eTP 1: Allocation of DAO Treasury to EUROC and WETH

Summary

Proposal includes a near-term commitment to allocate $3 million of the $32.6 million raised in the recent treasury diversification event from USDC to EUROC and $1 million into WETH. These funds will be intended for securing Uniswap v3 oracles and laying the foundation for promoting EUROC to the collateral tier. This proposal paves the way to enabling on-chain EURUSD FX trading via Euler.

Motivation

The motivation behind allocating treasury funds to EUROC and WETH is three-fold:

1. Further treasury diversification into high-quality stablecoins

The DAO holds a treasury that, until the recent funding round, consisted of approx 5.4m EUL tokens (approx 20% of the total EUL).

Upon the treasury diversification funding round in early June, approx 9% of EUL were converted into USDC. After this event, the DAO now holds a treasury consisting of 2,468,672 EUL tokens (approx 9% of the total EUL) and about $32.6 million worth of USDC.

Should the proposal pass, the DAO treasury will consist of:

1. $3 million of EUROC
2. $1 million of WETH
3. $28.6 million of USDC
4. 2,468,672 EUL (approx 9% of the total EUL)

EUROC would partially hedge FX risk and further represent the global nature of Euler users and stakeholders. The Euro is the world’s second largest reserve currency, after the US dollar, and is used by at least 400 million people daily. For the DAO, EUROC is also advantageous given potential expenses such as grants and work from direct contributors based in the EMEA regions.

2. Providing EUROC Liquidity into Uniswap V3 to strengthen oracles

The risk team will explore the best way to strengthen Uniswap V3 oracles while protecting the treasury funds from market risks. While the exact proposal for capital allocation will be handled in eTP 2, one possible allocation strategy could be:

A. Provide $2 million EUROC and $2 million USDC to the EUROC/USDC 5bps fee tier.

Liquidity split:

1. 10% of liquidity provided full-range
2. 20% of liquidity provided within 50% price range around spot price
3. 70% of liquidity provided within 10% price range around spot price

Given EUR/USD trades within a tight band, it makes sense to allocate most of the funds around the spot price to generate trading fees and protect the oracle from multi-block attacks.

While most of our analysis has focussed on 1-2 block attacks which require extreme price manipulation, multi-block attacks are less explored and potentially much more feasible. They require manipulation of oracles by a much smaller magnitude, which is why we believe it makes sense to deploy liquidity around a tighter band.

B. Provide $1 million EUROC and $1 million WETH to the EUROC/WETH 5bps fee tier.

Liquidity split:

1. 20% of liquidity provided full-range
2. 50% of liquidity provided within 100% price range around spot price

We expect similar volatility from EUROC/WETH as from USDC/WETH, which is why allocating the liquidity around a much wider price band is appropriate. Nevertheless, the multi-block attack described earlier demands a more concentrated position as per our research.

3. Paving the way to enabling on-chain EUR/USD trading via Euler and Circle

Assuming a strong pricing oracle and liquid on-chain FX markets, the risk team will be in a place to propose EUROC as a collateral asset on Euler. This would potentially enable Euler to capture a portion of the $6 trillion per day forex market.

An on-chain FX market has strong advantages vs TradFi FX markets:

1. Unified pricing feed: FX pricing in TradFi is extremely fractured and arcane. Bringing that to a public ledger like Ethereum will allow for transparency not seen before in FX.
2. Limiting market manipulation: given the public nature of blockchains, high-impact event-driven price manipulation would be substantially easier to track and prevent.
3. Weekend trading: on-chain FX could allow traders to hedge weekend risk.
4. Enabling anyone to LP into FX, not just the biggest market makers.
5. Opening FX to DeFi Natives like DAOs that want to interact with DeFi, not TradFi.

Euler is strongly positioned to enable this as, unlike competitors, it has an efficient position building engine. For eg, instead of lending EUROC, borrowing USDC, swapping into EUROC and recursively doing this in multiple steps, one could do the following:

1. Deposit 1000 USDC as margin
2. Mint 2000 eUSDC (assets), 2000 dUSDC (liabilities)
3. Swap eUSDC into eEUROC

Hence, you’ll get:

1. 1000 USDC margin
2. 2000 dUSDC (short USDC)
3. 1904 eEUROC (long EUROC, assuming 1.05 EUROC/USDC price)

In fact, one could post any collateral asset enabled on Euler as margin and put on a directional FX trade in one click.

Given Euler’s market-based liquidation module, users will lose less on average in the event of liquidations. This and the flexibility of the architecture makes Euler an institutional-grade solution for bringing FX flow on-chain.

Specification

1. How is EUROC different from USDC?

EUROC will be issued by Circle under the same full-reserve model like USDC.

2. Where will the euro reserves of EUROC be held?

Circle will hold Euro-denominated banking accounts at leading financial institutions, beginning with Silvergate Bank in the US.

3. What is Silvergate bank?

Silvergate is a leading bank in the realm of fintech and crypto. They operate the SEN (Silvergate Exchange Network), which allows clients to issue and redeem USDC and EUROC 24/7. All USDC and EUROC are fully redeemable 1:1 for fiat currency if desired.

4. Who audits EUROC?

Grant Thornton LLP will be issuing monthly attestations. Circle’s financial statements, which include EUROC reserves, are audited annually and filled with the SEC.

5. When will EUROC launch?

EUROC will launch on the 30th June, 2022.

6. What integrations are already in the making?

The DeFi integrations underway include Compound, Curve, DFX, Uniswap. Exchanges include Binance.US, Bitstamp, FTX and Huobi Global. Custodians include Anchorage Digital, CYBAVO, Fireblocks. Wallets include Ledger, Metamask institutional.

7. Which users is EUROC targeting?

EUROC is targeting exchanges, institutional traders, businesses and individuals. Judging by upcoming integrations, EUROC may become an integral part of DeFi and enable on-chain FX arbitrage. It could also become an integral part of other DAO treasuries, especially for teams based in Europe, the Middle East, and Africa.

Implementation

If eTP 1 is approved, the DAO will acquire $3 million worth of EUROC and $1 million worth of WETH via Uniswap, Curve or DFX at minimal market impact over the next few days.

Assessment

Given EUROC is based on exactly the same mechanism as USDC, which has proven itself as one of the most reliable DeFi assets, the risk of loss of funds for the DAO is limited. If this proposal is passed, it lays the foundations for potentially enabling EUROC as collateral on Euler, building an on-chain FX market, research collaborations between Circle and Euler, and more.

Risk assessment of providing liquidity into Univ3 and EUROC as collateral will be handled in another proposal subject to eTP 1 being approved by token holders.

Vote

The vote for this will be conducted via Snapshot till 5 July 2022, 9am EST. Here's the link to vote:

Relevant Links

https://www.circle.com/en/euro-coin https://support.usdc.circle.com/hc/en-us/articles/7085902140052-What-does-it-mean-to-tokenize-USD-and-redeem-USDC-