In the most recent governance proposal the community voted to take excess DAI in the Transmuter and reinvest it in Yearn to boost the rate of repayment for borrowers of alUSD. This decision has provided a great benefit to users of the protocol, and has created some of the best rates on stables in all of DeFi.
Building on the idea of putting this excess to work, some of the community members in our discord (Yunt Capital) were tossing around an idea that the Transmuter excess could potentially be levered by governance in V2 to actively manage the yield & rate of repayment between each of the three vaults. This would work by reallocating a portion of the yield earned in one collateral type, by using it to market-buy the collateral type of another vault. The effect would be an increase in the rate of repayment in loans against the market-bought asset, and decrease in the rate of repayment in loans against the market sold asset.
For example:
imagine we took a portion of the reinvested DAI in the Transmuter and used that to market-buy ETH, essentially replacing that DAI in the Transmuter with ETH. Doing so would have the effect of increasing the yield and rate of repayment on ETH, thus creating a much more attractive reason to borrow alETH. Conversely, it would decrease the current "boosted yield" of DAI and decrease the rate of repayment for alUSD loans. This strategy could be levered in any direction to increase the rate of yield/debt repayment for any of the vaults using yield from another.
For Your Consideration:
The purpose of this post is not to directly propose this as an AIP, or advocate for any specific implementation of this mechanism, but to flesh out the idea as a potential lever that could be added to the DAO; and to facilitate a discussion on the potential benefits, drawbacks, and risks. Listed below are some of our initial thoughts, but it's unlikely that we've thought of everything, so feel free to weigh in with additional considerations or expand on the below to indicate how you feel about it.
Thoughts on Benefits:
- Governance would be able to increase yield on any of the three vaults as needed, to be able to consistently provide attractive yield/repayment rates. For assets like ETH which traditionally provide lower yields in DeFi, this might allow us to keep rates competitive with riskier yield sources that we may not want to integrate with.
- This may allow ALCX stakers, who participate in governance and receive cash flows in the form of wBTC/ETH/DAI, to configure the allocation of assets they receive.
- Governance would have the ability to bootstrap supply of alETH/alBTC/alUSD by incentivizing borrowing, which may be helpful in creating more liquid alToken markets or additional utilities for alTokens in the broader DeFi ecosystem.
Thoughts on Concerns/Risks:
- The rate on yields set by governance might become selfishly driven by whatever asset governance holders like best
- Market trades of excess yield to another asset could result in slippage up to the preset slippage bound, causing a small net loss on total transmuter excess for every trade
- Gas costs for this kind of thing might be significant and worth taking into consideration as well
- Introduction of new contracts or additional complexity may be undesirable
Implementation Considerations:
- Inverse Finance provides DCA vaults, where yield earned on specific assets is automatically DCAed into a separate asset of your choice. Perhaps we could take the portion of the Transmuter funds that we want to reallocate, deposit into one of these vaults, and DCA the yield into the other collateral of choice. This might be useful in (1) abstracting away the need to manage the trading of excess we wish to reallocate, and (2) saving on gas fees required to perform those transactions.
- Over the counter buying could be used to avoid slippage and save money on gas fees as well
- This could also just be done manually instead
Credit to @Isthian for being the one to come up with this idea initially.
