[Strategy] Create MakerDAO/Aave/Curve passive Strategy vaults

Summary:

This proposal aims a creating a new strategy “vaults” using ETH and AAVE to collect stablecoins and CRV by leveraging interest rate arbitrage.

The vault strategy is simple, due to stablecoins liquidity crush, the interest rate and potential yield for stablecoins is high in DeFi. The vault will stimulate DAI supply and increase liquidity in both Curve and AAVE and collect the premium between cost of money - the MakerDAO Stability Fee - and yield - DAI and CRV -

This vault allows composability between 4 protocols : MakerDAO, Curve, Aave and StakeDAO.

High level explanation of the Vaults process :

  • User deposit ETH or AAVE
  • The vault create a MakerDAO vault and mint DAI up to 200% collateralization
  • DAI minted is deposited in Curve aave Pool and this deposit is staked in the Curve Aave gauge to collect CRV
  • the DAI in the AAVE pool is deposited into the Aave protocol.

Monitoring :

-The vault is monitored to check three risk parameters : Target collateralization, “wind down threshold”, and “boost threshold”

ETH-A vault example:

The ETH-A target collateralization is 200%, the “Wind down” threshold is at 165% and will repay to reach a 200% collateralization, on the other side in case of ETH value appreciation the “Boost threshold” is set at 240% and will mint more DAI to increase the vault overall yield.

Vault Target Wind Down Boost Liquidation threshold
ETH-A 200% 165% 240% 150%
AAVE 225% 190% 265% 175%

Both boosting and wind down are done with Aave flashloans, allowing to act on the vaults in a single transaction without requiring external capital and protecting the Vaults from a liquidation event.

Premium monitoring

The vault will check constantly the Premium between the MakerDAO Stability Fee and the Curve yield. if this arbitrage opportunity disappear due to higher Stability fee and/or lower Yield from Aave and Curve, the Vault will use a flashloan to “pause” itself by withdrawing from curve and paying back MakerDAO debt.
Considering the scenario of equal/low cost/return in stablecoins but Still CRV premium, the vault will keep working as this vault is designed to both increase Stablecoins and CRV holdings.
Lastly, in the scenario Cost > Returns but still earning premium due to CRV accrual, the vault will pause itself as this vault does not aim at selling collateral & CRV to keep it’s operation running.

Risk/Reward

These conservative parameters are a suggestion for the Vault launch, the MakerDAO OSM oracle acts with an hour delay before any liquidation can occur, thanks to flashloans, it’s highly possible to have much more reckless risk parameters, closer to liquidation threshold to increase significantly the vaults earnings. That being said, I’d suggest to consider this either after a period of testing the “conservative” strategy or just publish a “degen” version of these vaults for users with more risk tolerance.

Money Management

The vaults will enable strategies allowing to boost earnings on ETH and AAVE holdings, and will earn passively stablecoins and CRV, Users of these Vaults will deposit either ETH or AAVE but should not expect to collect more ETH or AAVE, their earnings will be in stablecoins & CRV assets.
They’re free to use those collected assets as they want.

Using vaults achieve economies of scale allowing many users to “batch” their investment in the same financial “vehicule” and significantly reduce the cost of the operation per user.
any user can copytrade this vault strategy but enabling the process will cost hundreds/thousand of ETH USD value to cover transaction cost.

In order to contribute to the StakeDAO ecosystem and conver the gas cost of launching and maintaining the vault, this strategy will have fees in two forms, flat onboarding fee and % of vault strategy earnings:

  • onboarding fee : 10 bps
  • Vault revenue share : 500 bps
  • withdraw fee : 0 bps

The vaults fees will firstly goes to a ETH “Gas Tank” reserve of 10 ETH designed to cover gas fees for normal operation and more importantly, to cover high expected fees for flashloans needed to protect the funds of the Vault users in case of Wind down threshold reached.
Each vault has it’s own gas Tank. gas Tank size is considered according to gasPrice market conservatively, Gas Tank size should be considered during quarterly evaluation of the vaults.

When the gas Tank is full, revenue premium is converted in SDT assets and delivered to actors with the following ratio :

  • Strategist 5%
  • SDT/ETH LP 55%
  • (when activated) SDT stakers : 40%

SDT/ETH LPs are collecting the SDT stakers share until activation of this staking option.

Vault Alternatives strategies

The CRV collected by the vaults can be locked for 4 Years in order to collect “3CRV” and will have the advantage to offer a full stablecoin-based return.

It’s up to the community to decide on this, some users will prefer having their CRV available and lock it/ use it as collateral/hold themselves, and additional complexity will increase gas costs and risk for the strategy.

I have also created MIP6 (collateral onboarding) on MakerDAO for aETH and aAAVE support allowing Aave depositors to create an additional credit line using the vault, if these proposal pass, I’ll highly suggest to create vaults using these assets as collateral as well.

Quarterly evaluation

As DeFi evolve constantly, Vaults strategy will be evaluated and will seize opportunities to tweak the risk parameters and even the strategies every 90 days, the SDT community will be invited to approve or reject the new strategies before implementing them.

Abstract:

This proposal aims a creating a new strategy “vault” using ETH and AAVE to collect stablecoins and CRV by leveraging interest rate arbitrage.

Motivation:

There’s a clear stablecoin liquidity crisis in DeFi, increasing the cost of money in the ecosystem and can cause negative effect on ecosystem growth, these vaults leverage synergies between protocol and will produce returns while contributing to have more liquidity in the ecosystem, it’s a win-win situation where all the protocols involved benefits for it.

For:

The vaults expected outcome for the 4 protocol involved are :

Protocol Expected outcome -
MakerDAO More DAI Supply by stimulated DAI minting demand More stability fee collected
Curve More liquidity in DAI swaps with less slippage
Aave More liquidity in DAI Cheaper borrow cost
StakeDAO New strategy More fees for SDT stakers & LPs

Against:

~Vaults will make money and money is the root of all evil~ :joy:

These vaults leverage on current premium gap between cost of money and potential yield, as DeFi maturity increase, the gap will close down eventually, it should come to your attention that the purpose of this vault, if it’s popular enough, is to basically kill it’s own returns by making the markets more liquids and efficient.

Feel free to voice your opinion on these vaults, let’s explore the Dark Forest with Aave-chan to find some yield there. Worst case scenario : we will be famous with a Rekt Article.

29 Likes

Nice proposal very detailed explanation :+1::+1:
I’m going to support this

3 Likes

All in!
Congratulation Marc for finding out strategies like this one☻

3 Likes

Will support this initiative for sure!

1 Like

FOR IT

Great Stuff Mark , I’m tired just by reading the whole thing LoL
Love the proposal and the big brains :brain: idea :bulb:

1 Like

As usual, very well explained and full of good things.

I will totally support this vault

1 Like

Quite the the well thought out, and crafted proposal.

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+1 for this proposal, with a rather rapid switch to a 175-185% collateralization version. Capital efficiency is a thing.

One concern is that I’d rather avoid imposing an onboarding fee on users, whenever possible. So I suggest to go for a slightly higher performance fee, like we have in the current vaults. Ideally, you don’t want to touch users principal deposit amount. The narrative that you always get more back than what you put in, is a very powerful one!

Somewhat related: the gas tank could initially be filled from the StakeDAO war chest. At the current rate profit is flowing back into the DAO this shouldn’t be a problem.

Still thinking about the best alternative strategy… Some auto-compounding of the original asset would be nice imo. Who doesn’t like extra ETH or AAVE, right? :upside_down_face:

2 Likes

Good feedback,

With a 10/15% performance fees (other vaults have 15% performance fee) we can basically discard the onboarding fee. I Think it’s a good alternative, will let the community decide on this.

The thesis behind this vault is to produce passive income & diversification on assets, that’s why we keep the stablecoins and CRV yield untouched, users can decide to buy more ETH & AAVE with their rewards, personally, I’m CRV bull bull bull so selling it is wheesh and wants the stablecoins to buy cool stuff.

also support of filling the gas tanks with SDT warchest, as an alternative path, I can fill them with own funds as a strategist and get reimbursed with earnings, when “debt” is cleared, the distribution schedule applies.

3 Likes

You had me at ‘more ETH and AAVE’ :slight_smile:

1 Like

Nice! +1
Not sure about the wind down parameters in case of a crash in aave or eth (you can never tell!), but if you say we have 1 hour delay before any liquidation occurs. We just need to time it correctly.

1 Like

Great strategy and very thorough.

A breakdown of potential protocol fees incurred by the strategy would be interesting as part of the risk/reward.

  • Maker - Stability Fee: 4.50%
  • Aave - Flash Loans: 0.09% per boost/wind down
  • Curve - Not entirely sure here?
2 Likes

Well thought out and written proposal. Would love to see this.

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If these are the kind of written proposals we are going to get here with detailed analysis, honest risk/reward assessment then keep that up because I love it. A proposal so nice I read that thing like 5 times.

This all goes back to what I believe Julien and others have said regarding Stake DAO as being mutually beneficial. That is what will continue attracting such proposals as eloquent as this one. If worst case scenario then Julien can bless us with Rekt tokens lel.

I’m all for a win-win-win-win (Maker, Curve, Aavem StakeDAO) scenario taking advantage of this situation as long as it runs. These multiple community beneficial strategies intrigue me. Defi needs more of this stuff.

Regarding onboarding fee I agree with Deepcrytpodive it always feels better to know its paid via performance.

My one question is regarding tweaking parameters would that just be a fixed schedule quarterly to make a detailed post showing the results so far and what if anything needs to be adjusted.

Anyways, this member of the herd approves.

4 Likes

Marc I wanted to make a non strategy comment but your gif game is on point. Let’s win this together!

1 Like

Hello Marc, nice project i will support it !

Full support! Thanks for the proposal.

This is genius from point of view…Marc you are brilliant.

100% support this and look forward to seeing it implemented.

I am in for this… This is beautifully thought off and we’ll said… I think it will benefit the community and grow the stake dao ecosystem