OUSD Convex Metastrategy

Overall Estimated Risk: 3/10 Projected Base APY: 2-6%

Overview

All OUSD in existence is backed 100% by a basket of stablecoins, which means that any independent actor may acquire OUSD in the market and redeem for one of the underlying stables, minus a redemption fee currently set at 0.25%. During times when there is less demand for OUSD, it will tend to deviate from $1.00 towards this lower bound of $0.9975 (minus gas fees). This proposal aims to address both this tendency to drift below peg and the opportunity to capture additional yield through deployment of collateral into the OUSD-3Crv Convex pool, also known as the “OUSD Convex Metastrategy.”

OUSD Convex Pool as a Leveraged Yield Position (LYP)

At the protocol level, all OUSD is worth exactly $1 of the underlying stablecoins (USDT, USDC, or DAI). This opens up an opportunity when there is a pool containing all 4 of these assets, such as the OUSD-3Crv Pool on Curve.

While OUSD issued outside of the protocol must be collateral backed, any OUSD issued by the Protocol itself directly into the Curve Pool does not require collateral, so long as the exchange rate for OUSD in the pool is $1 or greater. This is because OUSD issued directly by the protocol into the pool is automatically capitalized by the 3Crv paired with it in the pool, and so long as the Protocol is able to reacquire OUSD for $1.00 (or even better, less than $1) the Protocol retains a healthy balance sheet.

In other words, if there is sufficient 3Crv in the pool, OUSD can be printed to be paired with it. If there is more 3Crv than OUSD in the pool, OUSD can be added on its own. Otherwise, any OUSD added to the pool must be paired with 3Crv to maintain OUSD:3Crv at a 1:1 balance.

The ability to create OUSD without collateral generates a Leveraged Yield Position, whereby synthetic OUSD earns CRV and CVX emissions. For example, if the pool is in perfect balance, the protocol can add 1,000,000 in 3Crv collateral under its control while simultaneously printing 1,000,000 in unbacked OUSD, increasing the total position size to 2,000,000 (2x leverage).

This can boost the native APY significantly, as modeled here: https://docs.google.com/spreadsheets/d/1MknOWj2gcRAN9o2DFM__KKocLWftS1EOtYizZFcz2zM/edit#gid=0

OUSD Convex Pool as a Peg Stability Mechanism

Due to the nature of the redemption fee on OUSD, it is typical for there to be more OUSD in the pool than 3Crv, which makes it unattractive to supply OUSD. In fact, as of now, OUSD is approximately $0.9962 on Curve. At the protocol level, we have the ability to counteract this de-pegging by adding 3Crv into the Pool, thereby rebalancing OUSD and 3Crv and re-establishing the peg to $1.00. As an added benefit of this action, the protocol will gain additional OUSD under its control, which can later be retired through a burning mechanism. This is similar to the Algorithmic Market Operator (AMO) employed by FRAX finance to maintain peg stability within DEX pools, which has been very successful so far.

Example:

OUSD Price: $0.996 3Crv Balance: $2,000,000 OUSD Balance: $3,000,000

3Crv added to pool: $1,000,000 (+0.15% boost)

Updated OUSD Price: $1.00 Updated 3Crv Balance: $3,000,000 Updated OUSD Balance: $3,000,000

Protocol total LP position: $1,001,500 (+$1,500 in realized profit)

Risks

Smart Contract: 2/10

The risks for this strategy are largely the same as those for any other Curve/Convex strategy. 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.

Economic: 1/10

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. For this strategy, we have the flexibility to both add and withdraw from both sides of the pool, which significantly reduces the risks involved. The team has modeled out several scenarios and determined that the most efficient manner to add or withdraw liquidity is such that it brings the pool closest to 1:1 parity between OUSD and 3Crv.

See here a breakdown of these various scenarios: https://docs.google.com/spreadsheets/d/1DYSyYwHqxRzSJh9dYkY5kcgP_K5gku6N2mQVhoH33vY/edit#gid=0

Governance 2/10

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/

In the past, Convex has combated bad actors within their governance structure, for example, stripping Mochi from their CVX voting power after they attempted to mint their own stablecoin to acquire it. There is some risk for OUSD carrying out this strategy in that it may be viewed as exploitative, but not to the same extent as Mochi. Indeed, both FRAX and Abracadabra have been using protocol controlled value to mine CVX and CRV incentives, so there is already precedent.

Historical & Projected Returns

The majority of yield from the OUSD Pool on Convex comes from CRV and CVX token emissions, which rely on voting power and sustaining the gauge over time. Currently Origin Protocol controls approximately 218,000 CVX, which have been used to incentivize the pool over time. At a TVL of $11M and token prices for CRV and CVX of $1 and $5, respectively, this has equated to an APY of 4.5%. These emissions will decrease slightly each week due to token inflation decreasing CVX voting power.

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 4% to 6% APY at 11M TVL.

The projected returns from this strategy are in the range of 2% to 6% APY, depending on the amount allocated and the amount of OUSD minted into the strategy. Please refer to the sheet referenced above for a full breakdown of the range of possible returns.