With the results of the poll quite clear (15% Reserve Factor consensus), we can now finalize this proposal into an eIP:
Title: eIP 39: Promote LUSD to Cross Tier
Author(s): TokenBrice, Yuliyan
Submission Date: 12/26/2022
Simple Summary
This proposal suggests the promotion of LUSD to cross tier: increasing borrow factor, decreasing the reserve factor, and adjusting the interest rate model accordingly.
Abstract
While Euler Finance is not relying as heavily on centralized stablecoins as other money markets, thanks to the very healthy ETH/stETH markets, centralized stablecoins still constitute a sizeable share of both sides of the market. Nurturing markets for resilient stablecoins like LUSD enable Euler to hedge against the centralization-related risks of other stablecoins.
LUSD is already supported as collateral on Angle Money (borrow agEUR) & Mimo (borrow PAR). A promotion of LUSD to cross on Euler will pave the way for its support as collateral once supply caps are implemented. It should prove to be a serious hedge facilitating the attraction of a critical mass of LUSD to the supply side of the Euler market, enabling further growth.
If Euler Finance can attract a decent supply of LUSD, then further integrations could be considered, such as the support of Chicken Bonds’ bLUSD to enable bLUSD holders to leverage their positions.
Motivation
Risk Assessment
LUSD is the stablecoin outputted by the Liquity Protocol, run entirely by immutable code, just like Uniswap. This characteristic dramatically reduces the scope of risk, as it eliminates any possibility of a governance attack. Since Liquity only accepts ETH for collateral, the risk scope on that front is also immensely reduced.
There are currently around 345K ETH in Liquity Troves, backing 182.5M LUSD of debt (=total supply).
What’s left are primarily technical and economic risks, which are addressed through all relevant means. The protocol was audited multiple times, and features the top DeFiSafety score, demonstrating very careful development practices.
Finally, the oracle risk for Euler is also reasonable since the LUSD market is already using a ChainLink-based price feed.
Market Data
On mainnet, LUSD is mostly traded on Curve and Uniswap:
- On Curve, the LUSD / 3pool (USDT/USDC/DAI) is the main liquidity source with $~50M TVL, with another ~$4M TVL pool LUSD / FRAXbp (FRAX/USDC).
- On Uniswap, the LUSD / USDC 5bps pool is the main liquidity source with ~3M TVL and LUSD / DAI 5bps pool with ~$1M TVL.
- There is also an LUSD/wETH/LQTY tripool growing on Balancer with $550k TVL.
Volume-wise, LUSD sees some volatility depending on the ETH price movements, with an average of around ~$3M daily. Thanks to the available liquidity, 5M LUSD can be easily settled instantly to another stablecoin with minimal (<1%) slippage:
LUSD also has healthy markets on Optimism, with various stablecoin pairings (sUSD, USDC, MAI, USD+) and LUSD/wETH.
Background
LUSD has been added on Euler Finance as an isolated asset. With the addition of the EUL gauge votes, LUSD received a neat support ranking #9 on the latest round. The LUSD market now has a 1.23M LUSD supply with about 50% utilization rate.
Next to Euler, the main money market supporting LUSD is Aave, where LUSD can be borrowed. Aave has 1.6M LUSD supplied with 73% utilization rate.
References
Specification and Implementation
- Promote LUSD to Cross Tier
- Increase Borrow Factor from 0.28 to 0.70
- Decrease LUSD Reserve Factor from 0.23 to 0.15
-
Adjust LUSD Interest Rate Model (same as USDC)
- Base IR unchanged (0.00)
- Lower Kink IR from 10.00 to 4.00
- Lower Max IR from 300.00 to 100.00
Voting
If the community response to this RFC is positive and this proposal moves to a vote, a Yes vote would entail support for raising LUSD to Cross tier and adjusting its parameter, while a No would keep the same as current (Isolated tier).
Additional Context on Liquity
Liquity is a decentralized borrowing protocol that allows you to draw 0% interest loans against ETH as collateral with only a 0.5% one-time initial fee. Loans are paid out in LUSD, a USD-pegged stablecoin.
Borrowing with Liquity is extremely capital-efficient, with a collateral ratio of only 110%. In addition to the collateral, the loans are secured by a Stability Pool containing LUSD and by other borrowers who collectively act as guarantees of last resort. Users borrowing against their ETH use decentralized 3rd party front ends.
LUSD has proved its impeccable resilience by flawlessly going through several severe market crashes. - 5/19/21 ETH Crash - How Liquity Handled its First Big Stress Test
Liquity as a protocol is non-custodial, immutable, and governance-free. And LUSD is a stablecoin capable of resisting all kinds of censorship. No person or organization has any control over the protocol — it is “set in stone” in smart contract code and can never be altered in any way.
The Liquity protocol was launched on the 5th of April, 2021. As the code is immutable, there has been no update since then. The Liquity team has recently launched Chicken Bonds. It offers an amplified yield-earning and trading opportunity for LUSD holders while helping to reduce the stablecoin premium and improve its liquidity.