AIP-23 - Accept LUSD on mainnet and Optimism as collateral asset of the Borrowing Module

This vote propose the addition of LUSD as a collateral asset to borrow AgEUR

Hello Angle Community,

I’m TokenBrice, an active educator and contributor in the DeFi community since its inception and Liquity’s DeFi Strategist. I’m happy to chime in today to propose the addition of the LUSD stablecoin as a collateral asset for the borrowing module, both on mainnet and Optimism.

Context

With the Angle Borrowing module deployed on Ethereum and Optimism, LUSD could be a great next step to diversify the collateral exposure of the protocol into one of the few stablecoins maximizing censorship resistance.

LUSD is minted on mainnet, where most of its liquidity lives (>$70M TVL over several pools on Curve, Uniswap, and Saddle) and also exists on Optimism, with >$5M of liquidity on the DEX Velodrome.

LUSD has a Chainlink price feed (in USD), available here: https://market.link/feeds/b6c87f2d-a06c-4fec-88f2-c98bf8a8f4e3

As well as sufficient liquidity to ensure smooth liquidations if needed.

Proposal

This proposal would add LUSD on mainnet and Optimism, with the following proposed parameters:

Mainnet:

    params: {
      debtCeiling: parseEther('3000000'),
      collateralFactor: parseAmount.gwei('0.88'),
      targetHealthFactor: parseAmount.gwei('1.05'),
      borrowFee: parseAmount.gwei('0'),
      repayFee: parseAmount.gwei('0'),
      interestRate: interestRate,
      liquidationSurcharge: parseAmount.gwei('0.98'),
      maxLiquidationDiscount: parseAmount.gwei('0.05'),
      whitelistingActivated: false,
      baseBoost: parseAmount.gwei('1.5'),
    }

Optimism:

      debtCeiling: parseEther('500000'),
      collateralFactor: parseAmount.gwei('0.86'),
      targetHealthFactor: parseAmount.gwei('1.05'),
      borrowFee: parseAmount.gwei('0'),
      repayFee: parseAmount.gwei('0'),
      interestRate: interestRate,
      liquidationSurcharge: parseAmount.gwei('0.98'),
      maxLiquidationDiscount: parseAmount.gwei('0.06'),
      whitelistingActivated: false,
      baseBoost: parseAmount.gwei('1.5'),

Implementation

Launching a new collateral asset is straightforward and only asks to deploy an oracle and a proxy on top of a base vaultManager implementation. There’s no extra maintenance needed to have this working, except the keeper bots monitoring the assets.

Value to the protocol

Adding LUSD as collateral on Angle will help the protocol diversify away from centralized stablecoins such as USDC currently accepted on Arbitrum, Polygon or Optimism. Furthermore, since LUSD is a dollar-based stablecoin, adding it as collateral on Angle enables shorting the €.

Finally, depending on Angle’s DAO and team reactiveness, Angle Protocol could be the first protocol to enable LUSD as collateral, which should lead to significant demand. Since the Tornado Cash events, there has been strong demand across DeFi for more censorship-resistant stablecoins like LUSD. Having LUSD as collateral on Angle will help answer this need and result in sustained utilization. Besides, borrowing an €-based stablecoin from LUSD would greatly facilitate the off ramping process for Europeans looking to acquire IRL goods using their ETH as collateral on Liquity. (Liquity - Open Trove with ETH > Borrow LUSD > Angle - Borrow agEUR from LUSD > Offramp AgEur, for instance through jEUR)

Risks

The main risk is accumulating bad debt on LUSD-related Trove if opened positions cannot be liquidated. Despite fluctuations, the LUSD price has stayed within a $1.00-1.05 for most of its existence, mitigating that risk. Moreover, volatility spikes on LUSD usually are observed upward, as many borrowers are rushing to buy back LUSD and repay their debt. Therefore, it should not lead to bad debt.

Furthermore, those risks can be addressed by capping the LUSD vault to a reasonable level to ensure smooth onboarding. They can be raised later with another proposal if desired.