AIP - 89: Seed a EURA/USDA liquidity pool

Hello,

This is a vote for the protocol to seed a EURA/USDA pool on Uniswap V3 (0.05%) on Ethereum.

Context

The USDA and EURA native mechanisms (Transmuter) have been integrated by 1inch. This means that anyone coming with USDC from 1inch may be able to get access to USDA, and anyone coming from EURC may be able to get EURA.

Directly seeding liquidity in pools is a way for the protocol to avoid having to incentivize liquidity on these pools and minimize its cost of capital.

Proposal

We propose to seed an EURA/USDA pool on Uniswap V3 (0.05%) on Ethereum with 5m USDA and the rest of EURA minted by the protocol through its AMOs.

Implementation

The liquidity in the EURA/USDA liquidity pool will be deposited in the bounds between 0.8 to 1.6 EUR per USD.

The cost of making USDA deeply liquid is done here at the expense of a potential divergence loss + loss vs. rebalancing.

We have spent a lot of time simulating the impact on the protocol to put this liquidity, both for EURA and USDA reserves. Here, we built a dashboard enabling you to simulate different scenarios of liquidity, volatility, ...

Above is a simulation of how the payoff looks like vs. a simple hold strategy following some conservative hypothesis on the organic volume on the pool.

Payoff with price variations

Assuming the price of EUR goes to $1.25 and a daily volume of approximately $100k, the protocol would lose ~40k to IL. If the price of EUR goes to $1, and with the same volume conditions, the protocol would lose $70k to IL.

Currently, the cost of capital for the protocol on its EUR/USD pools is approximately at 20%, this means that sustaining a pool of this size would cost approximately $2m a year in incentives to the protocol.

With the equity backstop of the 2 stablecoins, the protocol can absorb a potential loss of this size. Note that this pool is just the first phase in the launch of the Forex operations of the protocol, and we've been working on more advanced mechanisms to ensure that the protocol statistically profits from these operations. We'll share more on this soon.

Payoff with no price variation

On the upside if the EUR/USD price isn't moving or comes back to normal, and assuming $100k of daily volume, the protocol would earn $40k a year from this.

With a $1m daily volume, the protocol would be earning $200k a year.

Accounting Considerations

While EURA and USDA are independent stablecoins, this pool will create some contained connexion between the balance sheets of USDA and EURA.

Let's say the pool starts at 5m EURA - 5m USDA.

In the USDA balance sheet, there are 5m USDA in assets and 5m USDA in liabilities, and equivalently in the EURA pool.

Now let's say that there is some activity and the composition of the pool is such that the pool has: 3m EURA - 7m USDA because people swapped USDA for EURA.

This means that some EURA are now out there in circulation backed by USDA.

The balance sheet of USDA here remains unchanged: 5m USDA in assets and 5m USDA in liabilities.

But when it comes to EURA, the liabilities remain the same: it's the 5m EURA that have been minted. Assets are now the 3m EURA and the (7m-5m) USDA that were used to get the (5m-3m)EURA which are now in circulation.

In short, there are some USDA in EURA balance sheet.

This direct deposit does not mean that EURA and USDA are created out of thin air, but rather that EURA may be in some occurrences be backed by USDA, itself backed by the assets in its Transmuter, and conversely.

Voting Options

1. For, seed pool
2. Against, do nothing