Enable locking of OETH collateral + Add Convex Frax locking strategy

Summary

This proposal is to add a new Convex Frax locking strategy and enable the locking of up to 15% of OETH collateral for a maximum of 7 days.

Background

There is an opportunity for OETH to earn additional yield on Curve pools that have a frxETH pair. By deploying a new Convex Frax locking strategy, the protocol could earn FXS incentives in addition to CRV and CVX. Those FXS incentives could be converted to OETH and distributed to holders as yield.

To receive these FXS rewards, LPs must lock their LP tokens for a minimum of 1 day and a maximum of three years. On the frxETH/WETH Curve pool, for example, leveraging the Convex Frax strategy currently increases the projected APR from 3.53% to between 4.5 and 7.5%

While the yield is compelling, it is important to consider that deploying this strategy would introduce a fundamental change to a core promise of OETH: that every unit of OETH can be redeemed for the underlying collateral at any time. The proposed Convex Frax strategy involves taking an LP token from Curve, putting it into the Frax version of Convex, and then locking it for a maximum of seven days. This means that there could be a run on OETH’s collateral and any deployed to the Convex Frax strategy may not be liquid for some number of days.

Additionally, if the Convex Frax staking contract gets low on FXS, there is a possibility that we will not immediately be able to withdraw our tokens and access the collateral. This occurred in preliminary testing and the Origin team had to ask Frax to top up the FXS rewards. They did so quickly, but if they failed to do so in the future, the protocol would have to purchase FXS and deposit it into the staking contract to unblock the withdrawal.

In order to mitigate potential risk, I propose setting a 15% cap on the amount of OETH collateral that can be locked at any time, and enforcing a maximum lock duration of 7 days. This would mean that the vast majority of OETH would still be backed by unlocked collateral at all times.

I believe the yield upside for holders outweighs this potential downside given that:

• The waiting period would only apply to a small portion of OETH funds
• OETH has deep liquidity on Curve
• There is a precedent for multi-day wait periods to redeem our underlying LSTs (stETH and frxETH) using their dapps
• Users continue to reveal that they’re willing to sacrifice liquidity in exchange for higher yield (think: EigenLayer, which has a 7 day withdrawal delay).
• Even in the massive industry turmoil surrounding the USDC de-peg in Spring 2023, OUSD only required a maximum of 50% liquidity to satisfy holder demand

Overview

If approved, this proposal would signal the community's support for two next steps:

• Deploy a new Convex Frax locking strategy
• Lock up to 15% of OETH collateral for a maximum of 7 days

Note, OETH’s only strategy that currently fits the criteria for Convex Frax locking is the frxETH/WETH pool that has been approved by the DAO but has yet to be deployed. These parameters for locking OETH collateral could apply to other pools and strategies in the future.

The allocation of funds to the strategy would be gradual. At the discretion of the Strategists, the allocation will ramp up over the course of several weeks.

Disclaimer:

🤞🏼 APY on any pool or strategy can change quickly and does so regularly. This one is no different.