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

Good clarification. Thanks.

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The only solution to directly mitigate this possibility 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.

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Great discussion, guys. I’m just wondering whether this helps by itself. There would need to be a set of changes, mostly parametrical, to the way we are currently set. And the question is whether we cannot approach the peg with current structure by changing the parameters. The issue is simple - the supply of H2O is too high. And that’s because the collateral ratios and fees have been set low (and reality evidently too low) and/or the amounts to be minted too high. What about simply increasing the collateral ratio for the stable pools to 110% instead of 105% and fees to 1.5% instead of 1% (or maybe just increasing the collateral ratio would be enough)? That would likely lead to large de-looping and thus reducing H2O in circulation. And that’s the aim. And yes, it would lead to possible liquidation, but people are supposed to check on the protocols they stake in, right? So if it is communicated enough, people will adjust. If not, their problem, they should have checked. I would give like a week’s notice.

And then, in steps, I would get rid of the SV I pools, reopen them as SV II with carefully set minting levels, increasing them step-by-step. And reconsider the MELT fees while minting. Should they be fixed? Should they be dynamic? And if, then how?

The bottom line is that we need to ask ourselves a question - in this market mood, are we more likely to be able to attract stables to balance the Curve pool (the current proposal/discussion), or to force some de-looping to lower the H2O supply (what I suggest)?

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Hi, @Phoenix_Risen, thanks for the thoughts.

I agree with some of what you said, specifically the part about transitioning any SVIs to SVIIs. We need to be able to charge a front end fee for the ability to leverage using our vaults. This fee can be dynamic, if needed, but it is likely better to change it from the current fee structure (# of MELT Tickets per $1000 collateral regardless of MELT price) to a new fee structure that requires a dollar amount per $1000 collateral - depending on MELT’s current price it will require more or less MELT tickets for entry.

Now, as for the rest…

Your proposal to increase the collateral ratio and stability fee only attacks half of the problem - The amount of H2O which ends up in the Curve pool. Sure, increasing both might temporarily alleviate our peg issues by forcing some de-looping, but what happens when users decide they want to loop again?

It will become a vicious cycle unless we can resolve the actual heart of the issue; the disproportionate share of av3CRV in the Curve pool, in relation to H2O.

The only way I can see to fix that problem, at this point, is by incentivizing av3CRV deposits, and the only way to ensure that’s what our emissions are incentivizing is through the methods laid out in the previous comments above.

A new USDT/USDC/DAI (3CRV) pool/farm on DeFrost paired with a temporary minting freeze on H2O would make it so for any users to access DeFrost’s emissions, they would need to go through the new 3CRV pool/farm, thereby benefitting the Curve pool weights, and finally causing H2O to regain peg.

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Ive had the night to think about it, and Im no longer sure a 3crv pool would fix anything. In fact, there is a possibility that it would lead to dilution of rewards that are now split between the 2 pools, if the majority of the h20 in the pool decided to purchase 3crv tokens and supply to the new pool. Being that curve is pretty much the only place to exchange, we would likely see little to no change in the amount of 3crv compared to h20, as the 3crv provided for the new pool was just swapped from the defrosth203crv pool in the first place, meaning zero net change to the pool composition.

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This would have been an optimal solution a month ago, but now we have this outstanding UST debt. If we push our vault owners into liquidation, we could lose enough H2O mcap that we are no longer overcollateralized.

Adjusting the collateral ratio could be pretty dangerous, even given the notice days ahead.
It might lead to some sudden liquidation to users and it will be quite unfair.

Adjusting the stability fee and minting cost in the supervault II might be a better choice.

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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.