Convex LUSD Strategy

Summary

Deploy the generalized Convex strategy with the LUSD+3Crv pool as the first implementation. Agree to limit allocations to 100k of OUSD’s collateral.

Assessment

Stablecoin Score: 82.8/100 Overall Estimated Risk: 2/10 Projected APY: 2-6%

‣ Full report and scorecard https://docs.google.com/document/d/1yB4R2zRh0B29v3jrlY1_0CdaBNLMR3YsxQlzabomEaA/edit

‣ Tokenomics research https://docs.google.com/document/d/12BNIPbjML0l1McWkTrQToyxuIF2mbHbxqJ7FIl3X9uA/edit#

‣ Smart contract review https://docs.google.com/document/d/1sc9NFfn-ACetRZOPfE6DdRi78hf6zokPkzIU1ZQ2jz8/edit

Overview

With the recent deployment of the Convex OUSD Metastrategy¹, the groundwork has been laid for OUSD to access yield from Curve MetaPools that involve 3Crv being paired with a fourth stablecoin. Our recent audit with OpenZeppelin included code for a generalized Convex strategy that takes advantage of this capability and allows us to quickly deploy a new strategy for any 3Crv-based pool. A recent proposal² from our team suggested that alUSD-3Crv could be the first pool introduced with this new strategy, but further security review has led us to conclude that it wouldn’t be prudent to get exposure to alUSD without sufficiently more monitoring and risk mitigation.

We are now proposing to start with LUSD-3Crv as the first Curve MetaPool that we deploy with the generalized Convex strategy. This would effectively introduce LUSD as the first stablecoin beyond DAI, USDC, and USDT that OUSD would become directly exposed to. It’s also important to note that we don’t recommend allocating significant funds to the LUSD pool immediately due to the stablecoin trading well above its intended peg. We view LUSD-3Crv as one of the pools with the lowest systemic risk that we can use to test out the generalized Convex strategy and confirm that everything works as intended with a small number of funds. Once LUSD’s price stabilizes and the protocol matures, our strategy will already be in place.

LUSD - the unstoppable stablecoin

LUSD is a censorship-resistant, decentralized stablecoin. It allows users to borrow against ETH (only) and pay a one-time fee instead of variable interest rates. The collateralization requirement is only 110%, although borrowers risk being liquidated at any ratio below 150%. This allows for greater capital efficiency than other protocols, although the actual collateralization ratio ends up being much higher in practice.

The entire Liquity protocol is governance-free and immutable. Since the contracts have been deployed, no upgrades or alterations can be made. The team itself does not provide a front-end interface that could be shut down. Independent DApp developers are incentivized to create applications for users to interact with the protocol.

Risks

Smart Contract: 2/10

Liquity’s smart contracts have been thoroughly audited by Trail of Bits and Coinspect. The protocol has also been live on Mainnet with TVL as high as $4.5 billion and no exploits. Since the contracts are immutable, there no new vulnerabilities can be introduced. Our team has also conducted an internal review of the contracts and found no major concerns. Beyond introducing exposure to LUSD itself, the proposed strategy would not introduce any new smart contract risks that are not already present in the current Convex strategies employed by OUSD.

Economic 3/10

LUSD has been trading above $1.00 for several months. As long as this remains the case, we will incur upfront costs to enter the Curve pool. If we do so and then LUSD’s peg is restored, we would suffer additional losses by exiting the LUSD position at a lower price.

Governance 1/10

Liquity’s smart contracts are immutable and cannot be upgraded or censored. While regulatory actions could impact the team, holders, or exchanges where LUSD is traded, the stablecoin itself is not subject to any direct regulatory risk.

Historical & Projected Returns

The majority of yield from the LUSD Pool on Convex comes from CRV and CVX token emissions, which rely on voting power and sustaining the gauge over time. DefiLlama’s algorithm predicts with “High” confidence that the APY is unlikely to fall below 2.80% in the next four weeks.

Risk Mitigation

Due to the limited LUSD liquidity available on DEXs and LUSD currently trading above the $1.00 peg, we will establish a cap of 100k on the amount of 3Crv funds that can be deployed to this strategy. This will limit the positive impact that the strategy could have on OUSD’s APY but will limit our exposure to the Curve pool becoming permanently imbalanced.

Reference

¹ https://vote.ousd.com/#/proposal/0xda10c0042d88482c26ae8ec98f3e09d3cd687376f6a5801f6b7f1e909bf834f8 ² https://vote.ousd.com/#/proposal/0xb2fe51c00e3662afa2341507959c2ba5d945b60e63620a2f5d40c8996353c1cb