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

Keep in mind, the assumption that all TVL would shift to the new 3CRV pool if we moved some rewards is not gauranteed.

Think about the original DeFrost-3CRV farm and when we removed the rewards. It became deprecated, yet, if my memory serves me, around $10M TVL stayed in that farm for weeks.

The idea here would be to leave some emissions in the DeFrost Boost Farm to appease those that choose to stay there (we’re already at 3%± APR on that farm, going a little lower won’t make much of a difference at this point in the grand scheme), but also transfer the H2O/AVAX emissions to the new 3CRV pool.

Due to the current composition of the Curve pool having a little over $1M in av3CRV and the current TVL of the DeFrost-3CRV Boost Farm being $16M, we can easily determine that with a new 3CRV pool users would need to close some of their H2O positions if they want to participate. Through this new 3CRV pool we would be making it so beyond the H2O vaults the only way the lion’s share of the MELT emissions become accessible to users is through depositing USDT/USDC/DAI into the new 3CRV DeFrost pool which would directly then benefit the disproportionate weights in the Curve pool, and finally, help H2O regain peg.

The team has also been discussing temporarily increasing emissions on av3CRV deposits to mitigate diluted rewards from all TVL shifting to a new pool, and to also ensure the rewards are incentivized enough.

All of this would need to be voted on via governance.

I will revert back to the fact of the matter here; the only way H2O remains sustainible at peg, is if there is more av3CRV in the Curve pool. The only way we get more av3CRV in the Curve pool is by incentivizing USDT/DAI/USDC deposits.

We can talk all day about maybe this will happen or maybe that will happen…The fact above still remains.

If anyone has a better idea on how to incentivize av3CRV deposits, I’m all ears. Please come forward.

We can’t attack one side of the coin (H2O by increasing stability fees,etc) and completely ignore the other side of the coin, av3CRV weight in the Curve pool, otherwise we’re doomed to a vicious cycle of;

Users using the platform for its intended value proposition, H2O vaults, and de-pegging H2O, again…and again…and again…

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Hmmm… I suppose if the balance of h20-3crv didnt change due to the concerns I listed above, 3crv would still remain more incentivized since those rewards are still being split between less 3crv than h20…

@Mountainking - Thoughts?

That’s true. I’m not saying it should increase crazily. Maybe in two steps - 107.5% and 110% or something like that. Honestly, I don’t think the new pool would solve much. The MELT price will likely not attract new stables. The issue really is the supply and it’s too high because of looping. Simple. We actually don’t need to decrease the supply too much to get closer to the peg. The collateral increase could be rough, but it’s been set too low. It might have been fine when MELT was shooting up and nobody cared. But in the current market mood, it’s holding us down. I’ll try put another proposal in a separate thread.

Country to @Doran 's idea, I don’t think the creation of a new av3CRV pool will work, to encourage more 3crv (or USD) into the H2O liquidity.

Let’s think of a simpler case in a Uniswap liquidity pool. The composition in a pool also means the comparative price.

For example in the MELT/USDC pool, suppose now we are rewarding the liquidity providers with 1000 MELT/day. Will the MELT price becomes higher (in other words, USDC will have a higher balance in the pool) if we incentivize the USDC entry directly, with the same incentives as 1000 MELT/day?

I think not.

Just like it is now in the DefrostH2O3CRV (thinking of it as an av3CRV/H2O pool with lower slippage in stable maths), simply migrating a portion of the rewards to the av3CRV (USD) entry will not eventually end up with an increase in the av3CRV (USD) liquidity in the pool.

The reason for that is that the DefrostH2O3CRV is a dynamic trading pool, not a static one. Users can always make inter-transaction freely and the pool can always auto-balance. The incentives for the entry will finally end up in the LPs in the liquidity pool, rather than for a seemingly single token staking. And users contributing av3CRV (USD), even from the new farm, will be exposed to the whole risks in the DefrostH2O3CRV pool, rather than the av3CRV (USD) asset itself.

Therefore, incentivizing the entry token, by creating a separate av3CRV (USD), will eventually make no difference from incentivizing the DefrostH2O3CRV pool itself.

How does this solve the UST debt issue? Just as it doesnt take much of a decrease in h20 to attain peg, it doesnt take much of a 3crv increase either. If we lose enough h20 mcap that we are no longer collateralized due to the UST debt, its game over.

While it may eventually lead to the same thing, in the meantime, we need some short term hope to stay alive, and if we prevent minting of h20, there will simply not be enough h20 in the short term to make this inefficient, no?

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As mentioned when we discussed in the team chat, the new contract would have to control the av3CRV deposits. Keeping in mind how the math on the Curve stable pool works, av3CRV deposits are still what is needed, and any potential transference would not outweigh the positive effect motivating av3CRV deposits would have on H2O’s peg.

@Mountainking If you have a better idea on how to incentivize av3CRV deposits, I’m all ears.
But it seems your idea is just to add more emissions to the already diluted DeFrost-3CRV Boost Farm.

At least with a new 3CRV pool on our platform, with a contract that controls the parameters we need for this to work, we force both USDT/USDC/DAI deposits, as well as H2O unlooping if a good portion of the current DeFrost-3CRV TVL would like to participate in the new set of emissions via the 3CRV pool.

As for @Phoenix_Risen above saying we can’t attract stables due to the MELT price;

Look at my calculations above in my full blown J.K. Rowling novel response (the long one).

If we can move to offer 30-40% APR in a new 3CRV pool on DeFrost, we will be offering a higher return on stables than not only what most users can currently get through looping a few times in DeFrost vaults, but also more than most users can get by staking their stables in external platforms. A bit of marketing here might be required to get the word out.

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Precisely. While it seems like the “easy” solution is turning off the H2O tap and adding more emissions to the already present DeFrost-3CRV Boost Farm, the 3CRV solution I’ve laid out with multiple scenarios attacks potential dilution in a few different ways, to at least give us a fighting chance in offering a reasonable yield on stable deposits.

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The reality is, we need very little additional 3crv to become a functional platform again.

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This much is clear.

:+1:

And btw…This is simply meant to serve as a native solution that might end up being short-term anyways as we continue to push for establishing incentivized H2O/Stable liquidity elsewhere, outside of Curve. We are continuing efforts on that front, which will likely turn out to be a more sustainible, long-term solution.

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I don’t think preventing minting of h2o will make much difference, as long as the total incentives keep the same. Perhaps a simple example to see if it makes sense. It is just one kind of reasoning of how auto-rebalancing may work in the pool. The real case could be more complicated but lead to a similar result.

Users can not freely transfer their av3CRV positions without withdrawing their position from the new 3CRV pool.

Our contract controls all interaction with the Curve pool.

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H20 providers would still be able to pull 3crv supplied by others though. This could essentially trap 3crv Lpers from pulling their funds, while the 3crv they provided is essentially now H2O from the exchanges in the pool, while they maintain the rewards for supplying 3crv, even with none in the pool.

That comes with the potential slippage risks outlined above. The pool will never allow all of the 3CRV to be removed, it’s essentially impossible, will become too cost/exchange ineffective for users trying to swap their H2O.

Should probably also implement a higher stability fee on current vault positions so users also don’t want to leave their H2O in for too long, so if they were to swap to 3CRV they would need to come back at some point to swap back and repay their loan, or else they’re at risk of paying a significantly higher interest fee.

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In principle I agree with a higher fee, I still worry this will lead to liquidations and a drop in mcap, leading to undercollateralization due to the UST debt.

@Mountainking I appreciate your input, but if this doesnt seem feasible to you, what idea does? It seems obvious to me that we have to do something or risk H2O death.

Something discouraging H2O minting, like higher minting fees, terminating some outstanding vaults, increasing stability fee.

This can be painful to lower our TVL, but could be necessary for recovering faith in Defrost in the long run.

That is all well and good if we had done it proactively, as Id been suggesting for months. But how do we move forward if our TVL drops? The UST debt will lead to undercollateralization.

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Still need a way to incentivize av3CRV deposits if we want to implement an action plan that accounts for possible DeFrost hype (more H2O vault usage) in the future, without said future possibility causing another depeg.

Need to be proactive on both ends of the spectrum.

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Evidently, there is not much willingness to increase the collateral ratios. I understand the concern with respect to the UST-induced loss that we have accrued there and possible liquidation it could cause just because people don’t check on their investment. The question then is - how to get rid of the toxic SV I pools (they are because their collateral ratios are simply too low and their possible minting is too high; we need looping, that’s for sure, but we can’t let it destroy the platform)? And the second step - finally get to SVs that would meet the criteria we now know need to be there - mostly higher collateral ratios, at least for the stables, and flexible MELT buy-ins (or maybe not even higher collateral ratios as we still want looping but adequate MELT fees, not completely sure about this one, but we certainly need either higher or flexible MELT buy-in fees to drive demand to MELT). Tbh, there is currently just one SV I that is being used, anyway, so it should not be that problematic.

But in the end, what is the main problem at this point, w.r.t. the peg? There is nothing to do with H2O apart from dumping it into H2O-3crv pool. So pretty much all (15.7m out of 17.3m) H2O is there. And that’s the issue. If there is something to do with it, they would be (also) elsewhere. Unfortunately, we are trapped because who would want H2O on their platform if it is already de-pegged so much. So we “simply” need to make it useful within the platform. We probably don’t want to go full Terra-style with the Ponzi-like Anchor single-staking. We have practically two-three possibilities:

  • Move some rewards from the H2O3CRV pool towards the H2O-AVAX pool. 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.
  • Set up a H2O single-staking pool with MELT rewards (again redistributed from the current H2O3CRV 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.
  • 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 actually with possible locking) and it never caused problems.

None of these would create new MELT emissions, just redistributing from the current H2O3CRV pool.

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.

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I think we have more options than what is being outlined here. I am in favor of phasing out SVI vaults in their current states (same points as above- collateralization factors etc). I like the idea of incentivizing non-H2O stablecoin deposits into the 3crv pool as well.

The UST debt is concerning. How bad is the debt currently? I am unsure how long this would take (on mobile currently) but the platypus purchases could be redirected towards buying out this debt for the time being. However, it may be an inconsequential amount/effect depending on size.

Perhaps reframing the question or approaches may be helpful. As a platform we have limited fee revenue and MELT emissions as tools we can use, most of which are allocated to existing pools. I think the H2O/AVaX pool should be closed and those emissions freed up.

I’m of the opinion that because the smart contract controls all interactions with the av3crv pool we have a good approach for the short term.

We nerf rewards on the current defrost3crv pool and H2O/AVAX LP and repurpose those emissions.

These rewards get split 50/50 between a single sided H2O pool that is a higher rate than the the 3crv pool, but eliminate looping or further minting against those. Consider sMELT boosting here.

The remaining repurposed rewards go directly to USDt/USDC/DAI deposits to incentivize bringing those in. Have a high collateralization ratio here to prevent over looping.

We’ve said a few times that the needle doesn’t need to move a lot in order to effect the peg materially. The above here and in previous posts aren’t perfect but rather than noodling on it, it’s clear that the worst thing that can happen is nothing changes. I’m willing to be the upside.

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