This is a proposal following up the passing of “[RFC] A deeper collaboration with Frax Finance”. Specifics about the size of the alUSDFRAXBP AMO were left out of the poll. This proposal presents five different choices for Alchemix DAO governance to decide. Before presenting these choices, let’s go over the current status of the alUSD3CRV AMO.
At the time of this writing, our most recent Votium round was for ~$68k in value for alUSD3CRV, and the AMO is expected to receive approximately $60k in CRV and CVX tokens over the duration of the 2 week epoch. Alchemix DAO is currently locking half of the rewards as sdCRV and vlCVX to grow our influence in these DAOs, with the other half being used to bolster our DAO treasury. Currently the peg is holding over the AMO designated 0.991 USDC minimum target. Even after the great CeFi/CEX fallout, our pool can support a 100k trade at 0.9923 and a 1M trade at 0.9919, providing significant depth for our users, with 76.8M TVL in the entire pool.
The size of the alUSD3CRV AMO’s current assets are $46.9M in alUSD3CRV tokens, and 11.6M DAI in reserve. In total, that is $58.5M. To support the market liquidity, 9000 ALCX tokens per month are allocated to Votium incentives for alUSD liquidity between both 3CRV and FRAXBP pools on Curve.
An alUSDFRAXBP AMO has the chance to significantly improve the efficiency of the AMO. Currently, the alUSD3CRV AMO turns liquidity provisioning from being a 100% loss into only a 12% loss for the protocol. Frax will aid us in both the form of Votium incentives proportional to the FRAXBP in the pool and additional FXS rewards for LPs. Accounting for both of these, the alUSDFRAXBP AMO could very well make liquidity incentivization into a net positive gain for the protocol.
Initially the DAO will accumulate all harvest FXS tokens. FXS can be locked to gain influence and economic benefits in the FRAX ecosystem. Therefore, until there is any further governance action to change this policy, we will not sell any FXS.
The major decision that we as a DAO must make is how much we allocate to each AMO.
Choice 0: No alUSDFRAXBP AMO
Choice 1: Continue current AMO setup, but allocate the 11.6M DAI reserve to alUSDFRAXBP
This is certainly the most conservative choice in a sense. The DAI in reserve would be converted to alUSDFRAXBP tokens, which would make the AMO the largest LP in the pool. It would deepen the markets and increase the amount of support from FRAX, but it still would be about 1/5 the size of the alUSD3CRV AMO, and a larger more liquid complement to the main pool. The Votium budget would be split 80% to alUSD3CRV and 20% to alUSDFRAXBP
Choice 2: Split the AMO’s 50/50 in size.
This is the clear middle ground choice. Each liquidity pool has its own advantages and disadvantages, based on the stable coins you prefer between them. The 11.5M DAI reserve will also be split evenly between both AMOs. This would be respectful of the users who prefer interacting or LPing with DAI and USDT vs FRAX while also increasing the earnings ratio of the AMOs. The current Votium budget would be split between the two pools evenly.
Choice 3: Make alUSDFRAXBP the primary AMO.
This is the Fraximalist choice. 80% of both the 46.9M alUSD3CRV and 11.5M DAI will be allocated to the alUSDFRAXBP AMO, along with 80% of the Votium incentive budget. This choice would still leave a sizable 11.6M alUSD3CRV AMO and adequate support from incentives for liquid markets. The resulting alUSDFRAXBP AMO would control 46.72M of the pool’s liquidity, likely resulting in making alUSD liquidity incentivisation a net gain for the DAO.
Choice 4: Fraxchemical alUSD
Same as Choice 3, but 100% in alUSDFRAXBP and allowing the alUSD3CRV pool to be deprecated. This would be the most aggressive option of the three, resulting in the largest AMO gains. However, if users want to swap to DAI or USDT, they will face higher fees as the trade will need to be routed via USDC or FRAX. Another potential drawback is that any and all potential risk with FRAX will be passed along to alUSD without alternative markets to diversify with.
Regardless of the choice the DAO goes with, it is important to not disrupt markets with this move. As such, the transition process will be gradual. Since each Votium epoch lasts two weeks, each transitory transaction should coincide with the Votium epochs. Therefore, the process will be split across three of these epochs, taking 6 weeks total to complete. This should give time for LPs to rebalance along with us and not disturb the markets in any negative way.
In summary, the addition of an alUSDFRAXBP AMO will significantly increase the efficiency and sustainability of alUSD liquidity incentives, perhaps making them a profitable operation for the DAO. Five choices are presented, offering a range of options from a complete rejection to a complete endorsement. Each one has its own pros and cons depending on your perspective. To arrive at the consensus best choice, we will use ranked choice voting.