Proposal to create a highly incentivized 3crv farm to help fix the peg

Proposals
#1

I propose we create a seperate pool for 3crv that does not accept H2O and incentivize it with a large percentage share of emissions currently designated to the DefrostH2O3CRV pool.

The APR on a 3CRV pool if we moved around 80% of the DefrostH2O3CRV emissions to it would amount to somewhere around 70-75% APR at current prices and ratios. We would not necessarily have to be this severe, its just a % I chose at random.

This can be estimated roughly by multiplying the current H2O3CRV APR (around 3.81% at time of writing) by 80%, then multiplying by 24.28 (the curent ratio of H2O to 3CRV tokens).

This is could be done by creating a farm which only accepts 3CRV tokens on deposit. Defrost then creates the DefrostH2O3CRV LPs and deposits into the DefrostH203CRV farm. In this way, H2O would not be able to enter this new incentivized farm, and the incentive would grow larger as the peg becomes worse, as less 3CRV tokens are splitting the same number of emissions.

Please put down your thoughts, being mindful that time is of the essence.

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#2

Pretty sure this was suggested back in January? Anyway, this seems like a solid suggestion and if it helps us natively get H2O back to something resembling peg I am all for it. We have been needing to do something natively about peg for a long time and it’s really bad it’s taken something like this to get a ball rolling. I know we have been told various things are in the works, but this is something we can get behind now. Before we get any further off peg.

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#3

Thank you @crypt0x for coming forward with an idea.

All theory at this point, but this could work similar to the super vault contracts in that it would automatically create the LP position in the Curve pool for the users then deposit those LPs back into the pool/farm on DeFrost for the rewards.

Users would be required to deposit USDT, DAI, or USDC on DeFrost so that our contracts can verify the proper assets are flowing into the Curve pool - and thereby not provide rewards to H2O looping in with this particular pool.

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#4

I’m not sure how the technical implementation of it would go, but I like the idea and I think it has potential.

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#5

In the absence of any other plans from the dev team, I think we should go forward with this. The project cannot grow with the h20 peg off for so long.

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#6

Thank you @crypt0x for the proposal for discussion.
Totally agree that one of the biggest problems haunting us for quite some time is the H2O pegging.
I believe we had a similar discussion previously (I forgot it was on this forum or on discord) and still have several concerns regarding the possible solution you proposed above.

  1. The idea is to incentivise the 3crv (USDC/USDT/DAI) entry for the H2O liquidity on the curve pool. However, even the contract can distinguish the entry assets in contributing to the H2O liquidity, users can always exchange H2O for 3crv (USDC/USDT/DAI) any time from the pool. Of course, the slippage are one of the burden he/she must undertake.
    Therefore, it may make not much big difference, compared with the current incentives for the whole H2O pool. Users, contributing liquidity with any single asset now, are making the trade and diving in the pool at the same time.

  2. For users contributing 3crv (USDC/USDT/DAI) , though the entry asset may be USDC, USDT or DAI, he/she will be exposed to the DefrostH2O3CRV pool in the end. Also, when he/she intends to withdraw the liquidity in the form of the entry asset, one needs to exchange the LP for the asset that one desires, and similarly, undertaking the slippage. I will be very different from the exposure of the sole 3crv liquidity providers. Therefore, even if the incentives seem to be much higher than the 3crv pool alone, the risk profiles are much different.

Anyway, it could be helpful when the de-pegging goes more serious. But please take into consideration that the 3crv (USDC/USDT/DAI) entry will also be highly and automatically incentivized with a favorable slippage, even if nothing is changed.

Considering an extreme case, if we move all of the incentives to the 3crv (USDC/USDT/DAI) entry, would it make much difference from the current incentives? 3crv (USDC/USDT/DAI) entry will be all converted to the LPs in the DefrostH2O3CRV pool, and considering that users can always exchange H2O for USDC/USDT/DAI, eventually, it will end up with a similar case as it is now. (the incentives for the 3crv entry are the somehow same as the incentives for the whole pool, as the entry finally becomes DefrostH2O3CRV LPs)

Happy to discuss more on the same.

#7

Just to be clear, we are talking about MELT emissions?

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#8

I would argue that yes, it would make a drastic difference, since it creates a constant incentive for additional 3crv to be entered in the pool. If what you are suggesting occurs, aside from the crazy slappage fees that would be paid, and 3crv ratio drops, the incentives rise again to encourage more 3crv deposits.

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#9

Otherwise what is your suggestion? As it stands, this is not sustainable. If our TVL drops any further we arent overcollateralized since we just HAD to add UST vaults right when our peg was returning.

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#10

And what h20 will be used to purchase 3crv? That h20 is already stuck in the vault risking high losses if pulled now, even greater losses as the peg decreases. The slippage is real.

1 Like
#11

I’ve already sent these thoughts to our core team chat, but thought they might serve users here to add further context…

Our users are skeptical to mint H2O even at $0.90. It’s still a 10% instantaneous risk if peg returns to $1 if they want to unwind, or else they’re imprisoned in our contracts/platform. No one wants to feel like they can’t move their funds around freely, and that is the general consensus from the community, not my words.

Incentivizing the whole pool does what we have right now, an H2O heavy pool and an unpegged stablecoin for months, severely hurting confidence and faith in DeFrost.

This is how the new contract could work:

  1. Pool/Farm Contract on DeFrost.

  2. Moving MELT emissions from the DeFrost Boost Farm to this new pool/farm so there are rewards. Consider moving MELT emissions from the H2O/AVAX pool as well being that the TVL is nearly gone in that pool, and it would help to either offset what we’d need to transfer from the DeFrost Boost Farm or add an additional buffer of rewards for the users of the new pool/farm.

  3. Users are required to deposit USDT, USDC, or DAI in this new pool/farm.

  4. Our contract then automatically takes their deposit and establishes the position in the Curve pool on their behalf using the DAI/USDT/USDC (We can require an entry fee on this new pool/farm to cover gas costs, something small and negligible but enough to cover our maintenance costs for establishing said position).

  5. The contract then takes the DeFrost-3CRV LPs created and holds them in the reserves of the contract. When a user wants to withdraw their USDC, USDT, or DAI from this new pool/farm on DeFrost.Finance, the contract will swap those LPs back to USDC, USDT, or DAI and return them to the user.

It will be like an autonomous USDT/DAI/USDC position in the Curve pool for the users, that the contract controls so that we can verify users are depositing USDT/USDC/DAI. The whole point of the new pool/farm behaves sort of like an escrow verifying that users are depositing USDT/DAI/USDC into the Curve pool. Otherwise we don’t know what they’re depositing and they could just be depositing H2O. We can’t alter the Curve pool contract, so this is a solution to verify the aforementioned.

The only solution to directly mitigate the possibility of H2O being looped/swapped for DAI/USDT/USDC (thereby ending up in the end with the same amount of av3CRV in the Curve pool) is by dynamically limiting the supply of H2O available to mint in the vaults until H2O regains peg.

This won’t motivate any current vault owners to unwind/leave their vaults - their positions can be accounted for.

It would simply mitigate the possibility that users would utilize this tactic.

Btw, it’s not guaranteed that users would, but this additional change in conjunction with the new pool/farm would ensure the new pool/farm is utilized as intended…

…The end result is, in theory, a stable coin pool that benefits H2O’s peg by depositing USDT/USDC/DAI into the Curve pool, all while ideally/potentially offering users rewards in the 30-40% APR range, higher than they can get looping in most of the vaults a few times, or by depositing their stables on external platforms.

The main qualm, then, would be one of two things;

  1. Slippage Risk
  2. Rewards dropping quickly due to TVL moving from DeFrost Boost farm to the new pool/farm.

I will address these separately…

  1. Users already face significant slippage risk in DeFrost’s current state. With this new method users can be made aware of any slippage risks and move forward with participating in the new pool/farm or not participating in the new pool/farm, accordingly.

  2. The current APR on the Defrost Boost Farm is 3.74%. It’s fairly clear that any users who are still using the platform aren’t using it for the MELT rewards from this farm, but rather the front-end yields on stable positions by looping via our vaults. This 3.74% is simply an added bonus to the bulk of their main position which is their leveraged vault, where most of their returns reside.

That said, even if a ton of the liquidity did move over into the new pool/farm, it would be FORCED to become DAI/USDT/USDC liquidity in the Curve pool, whereas most of it right now is H2O liquidity (from looping/leveraged positions).

This means that worst case scenario we shift to be heavier on USDT/USDC/DAI in the Curve pool, rather than H2O, and the rewards at this point might diminish in the new pool/farm. But choosing whether or not to be in said new pool/farm will work itself out naturally that way - Deterring any new users from entering if the rewards are too low, and naturally working out a favorable reward depending on how incentivized users feel to participate in said new pool/farm.

If the above did occur, and H2O went above $1 like we saw in the early days of DeFrost I still think it would give us a better foundation to work upon and I honestly believe long time investors on the DeFrost platform would take a sigh of relief to see H2O slightly above $1 as opposed to significantly below.

Lastly, to touch on some of the numbers…

H2O currently sits at $0.92 as of 11:08 pm, 5/13/2022. But it was just at $0.75 earlier today. :grimacing:

The current Curve pool makeup is as follows:

H2O: 16,047,851.52 (91.87%)
av3CRV: 1,419,287.59 (8.13%)

The Curve pool could be shifted to 83%/17% H2O/3CRV with just $1,500,000 of 3CRV deposited.
At a weight of 17% av3CRV in the pool, H2O would be at peg or devastatingly close.

If we were to take the emissions from the normal DeFrost-CRV Boost farm and apply the math using current MELT prices we would be left with an approximate BASE reward rate of 41.7% APR on this new proposed 3CRV pool with a deposit of $1,500,000 from users.

It wouldn’t require users that are looped to unloop, they can stay looped as they wish if they prefer that strategy of rewards.

What it could do is motivate other users who don’t want to risk looping at $0.75 - $0.92 and risk losing 8% - 25% instantly when we repeg, by giving them access to a 40%+ stable pool, effectively, which is higher than most stable pools/farms out there, atm.

…Okay, that’s all I have. I know this was long. Thank you for reading.
Everyone that’s here now is truly invested in DeFrost’s success long-term, that much is clear.
If we all work together we can certainly achieve that goal. :handshake:

4 Likes
#12

Exactly!

The only concern I could see is if our ratio was so low that when someone tried to pull their 3crv tokens, is if there wasnt enough 3crv to cover their share of the new farm.

1 Like
#13

i support for this proposal. we need to protect the integrity of H2O, now more than ever.

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#14

That risk can be accounted for in the slippage risks we could outline beforehand and hit the education of our community hard on that front so everyone who chooses to participate can be made fully aware of any potential risks.

1 Like
#15

Regarding depegging being more serious, we were in the 70% range today. Thats pretty serious.

People are not likely to exchange H2O for USDC at high slippage rates en masse. Some of this will occur, sure, and thats fine, its better than the alternative. But we need more 3CRV tokens on entry to the pool to have a chance at maintaining peg, this does that. If we dont maintain peg, we will see no usage, and the platform will die.

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#16

Yes, houndeyex, that is correct.

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#17

Ans if this works, we now essentially have a mechanism which will encourage minting h20 without destroying the peg. That means consistent platform usage, consistent fees, higher TVL, etc. And thus higher MELT price, thus higher APRs.

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#18

Ive run it through my head and I see a bit what you are saying.

A person could mint H2O, exchange for USDC, and stick the USDC in the new farm for the higher rewards, with the H2O still being in the pool, and no additional USDC added. I have to think on this.

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#19

Only throwing this in here as a side consideration - there is a lot going on with the discussion overall.

I don’t know how effective increased allocations of MELT rewards will be at attracting changes. MELT has been on a steep slope down and you’d be incentivizing with further tokens towards that. Investors would have to be extremely confident that this was an effective change to accept rewards that are actively dropping in value.

1 Like
#20

Nobody has mentioned increasing rewards, just moving them. I need to think more on it after some of these convos. I see a few possible issues.

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