alUSD-3Crv Convex Strategy

Stablecoin Score: 91/100 Overall Estimated Risk: 3/10 Projected Base APY: 2-5%

A full report along with scorecard may be found here: https://docs.google.com/document/d/1FaC4kbNF7pFKicl4xBr4zl1hzWK5G1kkNOqiVNGhhcI/edit?usp=sharing

Overview

Currently all OUSD in existence is backed by a basket of just 3 stablecoins (USDC, DAI, and USDT), however, there are other stablecoins that represent attractive opportunities for deploying OUSD’s reserve collateral to generate risk-adjusted yield. This proposal aims to establish the first new strategy that incorporates an additional stablecoin: alUSD from Alchemix via the alUSD-3Crv Pool on Convex.

alUSD - “unlocking future yield”

Alchemix Dollar (alUSD) was introduced in March 2021 as the first collateralized lending protocol supporting a like-kind yield-bearing position. This opened up interesting use cases where someone could deposit DAI, earn yield on that DAI, while still borrowing up to 50% of their collateral value in alUSD for spending. This was advertised as “unlocking future yield” as the loan would be automatically repaid by the yield generated by collateral. Collateral is routed into yield-bearing positions, with yvDAI as the first vault strategy, which has been expanded to include yvUSD, yvUSDT, Aave DAI, Aave USDC, and Aave USDT with Alchemix v2 launched in early Q2 of 2022.

Reserves & Pegging Mechanisms

alUSD can be minted through one of two methods:

alUSD can be issued as debt at a maximum LTV of 50% with DAI, USDC, or USDT as collateral. These stablecoins are then routed to the strategies mentioned above, which are all battle-tested DeFi blue chips. Currently almost all alUSD debt is backed by the yvDAI vault, and alUSD debt represents less than 10% of all alUSD in existence. Users may also create alUSD by exchanging for DAI/USDC/USDT at a 1:1 ratio. This represents the vast majority of alUSD today

Because of this, alUSD is overcollateralized with a healthy reserve of stablecoin assets, and a natural price ceiling of $1.00

alUSD maintains its peg stability through both DEX pools where alUSD is paired with other stablecoins as well its “Transmuter” module, which allows users to stake alUSD and receive either DAI, USDC, or USDT in a 1:1 ratio over time. The Transmuter works by providing arbitrage opportunities if alUSD drops below $1.00, streaming collateral from the treasury and the yield-bearing strategies to alUSD stakers over time.

In addition, Alchemix implemented the Elixir in April 2022, which is modeled off of the FRAX Algorithmic Market Operator (AMO) with the exception of not being able to mint alUSD directly into the LP pools. This AMO has become the primary way that alUSD re-establishes its peg with the Transmuter still available but no longer necessary.

Risks

Smart Contract: 3/10

The risks for this strategy are largely the same as those for any other Curve/Convex strategy, plus the underlying risks for alUSD. Curve and Convex are both battle-tested protocols whose smart contracts have secured billions of dollars in TVL over a period of one year, therefore, we estimate the smart contract risk to be relatively low. The protocol has already deployed a Convex 3Pool Strategy with no significant issues to date.

alUSD has a proven track record with over $100M in issuance over the past year of existence. Alchemix v2 has been audited by Runtime Verification with a continued engagement for any updates to the protocol. In addition, they offer a $1,000,000 bug bounty program through ImmuneFi.

More information: https://alchemix-finance.gitbook.io/user-docs/audits

Economic 3/10

For any DEX pool strategy, the biggest risk is the slippage which may occur when entering or exiting a pool. This is especially true if limited to a single-sided position, as the amount of coins returned can vary significantly depending on the shifting balance of the pool. Due to the alUSD Elixir helping to maintain peg stability, there should be limited risk when withdrawing collateral compared to other stablecoin pairs. The Strategist multisig can pay close attention to avoid significant slippage upon entrance or exit of the pool.

Governance (3/10)

Both Convex and Curve are governed by DAOs, and the vast majority of Curve’s CRV voting power resides with CVX holders. The largest holder of CVX is currently FRAX, followed by Badger and the somewhat defunct Terra. https://daocvx.com/leaderboard/

Alchemix is controlled by the Alchemix DAO of ALCX holders. To date, the ALCX DAO has acted in ways that benefit the future stability of the protocol, even despite other competitors such as Abracadabra experiencing explosive growth through less sustainable means. Alchemix also has benefited from a relatively slow governance process, often moving into new strategies or protocols well after the Lindy Effect has been established.

Historical & Projected Returns

The majority of yield from the alUSD Pool on Convex comes from CRV and CVX token emissions, which rely on voting power and sustaining the gauge over time. Currently ALCX DAO controls approximately 342,000 CVX, which have been used to incentivize the pool over time, along with modest bribes that have been consistent over the past several months. At a TVL of $105M and token prices for CRV and CVX of $1 and $5, respectively, this has equated to an APY of 3.5%.

The returns are highly sensitive to the underlying token prices, which have fluctuated wildly over the past several months. There is no guarantee that the APY will be sustainable, but it has remained relatively flat since the start of the bear market in July 2022 in the range of 3% to 7% APY at 100M TVL.

The projected returns from this strategy are in the range of 2% to 5% APY, depending on the amount allocated to the strategy.