SIP-16: Add Saddle USDC - FRAX Strategy

Title: SIP-16: Add Saddle USDC - FRAX Strategy Author(s): Sperax Core Team Reference: AMAs Created: Oct 25, 2022 Labels: #NewYieldStrategy

Simple Summary

Sperax Core team proposes to introduce a new investment strategy for USDC and FRAX within the USDs collateral pool: Saddle Finance FRAX-USDC-BP.

Abstract

Add a new yield strategy for USDC and FRAX. The primary yield strategy for USDC will now be the Saddle Exchange FRAX-USDC-BP.

Motivation

Diversify yield generation. Stargate is currently the primary USDC yield generation strategy. This was a reasonable short term strategy to increase yield, but the cross-chain bridging risk isn’t favorable. This new flavor of strategy keeps the USDC collateral away from bridges while unlocking a new yield source for both USDC and FRAX.

Overview

USDC deposited into the collateral fund when minting USDs will be sent to Saddle until otherwise specified in an SIP. FRAX that is deposited will be sent to saddle unless needed to pair with VST for the VST-FRAX strategy, in which case the FRAX will be used to keep VST slippage during the deposit to below 0.1% slippage.

To start, the Sperax team will allocate the remaining USDC in vault core, pair it with equal FRAX, then deploy these assets to Saddle.exchange and stake the LP token for SDL rewards.

This pool has significant rewards which has attracted healthy liquidity. Currently over 3.8M USDC+FRAX reside in the pool. This offers us the opportunity to deploy capital from the collateral fund into this pool without significantly diminishing APR.

Technical Specification

1. How does depositing collateral to the strategy work?

The contract sends collateral to FRAX-USDC-BP, which returns lp token for the liquidity provided (saddleFraxBP). Next, the saddleFraxBP LP are staked in the Saddle gauge to generate SDL yield in addition to trading fees.

2. How does withdrawal work?

The withdrawal is also a two step process, triggered when a user specifies their desire to redeem USDs for USDC or Frax.

The contracts first check if the desired collateral is available in VaultCore. If there isn’t sufficient funds in the VaultCore, the protocol will redeem part of the saddleFraxBP

3. How is the yield generated?

i. Transaction fees

ii. governance Token rewards → When we deposit the sToken to the farm the saddleFraxBP LP is staked into the Saddle gauge to start accruing SDL rewards (follows a variable APR approach).

4. How is yield transferred into USDs?

i. Fees → Paid in stablecoins, deposited into the protocol to mint for USDs

ii. Governance token → Will buyback USDs or approved collateral using SDL prioritizing the most profitable route

5. Pairing with Frax

i. New FRAX entering the collateral pool will be sent to Saddle Finance

ii. If FRAX is needed to reduce VST slippage when allocating VST, FRAX will be used to keep slippage <0.1%.