Since the alETH reverse rug, the alETH vault has had no incidents. The parameters of the alETH vault are still very much set up for a trial period, with a 400% collateralization ratio and a 4000 alETH debt cap. I do not think the time is right to adjust the collateralization ratio (we have only seen good sustained ETH yields for a short period of time), so that is a more controversial proposal for another day. However, I do believe we have the liquidity and demand to significantly increase the alETH debt cap.
Consider the following information:
- The alUSD debt cap is $200 million, compared to an alETH debt cap of 4000 alETH, which is approximately $15 million. This means the debt cap of alETH is less than 1/10th that of alUSD.
- The alUSD pool has a TVL of $443 million. The alETH Saddle pool has a TVL of $48m, and the curve pool has a TVL of $274m, for a total of $322 million, which is about ¾ of the alUSD pool TVL.
- The TVL in alETH/ETH liquidity pools approximately tripled after adding the Curve pool / bribes (from 100m to 300m).
- A swap of $15m alUSD to DAI results in a total slippage of 0.2%. 4000 alETH to ETH (same approximate value) results in slippage of 0.1%, 8000 alETH to ETH results in a slippage of 0.3%.
All of this information, to me, signifies that the alETH debt cap can be significantly higher than what it is, with little to no impact on the slippage and peg. So, that proves that we CAN raise the debt cap. But should we?
Reasons to raise the debt cap:
- alETH is stable without incident since the reverse rug
- The debt cap has been maxed out more regularly, so there is demand
- More debt cap = more TVL = more revenue for the DAO
Reasons not to raise the debt cap:
- We would be encouraging more users to deposit alETH prior to launching Alchemix V2, which may require migration. However, it is likely that Alchemix V1 vaults will be continued, and only after a while have some features revoked (such as new debt and new deposits). Additionally, the demand is clearly there for alETH - I think we have to trust our users to make the decision on what’s right for them, rather then limiting their options.
- Bribing is relatively new and could become less efficient as more protocols join in. However, even if alETH LP TVL dropped back down to 100m TVL, the debt cap could still 3x and have more conservative ratios than alUSD. And that would assume curve bribe liquidity completely leaves, instead of just reducing.
Based on the information above, I think the alETH cap can be doubled immediately with little-to-no effect on the peg, and increased at least 5x overall, over time. I propose the following (if this proposal passes):
- alETH debt cap will be increased in increments of 2,000 alETH, up to a maximum of 10,000 alETH (approximately $40 million).
- The first increase (from 4,000 to 6,000 alETH) shall occur when this governance proposal passes.
- When the current debt cap is reached, the Alchemix team will evaluate the health of alETH and have the ability to raise the alETH cap another 2,000 alETH (up to a maximum of 10,000).
This may sound aggressive, but I believe the slippage and TVL numbers above show how unnecessarily low the debt cap currently is for alETH, and even 5x-ing the debt cap to 20,000 alETH would give the alETH vault safer/more conservative parameters than alUSD.
To summarize:
A vote “for” results in an increase in the alETH debt cap from 4k alETH to 6k alETH, and gives the Alchemix team the discretion to raise the debt cap in increments of 2k alETH each time the current debt cap is reached, up to a maximum debt cap of 10k alETH.