AIP - 73: Enable Transmuter rebalances through negative fees

This is a vote to set up negative fees with the protocol to sponsor bC3M acquisition when the protocol is over-exposed to EUROC.

Context

Transmuter maximum exposures

Right now the Transmuter is exposed at 67.86% to EUROC and 32.14% to bC3M (you can check the Transmuter's exposure to its collateral assets in real time here). Transmuter comes with variable fees that depend on the exposure to each of the assets in its backing. Here is how the initial setup fees are looking like for Transmuter.

In particular, it's worth noting that fees are such that there are some exposures for which it's going to be impossible to mint with one token or burn for another one. For instance, if approximately 3.7m more agEUR are minted from EUROC, the system will reach its maximum exposure to EUROC, and it'd be impossible to mint more agEUR from EUROC.

At this point, it'd be only possible to mint with bC3M or to borrow agEUR (at a rate probably higher than what is given through agEUR staking contract) with the Borrowing module.

The thing is that the type of users who can mint from bC3M is probably not the same as the ones who can mint from EUROC. bC3M requires a Backed KYC and people who can already access bC3M might be less interested in agEUR savings contract because they can get what powers its underlying yield. As such, in this situation even if there is demand for more agEUR to be minted from EUROC, the protocol may be unable to fill it, and might leave aside some potential for growth.

It's not impossible that people come to mint with bC3M but this is far less likely.

Support for negative fees

The Transmuter mechanism supports negative fees. These can only be set by the governance multisig. Reason for having negative fees is to give financial incentives to arbitrageurs to mint from one asset. While some bC3M holders may be fine with just minting and buying agEUR at a discount some more advanced players may prefer to simply close their arb in a couple of transactions, meaning minting agEUR from bC3M and instantly burning these agEUR for EUROC earning more EUROC than what they used to buy bC3M in the first place.

With Angle savings infrastructure live, we may get to the point where many more people are coming to mint with EUROC thus bringing the protocol to this limit exposure.

Proposal

While an initial proposal was to enable the governance multisig to set negative fees to open arbitrage opportunities of up to 0.5% in the system, after a careful mathematical analysis, we're now proposing to take advantage of the support for negative fees in the system to let the rebalances happen automatically.

In practice, the exact fee schedule we're pushing for here is the following.

For EUROC:

• Mint: 0% fees till 73% exposure, 0.05% at 74% exposure, 0.1% at 74.5% and 100% above 75%. This means that it’s impossible to mint EUROC above a 75% exposure
• Burn: 100% burn fees below 50% exposure (we cannot have less than 50% exposure to EUROC), 0.1% fees at 50.5%, 0.1% at 59% and 0% at 67% exposure and beyond

For bC3M:

• Mint: -0.4% fees till 25% exposure, -0.35% at 33%, 0% at 40% exposure, 0.2% at 49.5% exposure and 100% above 50% exposure (exposure to bC3M cannot be greater than 50%)
• Burn: 100% burn fees till 25% exposure (exposure to bC3M cannot be less than 25%), 0.5% at 26% exposure and beyond

How to interpret this: whenever the exposure to bC3M reaches less than 40%, there is a negative fee to come and mint with bC3M. For instance at 33% exposure the fee to mint from bC3M is -0.35%, which means that to get 1 agEUR you can bring 0.9965€ worth of bC3M. At which point burning this agEUR for EUROC comes with no cost: an arbitrageur can earn 0.35% from the process of rebalancing the protocol's reserves.

Note that the evolution of the fees between two thresholds is linear, which means that there is a price discovery in what the market makers minting from bC3M will be able to accept. For instance, the fee between 40% exposure to 33% evolves between 0% to -0.35%: this means that there is going to be a form of competition between market makers to be the first one to take the arbitrage: like one may be fine with a 0.35% discount for the whole process while another one may be fine with a 0.3% bonus for this, in which case this last market maker will take the arb first.

With the fee setup proposed and assuming market makers are ready to accept a 0.35% discount, this would result in a convergence point to 67% EUROC - 33% bC3M (as currently).

The 0.35% estimated arbitrage fee here comes from the fact that Backed takes a .2% minting fee and that arbitrageurs/market makers taking the arb may want to be compensated for this. The upper bound enabled within the system proposed here is an upper bound on the fee that can effectively be set by the governance multisig.

Given the high burning cost for C3M, these negative fees do not open infinite arbitrage loops within the protocol and there is no risk of having the protocol's reserves depleted: it will always converge.

People could mint agEUR with EUROC to drastically increase the exposure to EUROC, hence trigerring the negative fees for bC3M, but their arbitrage would only aim bring the protocol back in a situation where it's exposed to around 67% EUROC - 33% bC3M if they were to burn all the agEUR they got.

Note as well that as part of the fee schedule introduced, 0% mint and burn fees are introduced for EUROC. This is meant to enable people to view the upcoming stEUR contract as the place where you can put your capital at rest, and enter with no fees. Fees will not always be null but the majority of the time the exposures should lie in an area where minting with EUROC comes with no cost.

Implementation

There are fee setters available in the Transmuter system, the protocol governance multisig will just have to set the fees with the schedule proposed in the Google Sheet.

Value to the protocol

This proposal guarantees that whenever people have minted a lot of agEUR with EUROC, the protocol will have the tools to increase back again its exposure to bC3M and therefore will be able to sustain the yields it is paying through its savings infrastructure.

It is key in ensuring that what is being built works as well with $1m in TVL as with $1bn.

Voting Options

1. For, dynamic fees
2. Against, do nothing