Back to the peg

The current price of H2O bellow the peg is holding the platform back (I see <$0.95 as problematic signalling). The price is simply the reflection of the circular stake stable → mint H2O → sell H2O for other stable → stake stable, rinse and repeat. I understand that this is one of the things that attracts people but if it’s too much, it’s problematic. Now, what can be done, realistically? There are practically only two parameters/processes that can be altered: the 1% fee in minting H2O, and its partial distribution (50%) to SMELT stakers in the curve/stables pool.

Increasing the fee disincentivizes the loopers and thus also lowers the TVL (in the process). However, keep in mind that the TVL also counts the looped/minted H2O, so it is artificially inflated anyway (if I looped 10k several times, I could account 50k to the TVL but in reality, I just added 10k). These higher fees are paid out to SMELT stakers which makes MELT more attractive. The question is what really happens to such H2O. It’s likely put back to the curve pool (further misbalancing it), or it’s used for buying something else (often probably MELT). Neither of it really helps keeping the peg, actually the contrary. And the truth be told, the H2O rewards for SMELT stakers are nice and all but I think most people are interested in boosting SMELT allows and the APY in the MELT/SMELT pool, anyway.

Proposal: Increase the fee from 1% to somewhere between 1.5% and 3% (I would go to 2%) and burn 75% (or all) of it. Keep the rest (if any) in treasury.

Sure, raising the stability fee will make some collateral less viable and decrease demand for the borrowing and reduce the supply of H2O. But is that really how we want to return to peg? By people having to buy back H2O, pay back the loan, and not participating in Defrost anymore? Such a move hits all borrowers, not just loopers. Economically, I actually don’t see why 3 people posting collateral and borrowing is any better than 1 person looping 3 times*

Instead of trying to bring the peg back by reducing the supply of H2O, I really think we should just focus on increasing the demand.

One issue I see is the fact that for the stablecoin LP collateral accepted by Defrost, none of them involve H2O. If there were USDC-H2O pools out there with attractive yields, we at least have users keeping half the H2O they mint, some even outright buying H2O to participate in the pool.

Honestly before reaching out to other platforms to add new collateral, we should probably make sure the house is in order before getting those other views. I would really love to see meaningful interest rates on an H2O-stablecoin pool and have that LP be accepted as collateral.

Something to consider when creating these new pools is a higher fee? More earnings for depositors and people using the pool can think twice about selling their H2O to take DAI elsewhere to play with.

*Note on why I don’t think looping is the villain. Let’s say:
Allan Puts 1,000,000 USDC-DAI LP, Borrows 700,000 H2O, sells on curve
Bella puts 700,000 USDc-DAI LP, borrows 490,000 H2O, sells on curve
Charlie puts 490,000 USDC-DAI LP, borrows 343,000 H2O, sells on curve


David puts 1,000,000 USDC-DAI LP, borrows 700,000 H2O, sells on curve for 350,000 DAI, 350,000 USDC, puts another 700,000 USD-DAI LP, does it again with 490,000 H2O, sells on curve for 245,000 DAI, 245 USDC… you get the idea.

It looks the same to the peg. Same amount of H2O sold and and other stablecoins taken out. Also for defrost same amount of TVL increased. I don’t think looping is to blame. and I don’t think attacking the attractiveness of borrowing by increasing stability fee is the best solution for the big picture of the platform.

Looping is 100% to blame. This becomes more apparent when you begin to realize that we had nearly reached peg due to being out of available H2O in stable vaults, when decs added more stable vaults, killing peg again. I dont much care about TVL if new people dont want to participate because our peg is consistently a joke.

I like the proposal with the exception of removing rewards paid to MELT holders. Thay can not be removed or my vote is not. We can increase stability fees, burn, whatever, but would people stop trying to take away all the stablecoin rewards? Have we learned nothing from the last vote?

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To me, I feel that just confirms the oversupply of H2O drives down the peg. Who’s to say whether those are new users or looped deposits?

If we wanted to attack looping specifically, then it wouldn’t be via the stability fee because that hurts all borrowing in general equally - what you might want to do is raise the collateral requirements. This means at each cycle of the loop, the looper is exponentially diminished.

So raising collateral requirements wont affect how much real collateral people have available hence me leaving A, B, and C unchanged in that regard. It still definitely reduces H2O minted, but it has greater effect on loopers since their “fake” collateral is greatly reduced.

Either way, I would still prefer solutions around making H2O more useful other than just an intermediate step to get to the token you actually want.

The difference is that the looper drives down the peg because they disbalance the H2O-stables pool whereas the three separate people do not (because they bring more actual collateral).

Increasing min. collateral could work too. Only it is difficult to change it in the active pools because it would put most people into liquidation immediately. Increasing the interest rate has no such side effect.

Looping is an amazing strategy for people looping, and is probably one of the main reasons people are minting H20 atm.

It is temporarily hurting the H20 peg, but I think it helps with the platform’s use case. I just think that as a product it has to be limited in the size we offer so that h20 holders don’t have to deal with peg volatility from loopers.

Atm I think our efforts should be focused in encouraging people to deposit stables into the h2o-crv pool to that end a change in the website User interface may be a good idea.

Currently the first thing that newcomers see when opening up a Defrost webpage is the buy button, the mkt cap and the amount of melt burned. Platypus mooned because the first thing users see in the interface is the stake stablecoins into the protocol with the platypus token coming off as a secondary thought.

Our UI brings token buy button to first thing in mind. It is great for causing moon spikes as fomo chase buyers join, but terrible for adding long term tvl and actually providing a service to users.

I would say that the peg returned because the introduction of SV2’s melt tickets caused the shallow-liquidity MELT token to raise in price enough that the APR on the H2O Curve pool was attractive enough for people to move their DAI/USDC/USDT from other places into that pool.

Monodactyl is right when they say that looping is the same for the pool as multiple entrants. The only thing that matters is the balance between H2O minted and non-H2O stables deposited in the pool. Since MELTs are what we have available to reward pool participants, increasing the MELT price so that the APR is competitive is the only path towards a full peg.

Answering, “How do we increase MELT value?” is the same as fixing the peg.

H2O is de-pegged because 3crv demand is high and H2O gets sold into the pool. As a community we shouldn’t change the looping mechanism because this generates all the revenue for the protocol and is extremely popular with stable-yield seekers. My suggestion is to have part of the 20% performance fee collected in the Super Vaults to be paid out to 3crv providers in the av3crv pool. The idea here is to create a positive feedback loop which goes

  1. more Super Vault loopers,
  2. increased 20% performance fee (on an absolute number basis),
  3. increased incentives to 3crv providers,
  4. 3crv providers push H2O peg back to 1,
  5. repeat from 1. again

it may be technically difficult to do step 3, but I believe this is the long-term solution to ensure that Defrost will be able to expand to hundreds of millions of TVL.

This project only serves to loop, like abracadabra. Otherwise, what’s the point?

Ive never looped, and I use this platform a lot. There are many uses for defrost, and not all of them involve leveraging stables.

My yield is 295% APY in stablecoin (UST - USDC). Is there a way to earn more?

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