Introduction
The Alchemix Elixirs have proven their effectiveness in carrying out curve pool rebalances without relying on 3rd party arbitrageurs, as well as generating additional revenue for the AlchemixDAO. However, it has come at the sacrifice of one of the tools that LPers and loan-takers can use to exit alAssets - the transmuter. The transmuter offers the only way that alAssets can be redeemed at a predictable rate with an unpredictable timeline. The transmuter does have a downside, in that when the flow rate is too high the liquidity pools can be drained for very small amounts of arbitrage. This proposal aims to reintroduce the transmuter in a limited capacity, while still allowing the Elixir to operate and provide benefit when the transmuter is overfilled with funds (ie, when the TransmuterBuffer has a balance).
Proposal
This proposal re-introduces the transmuter with new operating parameters, as well as provides more specific parameters to how the Elixirs should establish a balance and how they should operate with that balance. Items in bold below will be enacted immediately. Items in italics below will be enacted periodically per their descriptions.
Elixir Immediate Actions:
1. alUSD Elixir to withdraw alUSD single sided to target 0.991 price
2. alETH Elixir to withdraw alETH single sided to target 0.991 price
General Transmuter/Elixir Modifications
- Yield harvests for respective assets will flow into the TransmuterBuffer instead of the Elixir.
- Should the TransmuterBuffer exceed a balance of $500k or 250 WETH, that balance will be transferred to the Elixir to be deposited into the respective liquidity pool.
- Each Elixir will have a defined minimum withdrawal rate each month, that will be enacted if the 30-day TWAP of the previous month’s alAsset price is below 0.99 AND alAsset price is still below 0.99 at time of action. This withdrawal can happen at any point during the month, in order to limit immediate arbitrage actions and provide more benefit to those staking in the pools for longer periods of time.
- The Elixir is authorized to make additional single sided withdrawals to bolster the price when specific factors have caused a significant reduction to the net incentives to the respective alAsset, broadly targeting the withdrawal of half of the alUSD that is theoretically no longer being incentivized. AMO withdrawals for extenuating circumstances can also be proposed by governance. 1
DAI Transmuter/Elixir Modifications 2 3
- Deposit 800k of Elixir held DAI to the transmuter each week for the next 12 weeks (~10m total, matching current DAI held by the Elixir)
- Decrease DAI transmuter flow rate from $2.5m/month to $1.25m/month (From 1 DAI/second to 0.5 DAI/second)
- Set the minimum Elixir withdrawal rate of alUSD to $1.5m alUSD/month (triggers based on the 30-day TWAP of the previous month below 0.99, as long as alUSD price is still below 0.99)**
WETH Transmuter/Elixir Modifications 2
- Deposit 300 of Elixir held WETH to the transmuter each week for the next 12 weeks.
- Decrease WETH transmuter flower rate from 2600 WETH/month to 800 WETH/month (From 0.001 WETH/second to 0.0003 WETH/second)
- Set the minimum Elixir withdrawal rate to 1800 alETH/month. (triggers based on the 30-day TWAP of the previous month below 0.99, as long as alUSD price is still below 0.99)
1 An example of Elixir operations authorized by this rule would be the termination of 3rd party incentives for an alAsset pool, or an immediate or sustained significant decrease in the effectiveness or total capital being allocated to cvx bribes. The rebalance would target a size that offsets half the effect of the alAsset incentive reduction.
2 Note current available flow in the DAI transmuter is $6.5m, current available flow in WETH transmuter is 2300 WETH.
3 Note DAI is chosen as the majority of alUSD TVL is denominated in DAI_
Definitions
Transmuter - Funds sent to the transmuter are instantly redeemed for alUSD staked in the Transmuter.
Available Flow - The quantity of funds that can immediately enter the transmuter at any given time. When funds enter the transmuter, they decrease the available flow accordingly.
Flow Rate - The rate at which the AvailableFlow increases.
TransmuterBuffer - The contract that holds excess funds that are currently unable to be sent to the transmuter due to the lack of Available Flow. In V1, these funds were used to farm boosted yield.
Elixir - The contracts that provide liquidity to the curve pools with excess alAsset backing, and are capable of withdrawing alAssets single sided to rebalance the pools. The Elixir/Elixirs hold some Transmuter v1 funds as well.
Analysis of Current Pools and Broad Justification
Between the alUSD CRV pool, the alUSD Saddle Pool, and the D3 Curve Pool, there is a total balance of 71.5m alUSD and 27.4m of stablecoin assets. The alUSD Elixir currently controls 30m of liquidity and 10m of DAI. The 10m DAI could be deposited, and then 40m of alUSD could be withdrawn single sided. This would put the global balance of the alUSD pools to 31.5m alUSD and 38.4m of stablecoin assets, thus putting alUSD over the price of DAI and increasing the effective global alUSD APR by ~1.5x.
Between the alETH CRV pool and the alETh Saddle Pool, there is a total balance of 31.5k alETH and 11k ETH/ETH synthetics. The alETH Elixir currently controls 23k alETH/ETH of liquidity and has 4k WETH. The WETH could be deposited then 27k alETH could be withdrawn single sided, putting the global balance of the alETH pools to 4.5k alETH and 15k ETH, thus putting alETH over the price of ETH and increasing the effective global alETH APR by ~2x.
The purpose of this analysis is to show that both alAssets are capable of being rebalanced to a 1:1 price multiple times in the future. However, doing so provides instant exit liquidity for LPers - which is not the design or intent of Alchemix. LPers are meant to exit instantly at whatever the current curve price is (which is bolstered by the AMO), or exit over an undetermined period of time at a fixed 1:1 rate via the transmuter.
Additionally, the lack of instant pool rebalances is more beneficial to Alchemix as it allows the Elixir to collect more CRV and CVX emissions over time (rather than draining the Elixir and allowing mercenary LPers to enter the pool to collect those emissions / the arbitrage).
The purpose of this proposal is to set a rate that creates more predictability for LPers determining their strategies, while allowing flexibility for the alAsset supply to decrease more quickly as needed via additional Elixir operations. More predictability for LPers with the possibility for the Elixir to intervene favorably means less risk, which can help reduce the total costs of incentivizing liquidity.
Justification of Specific Parameters
Elixir Immediate Actions
0.991 initial target price is intended to reflect current market conditions and recent alAsset prices, while also approximately matching the amount of alUSD remaining in the D3 pool. It also creates a bit more buffer for the market to to rebalance internally prior to triggering any AMO minimum withdrawals.
General Elixir/Transmuter Modifications
The Transmuter is meant to be a more transient alUSD redemption and pool rebalance mechanism, while the Elixir is meant to react to larger events and to maximize protocol profitability/scalability when the alAsset supply is large and liquidity is deep. By redirecting yield flow to the TransmuterBuffer, we ensure that the most dependable mechanism for alUSD redemption is available even if the Elixir carries no balance.
The TransmuterBuffer represents the amount of collateral that is available to enter the transmuter (and thus be immediately claimed by staked alUSD). When the available flow of the transmuter is zero and the yield flow to the buffer exceeds the flow rate of the TransmuterBuffer, the TransmuterBuffer can build up a balance of idle funds. To smooth out operations and allow for some temporary transmuter available flow to build up and be used, the Elixir will only harvest TransmuterBuffer funds when they exceed 500k USD or 250 WETH.
The transmuter flow rate will operate regardless of if the alAsset price is trending up or down. The minimum Elixir withdrawal is intended to supplement the reduced flow rate of the transmuter, but only when the transmuter isn’t able to keep up with demand. This is represented by the target TWAP price of 0.99 for each alAsset. In current market conditions, this price has represented an achievable price at which borrowers will still take loans and many LPers will still feel comfortable LPing. This price is generated more from emotional market behavior than efficient market theory, but could be adjusted in the future by governance.
Lastly, the Elixir is also able to make larger one-time single-sided withdrawals should events occur that reduce the amount of global incentives for alAssets. For example, if Alchemix were to terminate bribing CVX voters, or were 3rd party incentives on an AlAsset pool to end. The amount of withdrawal would determine what quantity of alAssets were collecting yield from the incentive (for example, how much alAsset was in the 3rd party pool), and withdraw half of that Elixir from the curve pool. The Transmuter and Elixir minimum withdrawals would be expected to cover the rest over time. This approach ensures the Elixir can react to market events while also not providing instant exit liquidity (and thus sacrificing revenue and acting out of line of the ethos of the transmuter/Elixir) for all market participants.
DAI and ETH Transmuter/Elixir Modifications
The DAI Transmuter/Elixir modifications use specific parameters to address the current surplus of DAI and WETH held by the Elixirs, giving them a 12 week runway to be dripped into the TransmuterBuffer. The reduction of the transmuter flow rates in combination with the DAI and WETH deposit rate into the Transmuter (which will decrease the AvailableFlow) is intended to reduce the available flow to 0 in the same 12 week period. This helps reset the system since the AvailableFlow has grown in the months that the transmuters have not been in use. The combined value of the Elixir withdrawal rate and the adjusted transmuter flow rate is intended to match or exceed the old Transmuter flow rate. This reduces the amount of marginal-profit arbs that can take place while still ensuring a similar minimum alAsset burn rate when peg is under pressure.