Fixing the peg through making H2O useful

The current situation is not ideal for H2O and the whole protocol. Without getting back to the peg, it will be hard to get back. Why is there a de-peg? Because there is too much H2O compared to other stablecoins in the H2O3CRV pool, aka the Curve pool. Why is there too much H2O compared to the others?

  • Not enough other stables in the pool.
  • Excessive minting caused by looping in the stable pools.
  • H2O cannot be reasonably used elsewhere.

There is another proposal (Proposal to create a highly incentivized 3crv farm to help fix the peg) that tries to attack point 1. I do not believe it will help and it is also quite unintuitive for users. In addition, the current market mood is not such that people would be willing to put too much of their stables into a protocol that lost 99% quite recently.

Point 2 would be relatively easy to solve within the parameters we have at hand (collateral ratio and interest rate). However, looping is an essential part of Defrost so we probably should not suppress it too much.

This leaves point 3, i.e. H2O is not really useful, in a sense that it cannot really be used anywhere else than the Curve pool. And that’s precisely where almost all (15.7m out of 17.3m, currently) sits, practically dumped there. We need to get this H2O out of the Curve pool. How? We need to make it useful outside of it. How and where? Within the platform because no other platform will like to use a stablecoin de-pegged at 0.92, will it? So what is the current use within the platform? We already mentioned dumping it into the Curve pool. And then also providing liquidity in H2O-AVAX pool on TraderJoe but the rewards are pretty tiny (keeping the current liquidity in mind).

There are 3 things we can set up within the platform, reducing the MELT rewards in the H2O3CRV pool and move them to the following:

  1. H2O single-staking pool with MELT rewards and maybe SMELT boosting but with locking added into the equation. What was the issue of the UST Anchor staking (apart from other issue within the ecosystem)? Fixed APY at 20% with UST pay-outs (aka pretty obvious Ponzi; hindsight is 20/20 of course, but retrospectively, it is very obviously flawed) and no locking so everyone can dump quickly. We would avoid that with locking and payout not in H2O. Locking can be applied like a multiplier to the boosting dependent on the length of the lock, or by only partially releasing the H2O if withdrawn (we can use the current “every six days” rule we already have for the rewards).
  2. Incentivize the H2O-AVAX pool more. Currently, it looks like there are high rewards (base 57%) but that’s simply because there is just $20k liquidity there so any larger deposit will make it go lower quickly (and nobody will do it; keep in mind there is almost no IL in the Curve pool, but there is one in the non-stablecoin pair). Keep in mind that the TJ LPs and Curve LPs are different. You can simply dump your H2O into Curve but you need a pair for TJ.
  3. Set up MELT-H2O TJ LP (it does not even exist on TJ at this point) MELT rewards (again redistributed), again possibly with SMELT boosting, probably no locking. There has always been a FRAX-FXS LP pool on SushiSwap (it was, probably still is, actually with possible locking) and it never caused problems.

None of these would create new MELT emissions, just redistributing from the current H2O3CRV pool. The direction of the distribution among 1.-3. is up to discussion.

Making H2O actually useful within the ecosystem would create pressure of withdrawing it from the Curve pool which is currently a price-setter and will likely be even after that. The trick is that even if the new utility of H2O within the system moves H2O above the peg (i.e. “too much” H2O being withdrawn from the Curve and used elsewhere), people can simply arbitrage it back (H2O is always minted at $1). And at that point, we need to have Super Vaults that can make use of that and put pressure on MELT through the entry fees. MELT needs some utility as well to make this all work as it is the rewards token.

So together with coming up with 1.-3. (or a subset but I think all three make sense, maybe even moving a part of the rewards to the MELT-AVAX pool as well), we should:

  • Stop minting in all SV I and SV II.
  • Set up SV III (call them Ultimate Super Vaults, or something) where the relevant pools (a subset of the current pools) will be. We can think about the level of collateral that is set for stablecoin pools. Is 105% enough? But what is for sure, we should make the MELT buy-in burn either directly in USD terms (probably different tiers for stable and non-stablecoin pools) or maybe even a function of de-peg. But I think the USD terms might be enough, the level is up to discussion; I believe when SV II was set, these were worth like 0.1% of the minted value.
    (- Slowly start increasing interest on SV I and SV II to force the capital to move to SV III)

All the above points should be rather easy to implement as they are already part of the system to some degree (the only exception being the lock-up period but I’m confident there must be a lock-up in the single-H2O pool).

These changes should keep the looping incentives rather untouched (if 105% collateral is kept), getting us back to peg, utilizing the currently existing “back to peg” mechanism when we are above the peg (and newly pushing back to peg if we are below through H2O utility within the system), increasing MELT demand, creating a nice system of incentives and interactions that are circular but not Ponzi.

Once this is settled, we will have better chances utilizing H2O outside of Defrost.

Let me know what you think.

4 Likes

Thank you @Phoenix_Risen for all the suggestions!
The general idea is great and you have dug deeply into the Defrost protocol’s mechanisms and how it is working.

  1. The H2O single-staking pool is somehow like an H2O-savings pool. It can absorb some of the H2O liquidity and work as savings account for H2O users, rather than putting it into the liquidity pool on Curve. However, I am personally a bit sceptical about rewarding the savings pool with MELT. MELT’s price and market cap has already dropped much and incentivizing the pool with MELT will probably not help much. Of course, you said that we could choose to move some of the current MELT emissions there, but still, MELT incentives are far less attractive now, especially when the market is not in a bull run.

The last proposal already promised more than half of the H2O in the stability fee will be applied to buy back ECD/VTX. But the market is changing fast. Perhaps we could raise a proposal to redistribute these H2O to the savings pool.

  1. and 3. I think they are more or less a similar proposal, like to create more trading utilities for H2O. I believe for a soft-pegged stablecoin, it is more important to have pools with deeper liquidity, than pools with more diversity. H2O-AVAX pool is working like any other pool, that provides liquidity for H2O transactions. The difference between H2O-AVAX and H2O in Curve, is that it pairs with a more volatile coin in the Uniswap math. Even with the liquidity in Curve, provided deep enough, traders can easily trade H2O for AVAX with an aggregator like Paraswap, or do the transactions manually. Therefore, I don’t believe moving the incentives to H2O-AVAX will do much help.

Also, similar logic applies to the MELT-H2O Pool.

The reason that Curve does not have enough liquidity in USD in the H2O pool is due to the stable math. If a similar pool like H2O-USDC is built on TJ, now the liquidity could be smaller with higher slippage.


I personally agree that we could raise a proposal to Stop minting in all SV I and SV II. We could do a direct termination, or with a much higher minting cost.

The SVIII you said will be more complicated with some changes in the current contract, requiring coding and auditing. Also MELT has not got a valid price feed, therefore, applying a MELT oracle in the contract could be dangerous. We could use a manual adjustment for now and continue to work on a better solution.

Once again, thanks for the contribution.

2 Likes

@Phoenix_Risen Thanks for the elaborate post/proposal.

A lot of what you are suggesting is in line with what we’ve already been discussing;

  1. Turning off the H2O tap
  2. Incentivizing H2O withdrawals from Curve

etc…

As for @Mountainking’s thoughts about why the Curve pool is so disproportionate being directly due to Curve’s stable math for these types of pool;

The weight is heavy on H2O because that’s what users are looping with and depositing.

If users were depositing USDT/USDC/DAI the weight would not be this disproportionate, stable math or not - that’s a fact.

That said, we need to either;

  1. Incentivize H2O withdrawals

or

  1. Incentivize 3CRV deposits

&

  1. Stop H2O minting for now
  2. Change fees on SVIIs to a $ per collateral basis
  3. Consider increasing stability fees

An increase in stability fees could help fee directive initiatives if there are fees actually being paid in (H2O loans being repaid)

I would be for switching the fees going towards ECD/VTX to a single sided H2O pool, although it does seem a bit silly being that we just voted to use them for ECD/VTX.

If we create a single sided H2O pool we need to ensure that with reasonable TVL projections the pool can provide a high enough APR to incentivize H2O deposits.

I would be supportive of the motion to convert all existing SVIs to SVIIs, with entry fees, and using all entry fees to create permanent POL (burned) or direct the entry fees towards incentivizing a 3CRV escrow pool or single sided H2O pool.

Not sure if a single sided H2O pool is a long term fix if we assume that only a percentage of vault users will place their H2O there. When the market turns around and DeFrost usage picks up the MELT incentives could motivate users to still just deposit into the Curve pool to LP for MELT rewards, and if the H2O heavily outweighs the av3CRV again due to this, we’ll depeg once again.

I think we really need to put emphasis on the av3CRV side of the Curve pool until we can establish an incentivized H2O/Stable pool with deep liquidity elsewhere.

Lastly, I agree that we do need to keep working towards the aforementioned, liquidity for an H2O/Stable pool, utilizing good math, elsewhere.

1 Like

I would think that the 2nd option ( 2. Incentivize 3CRV deposits) would be better, since it has more potential to attract more TVL to the project IMO

2 Likes

Have to say that I agree…But I am open to criticism of the idea, and still open to consider other solutions as suggested by my above reply, of course…

That said, a stable pool with a reasonable return can be marketed as that…a stable pool with a reasonable return.

Whereas a single sided H2O pool alongside a mint freeze can only really be shown as a depegged stablecoin single sided pool until we regain peg - but the pool is meant to cause the repeg so there will be a period of time when it’s seen as the aforementioned…

1 Like

Thats true, but if there were, say dual rewards that were paid out on a savings pool in lets say MELT/USDC, and the rewards were high enough, it wouldnt matter as much if we are a depegged stablecoin. The larger the pool grows, the more dilution of rewards, but also the less need for usage of the pool. If this helps the peg, we see an increase in TVL, and thus an increase in MELT price, but also an increase in rewards needed to incentivize. In theory, in a dual reward pool, this could be somewhat offset by an increase in the price of MELT as we see an increase in usage. If we manage to get to a place where melt price is again high, we could then put those protocol fees back to their current purpose.

In a perfect world, we would tackle both the need for encouraging withdraws of H2O, while at the same time encouraging deposits of 3crv. The limiting factor obviously being the number of rewards we have to give away.

Id even be in favor of retaining the 15% of emissions that we are due to lose, just redirecting them to where they are needed, if it would enable us to tackle both fronts simultaneously.

Dilution sucks, but not as bad as a slow death.

2 Likes

Here is another whacky idea. In addition to a lockup period for an H2O stable coin pool, what if we further encouraged depositing here by giving voting rights to timelocked H2O, though not at a 1:1 ratio. Again, just spitballing ideas, pick them apart if they are more stupid than they seemed when i wrote them down. Im more writing as im thinking than elaborating on any well thought out plans.

2 Likes

Thanks for the reaction.

For you reaction 1. This is a bit of an egg-chicken thing. MELT is our rewards token, it should be used and thought of like it. We should be aggressive trying to increase its value - through H2O minting fees, buybacks (ECD/VTX is not really interesting at this point, let’s direct it all to buybacks and burning of MELT). Without relevant MELT, it will be difficult attracting pool participants. That holds for all pools. But let’s try the math. Let’s say we assign 3k MELT to this pool, daily (always, I speak about taking the rewards from the H2O3CRV pool, no new minting). That’s around 1.1m MELT a year. Even at the current low price of 4c, this is worth $44k, say =44k H2O. If there is 1m H2O in the pool, that is approximately 4.4% APR. And that is not that bad for a stable, is it (and that’s without SMELT boosting)? Now imagine MELT actually moves up again (which it should if we work on the Super Vaults). So it’s not a lost cause. Contract-wise, that should be also easy, right? I imagine locking might be a bit more complicated but it would help either way. But it should be worth it even without locking (but people should not expect high yields without locking). What I’m trying to say is that it can be done pretty easily if we do not add locking.

For your reaction to 2. and 3., I actually do not agree. We do not have “deep liquidity”, we have “unhealthy liquidity”. The liquidity pool on Curve is practically equal in value to the total H2O in circulation. That’s not normal and we should not want that. I also understand the difference between UniSwap-type and Curve-type pools. The misbalance is not due to the math but due to the fact that H2O can’t go anywhere else. I’m no saying there should be no Curve pool, there certainly should be and its LPs should be rewarded, but diversity is actually important here. Because there is a huge difference between dumping you H2O at the end of looping into the Curve pool where you get some penalty but still a tiny one. If you have a place to put it at better rate, say H2O-AVAX pool or H2O-MELT pool, you either swap half your H2O in the respective pair and stake, or you sell your H2O for say USDC in the H2O3CRV pool and buy AVAX or MELT on TJ and then form a pair (that would make sense if the liquidity in the respective pair is not high enough on TJ). So there is either no new H2O in the Curve pool or only half of it compared to simply dumping it when there is no other option. The mismatch between the Curve pool and TJ H2O price can be then arbitraged by bots or whoever likes. But either way, it will be better for H2O price.

For the SV III, the fee can be paid in H2O or USDC/USDT, accumulated over a week, and then used to manually buy MELT back and burn. It can be a nice weekly marketing thing as well. So no issue here.

2 Likes

In regards to the last paragraph, I think instead of doing buyback and burn, we should probably be doing buyback and POL from this point forward. It just makes more sense given our low liquidity.

1 Like

The buyback and burn using stability fees is buyback and burn POL (permanent POL)

As for your sentiment about “writing thoughts as they come rather than being critical of what I’m writing”

Keep doing that.

We’re all here to help each other and help DeFrost survive/grow.

I’m willing to wager more people would be commenting on these proposals if they didn’t feel like they wouldn’t write something “worthy”.

Every comment is valued and worthy here. Keep them coming. - to everyone.

1 Like

When it comes down to it, Id love to see us hitting the withdraw h20 and deposit 3crv incentives pools issued simultaneously. We have seen what happens when we set ourselves up with a single point of failure. Its a bit like throwing things at the wall and seeing what sticks, but thats probably not such a bad thing given the predicament we are currently in.

2 Likes

All these sound like reasonable ideas, though I will admit most of it is way over my head.

I agree with repurposing the funds that are being used to buy ecd/vtx. Let’s keep those funds in the protocol for now and when we get peg back they can be reassigned back to buying tokens outside our protocol. I know we just voted on that but let’s be flexible and keep Defrost strong.

I also think that encouraging BOTH withdrawing H2O from the curve and depositing 3crv. Why limit it to one? If we do both like @crypt0x mentioned we now have 2 “fail-safes” if you will, instead of relying on only one. We honestly need more to rely on in Defrost, instead of waiting for other protocols to save us.

I don’t like emissions but I do agree that keeping the 15% emissions instead of dropping them would be beneficial to getting us to peg. Use those emissions for incentivizing pools.

I’ll leave all the math up to you more highly intelligent people. These are just my 2c worth. Maybe is 5c now with inflation :rofl:

2 Likes

I agree with all of this @FrostedFireball. :ok_hand:

@Mountainking Do you want to chime in on the emission cut?

2 Likes

It actually makes sense. It is not necessarily one or the other, it can be both to a certain level.

Starting with the obvious - mint freeze on old SVs and introducing Super Vaults with fees based on USD value (as we do not have stable MELT price feeds, let’s do what I proposed in one of the comments - get it in USDC/USDT and then do weekly buyback and burn of MELT).

I would stick to the 15% reduction. That is given and promised. We should keep the promise. Maybe unless voted about. But still I would vote against not reducing.

We currently have DefrostH2O3CRV boosting pool, MELT/AVAX boosting pool and H2O/AVAX boosting pool with 39,950 MELT, 2,550 MELT and 850 MELT daily rewards, respectively. That’s before the 15% reduction. 43,350 MELT daily in total that we can play with. I think we can be quite aggressive towards reductions in the H2O3CRV pool. I think we should support at least one H2O pair on TJ. If I could choose from the combination, I would go with something like:

  • H2O3CRV pool: 25k
  • av3CRV pool: 7k
  • MELT/AVAX pool: 3k (this is the riskiest pool)
  • H2O staking/savings: 4k
  • H2O/MELT pool: 4k

Or not going with the H2O/MELT, then:

  • H2O3CRV pool: 25k
  • av3CRV pool: 8k
  • MELT/AVAX pool: 5k
  • H2O staking/savings: 5k

Or maybe even more aggressive but I’m not really sure about these, we currently need like 2m in non-H2O stables to be quite fine, so these 7k or 8k MELT should give nice APRs there.

3 Likes

By no means should we be reducing the melt/avax pool rewards (aside from the expected emissions cut). Thats a hard no from me on that one if we go that route.

3 Likes

@Phoenix_Risen Is suggesting a decrease of H2O3CRV emissions and an increase in MELT/AVAX + adding a single sided H2O pool and the 3CRV escrow previously discussed…

All of this in conjunction with the;

  1. H2O minting tap being shut off
  2. SVII entry fees converting to $ amount per $1000 collateral, as opposed to # of MELT

Then there’s also the discussion of stability fee increases which I propose should be included as an option in the H2O Repeg vote.

3 Likes

That all sounds like a solid plan to me, though I would recommend the stability fee vote to be a seperate vote alongside the other things discussed here. Just a thought.:+1:

3 Likes

Yeah, agreed…or composed in a way that allows for it to be an option outside of other popular options so it’s not inhibiting the desire of someone to want to vote if it’s tagged along everything else in the mix.

3 Likes

Agreed. We might be aggressive there as well, the MELT liquidity (its support) is certainly needed for the growth. But the distribution itself is a step 2 thing in a way. We first need to decide whether proceed this way or some other.

1 Like

Let’s make a proposal and let the community decide whether to make a cut or not.

3 Likes