EGP-13: mStable Save <> Element Finance proposal

EGP-13 Title: <mStable Save <> Element Finance proposal> Author(s): https://twitter.com/0xloth Type: Asset Onboarding Proposal Date Proposed: <2022-09-13> Date Ratified:

References

• mStable Landing Page
• mStable Analytics
• mStable Docs
• mStable Snapshot
• mStable Governance Forum
• mStable Save Contracts
• mStable & Risks

Sentence Summary

This proposal is a temperature check for the addition of a mStable strategy to Element Finance built on top of the Save product

Paragraph Summary

A couple of months ago, was initiated a discussion with the Element team about how mStable and Element Finance could partner to create a fixed-rate market on top of mStable Save & the mUSD asset

Motivation

Element Finance currently supports multiple vault strategies. The APY for most of them is highly reliant on the market bonanza. On the flip side, mStable Save (because of the plurality of its yield sources, especially its embedded AMM fees) is market-agnostic and produces a highly resilient yield

Creating a fixed-yield market on top of Save would offer an additional layer of resiliency, highly appreciated by long-term-oriented depositors, looking to lock in capital for a duration of>1 year. We believe this user class is of value for Element and is relatively underserved at the moment.

Beyond this, mStable alongside Element, are early adopters of the ERC-4626 standard drastically improving the composability of DeFi yield-bearing vaults. 

Save has recently been upgraded to be ERC-4626 compliant, the integration work of the vault shall be minimum.

More generally, the benefits would be:

• Consistently strong APY
• Long-term depositors attraction
• Trustless and battle-tested contract
• ERC-4626 compliant integration

More generally, we would love mStable Save to be part of the Element Finance ecosystem.

In the last few months, mStable has been heads down building a generalisable, composable and market-reactive multi-vault architecture powered by the ERC-4626 standard.

Also, we closely followed Element deployment on Aztec connect. mStable is very close to the Aztec team and is working on integrations on their network as well.

Specification

Classify the proposed new asset and all related underlying assets. The specification should be detailed enough to allow for risk analysis (DAO due diligence report) and for implementation to begin as well as testing. The specification for asset onboarding EGPs must include the following components:

Asset Classification

1. Name of the proposed asset.

mUSD 

1. Strategy or single yield source.
   1. Underlying asset classification

Stablecoin

1. List of all underlying assets

mUSD is the first meta-asset introduced by mStable. mUSD is a USD-pegged crypto asset in its own right, backed by a basket of selected USD stablecoins. The assets currently underlying mUSD include: USDC, USDT, DAI, sUSD

As of today, the basket breakdown (Liquidity + %) is the following: 

• sUSD 3.62m 11.24%
• DAI 9.48m 29.42%
• USDC 9.67m 30.00%
• USDT 9.46m 29.34%

If the underlying asset(s) is a stablecoin.

1. What mechanisms does it use to maintain stability?

mUSD is 1:1 backed by its underlying basket 

The basket is constantly arbitraged through mUSD native AMM. Each asset within the basket has a set of max and min weights. Currently, these are set to 5% and 50%. This means that no single asset could make up more than 50% of the basket nor less than 5%. This is to limit exposure to a single underlying asset in the unlikely case of a depeg.

1. If it's not a stablecoin, what drives the underlying asset(s) price?

N/A

1. Yield source(s) according to each underlying asset.
   1. Organic (e.g. lending, borrowing, underwriting risk).

mStable deposits 98% of mUSD's underlying assets to established money markets to earn a base interest rate. This rate is then further increased by distributing mStable Swap fees and liquidating external protocol incentives.

mUSD exposition breakdown is:

• 40.5% to Aave
• 59.5% to Compound

If we break down Save APY, 55% of it comes from lending interest revenues on Aave & Compound, 22.5% from our AMM swap fees & the remaining 22.5% from platform rewards liquidation. It would mean that 25% of Save's yield is independent of lending protocol and their inherent risk. Save APY is hence fully organic, market-neutral and ultra-consistent.

As of now, there is $13m deposited into Save on Mainet (Down from $45m ATH earlier this year)

1. Emissions.

Unrelated to mUSD & Save

1. Inflation.

Unrelated to mUSD & Save

1. Enumerated underlying asset(s) liquidity.
2. Can the asset(s) protocol economics be modified?
   1. What economic protocol parameters can be modified?

Economic protocols that can be modified are: fees, rewards liquidation destination

1. What are the requirements to change protocol parameters?

mStable is a fully decentralized protocol. MTA holders can propose changes affecting contracts, fees level, and potentially new strategies.

mStable is governed by MTA holders who have staked their tokens to participate in the community-based proposal system.

Anyone can participate in the mStable governance process by joining discussions in either the discord or public forum. Ideas are then formalised and proposed to the community for on-chain signalling by MTA holders

1. Asset strategy fixed or flexible.
   1. If flexible, who/what is able to modify the strategy?

MTA holders can propose changes affecting contracts, fees level, and potentially new strategies.

However, it has been stated by the core team since the inception of the Save product that its risk level and strategy complexity will be serving a very specific risk profile and won't be changed.

1. *List all modification requirements and scenarios. *

Stablecoin Yield Source change

Proposed Term Duration

Term length: 2 months

Start date: 01/10/2022

Technical Implementation

• The final code that will be used directly in the on-chain vote to execute the EGP.
• Refer to the [Yearn Vault AYearn Vault Asset Proxy Implementation Guide
• There should exists a whitelist of people who are qualified to create the implementations on-chain (i.e the proposal).
• Initially the whitelist will be individuals who have successfully created a proposal on-chain. Currently that list would be:
• Element Core Team
• Greg
• John
• Members who submit their own proposals (have the code written), and successfully execute on-chain, will be added to the whitelist.
• If a proposal requires implementation by someone else, the DAO will first enlist from the whitelist, if no one from the whitelist is able to take on that task, the DAO will put a bounty out for someone to make the proposal.
• This requires funds to exist that can be spent perhaps a few thousand dollars, and we can determine bounty sizes from there.

Test Cases

For the implementation or testing of the technical implementation.

Security Considerations

Proposed Asset's Reputation and Security.

mStable is a decentralized stablecoin ecosystem producing sustainable yield on USD. The protocol saw more than $6bn in transaction volume on its AMM, has been operating for 24 months without interruption or hacks and is one of the safest projects in DeFi for stablecoins.

For everything about risk, feel free to visit this

3. List of all directly related protocols to the classified assets above

• Aave
• Compound
• Circle
• Synthetix
• Tether
• Maker DAO

4. All relevant audit information including a report (if public)

If not public it needs to be acknowledged.

• List any past vulnerabilities or exploits (including stolen funds).

None

• List any exploits or discovered vulnerabilities by white hat or bounty programs

None

Technical Review Plan or Audit Information

• Third-party audit provided and or sign-off from security pod

Please find below mStable audits

• Consensys Diligence
  • Bramah Systems
  • Certik
  • PeckShield
  • DeFi Safety: 93% Score

Next Steps (Voting Outcome Summary)

• Discuss this proposal on the forum and discord.
• Implement a poll on this proposal on Snapshot.

Should this first round of partnership be a success, it seems they are plenty of potential synergies and convergences between Element & mStable roadmaps to offer users appealing yield opportunities