Summary
This proposal seeks Euler governance approval to list Spark’s sUSDC token on Euler’s Unichain market.
Spark
Spark is the first Star (subDAO) in the Sky ecosystem, focusing on high scale capital allocation. In addition to Spark’s in house lending market SparkLend on Mainnet, Spark also facilitates the Spark Liquidity Layer, a framework for onchain capital allocation across defi and tokenized assets.
Spark Liquidity Layer is the largest onchain capital allocator by TVL with over $2.8 billion allocated at the time of writing, primarily on mainnet but now featured on an increasing number of L2 networks including Base, Arbitrum, and soon OP Mainnet and Unichain. Highlights of Spark’s allocation activity include:
- The Spark Tokenization Grand Prix, which has allocated over $1.5 billion into tokenized treasury bill products
- Spark’s Morpho USDC vault, which powers roughly 80% of the liquidity behind Coinbase’s BTC backed loans product while ensuring stable rates
- Integration into over a dozen other products across defi and tokenized assets (see all Spark allocations here)
By reallocating capital to optimize risk adjusted return between various assets and chains, Spark helps improve market efficiency and reduce liquidity fragmentation across the entire defi space. A full overview of Spark’s activity can be found in the Spark data hub.
sUSDC
In addition to allocating assets into defi protocols and tokenized assets, Spark also offers the sUSDC vault, which is a savings product powered by the Sky savings rate, delivering stable yields at large (effectively unlimited) scale. sUSDC currently has a TVL of over $350 million, and has added over $200 million in TVL in the past month.
sUSDC is redeemable into USDC with no fees via a PSM mechanism deployed on each supported L2 (including Unichain), and Spark dynamically replenishes liquidity to ensure that sUSDC can always be purchased or redeemed for a corresponding value of USDC.
sUSDC is backed by Spark and Sky’s pool of collateral assets. This includes various types of backing:
- Liquid fiat-backed stablecoins: Sky targets maintaining at least 25% backing in USDC in the PSM, which ensures USDS (and by extension, sUSDC) maintains a strong and stable USD peg.
- Tokenized treasury bills: Sky holds excess liquidity in tokenized treasuries, which provide higher yield than the USDC PSM while also offering risk diversification with respect to the issuer. Currently, Spark allocates to Blackrock BUIDL, Superstate USDTB, and Centrifuge/Janus Henderson JTRSY.
- Overcollateralized defi loans: This category includes the legacy MakerDAO CDP vaults, as well as liquidity injected into defi lending markets such as SparkLend, Aave, and the Coinbase onchain loans product facilitated via Morpho on Base.
- Overcollateralized offchain loans: Spark allocates a capital into offchain overcollateralized crypto lending via Maple’s syrupUSDC. This allows Spark to capture excess risk adjusted return for sUSDC that arises from certain counterparties specific needs, including compliance requirements to face identifiable counterparties as well as tax concerns about wrapping BTC.
- Tokenized basis trade products: Spark allocates capital to Ethena, both directly with holdings in USDe and sUSDe, as well as indirectly through overcollateralized lending in Spark’s Morpho DAI vault on mainnet. During periods of high funding rates, this can capture significant risk adjusted returns.
Sky is implementing a dynamic risk management and prudential regulatory framework that requires stars like Spark who manage capital allocation to hold risk capital against their various assets. In practice, this means that as the risk profile of the collateral portfolio changes, this will be accompanied by changes in capital requirements that should help offset any bad debt.
Benefits for Euler
Onboarding sUSDC can bring significant benefits for Euler’s Unichain market and Euler as a whole.
sUSDC earns native yield sourced from Sky and Spark, and this would help ensure a minimum level of borrowing demand for USDC and USDT0 if borrowing demand from other collateral assets declines. Providing a floor for yields earned by stablecoin suppliers can help grow deposits and improve user retention.
Additionally, allowing sUSDC to be borrowed against cryptonative collateral assets listed on Euler Unichain market provides an additional source of stablecoin liquidity in cases where market borrowing rates trend higher than the sUSDC native yield (currently 4.5%). Generally, this works best by implementing a “flatter” interest rate model, where the sUSDC native yield effectively acts as the base borrowing rate at 0% utilization, and a smaller low slope parameter plus this base rate achieves a rate at optimal utilization similar to other stablecoin markets. An additional benefit here is that, while below the optimal utilization ratio, borrowers will tend to experience lower interest rate volatility than other stablecoins, which may be appealing to some users. There’s a bit of cognitive overhead for users to understand how borrowing a yield bearing asset works, but this can be addressed with front-end updates (eg. showing the borrow rate as a composite value including both sUSDC yield and the Euler interest rate model).
Spark is also planning to allocate a significant OP grant towards growing sUSDC liquidity across Unichain and OP Mainnet, and will include sUSDC deposits on Euler to earn these rewards as soon as reasonably practicable.
Risk Factors
sUSDC is indirectly exposed to the risk of underlying collateral assets listed above. Sky and Spark both maintain capital buffers that insulate end users against losses, so sUSDC would only experience impairment if bad debt exceeds these collective capital buffers. Currently Sky holds over $90 million in surplus to protect against losses.
sUSDC on Unichain relies on liquidity in the Unichain PSM to maintain a 1:1 USD peg locally. If Spark infrastructure for rebalancing liquidity faces an interruption in service, liquidity of USDC in the Unichain PSM may become temporarily exhausted, which would make it impossible to redeem sUSDC for USDC on Unichain directly. However, sUSDC could still be redeemed for USDS, which could then be bridged back to Ethereum to redeem for USDC in the L1 PSM. We expect that arbitrage transactions would prevent USDS and sUSDC from trading significantly below peg on Unichain even if liquidity in the Unichain PSM becomes temporarily depleted.