, you'd lose 100%.

Because of the extreme demand to sell FEI back to ETH, people were willing to pay some penalty (but not a 100% penalty) so the price of FEI was continually between $.93 and $.97. This was unsustainable for a stablecoin intending to be pegged at $1. Through a series of governance proposals, the issues were resolved. First, the direct incentives mechanism was removed, which was artificially keeping the price above $.90. This dropped the price of FEI into the $.70s and $.80s as people were able to sell out if they really wanted to. Next, they instituted a mechanism to use the protocol controlled ETH (which was a huge war chest at this point based on the oversubscribed launch) to buy back FEI @ $.95 from anyone who wanted to sell at $.95. Just announcing this moved the price back up to $.95 because of arbitrageurs. Then they slowly moved this target closer and closer to $1 through a regularly repeating (every 4 hours?) pool rebalancing mechanism.

All in all, at this stage, FEI is a very stable stablecoin project. Its risk is that it's collateralized with ETH so if there's a huge crash in the price of ETH, it could theoretically become undercollateralized but it's sitting on over $500 million in protocol controlled value and this represents a 300% collateralization ratio so, in my opinion, it's in a very healthy spot. With its current peg mechanisms and its PCV, I would have no concerns about it being included in this pool.

coinmonk

idrealistic thank you for the explanation🙏🏻

yuntamoto

I don't have any issue with the rewards allocation, and I generally think new collaborations are good for Alchemix. However, could someone explain how this 4way pool of stables fits into the big picture for Alchemix? I'm not opposed to it, but would like to better understand what we can expect to get from this, and thus the argument for supporting this.

jamesk

yuntamoto one more use case for alUSD?
Another way to exchange alUSD for different tokens directly?