agEUR Seniority in the Core Module

This is a vote to decide on whether agEUR holders should be considered senior over other protocol stakeholders (Standard Liquidity Providers, Hedging Agents) in the Angle Protocol Core module when there is a loss that is not automatically handled by the smart contracts and the voted parameters.

In the specific case of the Euler hack and the potential losses faced by the protocol’s Core module, deciding on agEUR seniority would mean that once the protocol reopens its peg should be defended using the collateral leftover in the protocol, potentially at the expense of other protocol stakeholders (Standard Liquidity Providers and Hedging Agents notably). Taking this vote will give the DAO the foundation to move forward with next steps following the Euler situation.

Context

On March 13th 2023, Euler Protocol suffered a $197m hack, which led Angle Protocol to lose the 17.6m USDC it had lent on Euler at the time.

Prior to the Euler hack, the Angle Core module had a Total Value Locked (TVL) of approximately $36.1m and the protocol had holdings of different assets spread across various chains worth ~$1.0m. 17.3m agEUR had been minted through the Core module.

In addition, the protocol had:

• ~$11.8m in deposits from its Standard Liquidity Providers
• ~$71.0k in deposits from Hedging Agents
• a surplus of approximately $6.5m

If the funds from the hack (17,614,940.03 USDC) were to be definitely lost, the value of the DAO holdings would be down to approximately $19.5m.

In this case, the amount of reserves in the Core module would become inferior to the value of the claims of agEUR holders, of Standard Liquidity Providers, and of the remaining hedging agents in the protocol, as a whole. Should agEUR be considered senior, as the value of the assets of the protocol remains superior to the value of the agEUR issued by the Core module, the protocol could defend its peg using its collateral reserves.

This page has more details on the state of the protocol after the hack.

As of the 30th of March 2023, a portion of the funds of the hack has been repaid by the hacker. Yet, it is still uncertain how this will route to Angle DAO and with what timeline. Even if a proportional amount of what has been repaid by the hacker was given back to the protocol through Euler, the protocol would still be in a loss situation.

Following the hack, the main features of the protocol were paused by its emergency multisig.

Due to the hack and to the protocol being paused, agEUR has lost its 1€ peg. As it stands, if the contracts were unpaused with the pre-Euler hack parameters, it would lead to a bank run situation as agEUR would be redeemable 1-1 against reserve assets, and sanTokens would be redeemable at 1-1 at first, then with a slippage once the collateral ratio is lower. In the end, the last users would be left with nothing as the smart contracts would likely have nothing left to redeem assets against.

Some have suggested that instead of running into this bank run scenario, the remaining assets could remain frozen and be redistributed differently according to what is voted. The key question to decide on, regardless of the outcome of the Euler hack, is to determine the order of “seniority” among the different token holders of the protocol.

The DAO needs to decide this question not only for the Euler situation, but for all potential such events in the future where a loss accrues in the protocol’s Core module and is not automatically taken into account by the smart contracts or the voted parameters.

Vote

The uncertainty from the Euler situation (about the distribution of the repayment proceeds by the Euler DAO and subsequent repayments by the hacker) may last for quite some time, so the vote here is to clarify the situation for all Angle Protocol stakeholders.

This vote is done here in the context of the Euler hack where the DAO may potentially experience a loss, but the intent of this vote is to be a general resolution about the seniority of holdings in the protocol’s Core module.

While, following the Euler situation, a lot of detailed scenarios have been discussed on Angle Governance forum and on Discord, the point of this vote is to decide whether agEUR must be considered senior in the Angle Protocol’s Core module over other protocol stakeholders (Hedging Agents, Standard Liquidity Providers) when there is a loss that is not automatically handled by the smart contracts and the voted parameters. In the context of the Euler hack, seniority for agEUR holders would mean that if and when the protocol’s Core module reopens, agEUR peg should be maintained using the available collateral reserves in the protocol.

Implementation and next steps

This vote should not be followed by any immediate action on the protocol. Because this vote is about principles rather than implementation, any plan to solve the current Euler situation if the loss stays as it is would still need to be discussed by the DAO and abide by the foundation this vote provides regarding seniority.

For the specific Euler case and the current potential loss faced by the protocol, conditions under which the protocol should be reopened would need to be discussed and addressed in future proposals and votes. Based on the outcome of this vote, and should the protocol loss remain as it is (with nothing from the hacker redistributed to the protocol), there could be a lot of different scenarios to consider to solve the current situation. In the case where agEUR is voted as senior, there could be discussions on the rest of the waterfall, with for instance ideas on whether some Standard Liquidity Providers should have seniority over others, or whether there should be some form of preference for governance token holders in a subsequent breakdown of funds. If agEUR is not voted as senior, the same considerations could arise around the levels of seniority of SLPs or HAs.

For this vote, and for future discussions, there are already some places in the docs that refer to this kind of situation:

• Angle Core Module collateral settlement with an example implementation here.
• Page about SLPs
• Angle Core Module risks and emergency solutions

In all cases, there would also need to be discussions on how to technically implement the next steps that would have been chosen.

Voting Options

1. For agEUR holders seniority over other protocol stakeholders in the Angle Core module

For establishing agEUR seniority over any other assets of Angle Core Module when there is a loss that is not automatically handled by the Core Module’s smart contracts and the voted parameters. In particular, this means that the agEUR holders would be senior to other protocol stakeholders (including Hedging Agents and Standard Liquidity Providers).

2. Against agEUR holders seniority over other protocol stakeholders in the Angle Core module

In this case, specific discussions would need to be held to see how to distribute a loss among protocol stakeholders (whether agEUR holders, Hedging Agents or Standard Liquidity Providers) whenever a loss that is not automatically handled by the Core module’s smart contracts and the voted parameters accrues.