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The Tally Newsletter, Issue 36

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The Tally Newsletter, Issue 36

June 16, 2021

monetsupply
Jun 16, 2021
Share this post

The Tally Newsletter, Issue 36

newsletter.tally.xyz

Welcome back for issue 36 of the Tally Newsletter, a publication focused on all things decentralized governance. We’ll keep you updated on key proposals, procedural changes, newly launched voting systems, shifting power dynamics, and anything else you need to know to be an informed citizen. 

This week we cover:

  • Curve’s conflicts with Alchemix and supporting protocols

  • MakerDAO community struggles to reduce USDC exposure

Plus brief updates from around the ecosystem.


Curve Moves to Block Rewards for Alchemix Pools

TL;DR: Some felt underlying Yearn vaults’ CRV sales allowed Alchemix users to double dip on rewards, but this logic could also apply to certain other supported assets.

While the defi governance space is rarely short of drama, this past week has seen a burgeoning conflict between Curve Finance and two of their primary integrators, Yearn and Alchemix. 

It seems the spat was initially kicked off by the Curve team’s reluctance to add rewards for the forthcoming Alchemix alETH pool. Alchemix is a protocol for non-liquidatable, self repaying loans - under the hood collateral is held within Yearn’s vaults, and yield earned is used to gradually repay the debt without requiring user action. 

Twitter avatar for @CurveFinance
Curve Finance @CurveFinance
A proposal to get an @AlchemixFi alETH/ETH pool up in UI. This pool would not get CRV in order to not double-dip into CRV inflation (alETH is inherently linked to vaults dumping CRV) - only listing in UI is proposed gov.curve.fi/t/scip-41-add-…
signal.curve.fiSnapshot
4:18 PM ∙ Jun 15, 2021
137Likes11Retweets

alETH is backed by Yearn’s yWETH vault, which generates the bulk of its returns through participation in Curve pools and CRV rewards. By borrowing alETH against these vault shares and then reinvesting the proceeds back into the vault, users can lever up their returns and contribute a higher effective amount of liquidity per unit of invested capital. 

Because Alchemix relies heavily on Curve inflationary rewards to support their core product, some Curve community members raised concern that it was unfair to also incentivize liquidity pools for alETH as well - users could potentially earn CRV on their collateral plus an additional layer of rewards by reinvesting the borrowed amount.

Twitter avatar for @AlchemixFi
Alchemix @AlchemixFi
Deposits for @saddlefinance are now LIVE. Please read this guide to depositing on Saddle. If you are familiar with Curve, you will feel right at home. alchemixfi.medium.com/saddle-finance…
Image
2:34 AM ∙ Jun 15, 2021
190Likes27Retweets

With the likelihood of being refused rewards for the alETH pool, Alchemix developers decided to launch their incentivized ETH pool on Curve competitor Saddle Finance instead. This evidently didn’t play well with Curve, who has alleged IP infringement against the Saddle team for their implementation of Curve’s stableswap AMM model.

Twitter avatar for @CurveFinance
Curve Finance @CurveFinance
alUSD apparently is linked to dumping CRV from inflation schedule, so it currently causes more dumping of CRV than a normal pool would. There is a possibility to remove CRV inflation for this pool via a governance vote, hence the proposal:
gov.curve.fiCIP#67 - Remove alUSD gaugeSummary: Remove alUSD gauge so the pool stop receiving CRV. As pointed out by community members, alUSD is collaterized by Yearn Vaults which make around 25% of their yield from dumping CRV. We would like to propose to remove the gauge from Curve as this essentially allows leveraged CRV farming via…
4:21 PM ∙ Jun 15, 2021
267Likes35Retweets

This was followed by Curve beginning a discussion and governance process to remove CRV rewards from the already supported alUSD pool, which represents a much larger part of Alchemix’s business. This also heavily impacts Yearn, a key Curve participant which has received hundreds of millions in deposits in its DAI vault through Alchemix.

Twitter avatar for @bantg
banteg @bantg
Imagine killing your highest-yielding vault and turning down potential partners by association without any chance for the DAO to express the opinion. Yearn will vote against if this goes on chain.
Twitter avatar for @CurveFinance
Curve Finance @CurveFinance
alUSD apparently is linked to dumping CRV from inflation schedule, so it currently causes more dumping of CRV than a normal pool would. There is a possibility to remove CRV inflation for this pool via a governance vote, hence the proposal: https://t.co/KGt2E9jmXi
4:49 PM ∙ Jun 15, 2021
456Likes50Retweets

While the argument against rewards double dipping has some appeal, this may not be the best way of approaching the issue. For example, the alUSD have relatively high trading volume compared to the amount of rewards issued, implying better profitability to CRV holders. 

As a counterpoint, the recently added USDP pool (via Unit Protocol) has much lower liquidity utilization and contribution to CurveDAO revenue, while receiving 3 times higher rate of rewards. Unit Protocol is also integrating leverage on Curve positions directly into their borrowing platform, allowing users to have similar leveraged farming exposure as Alchemix. Divergence in Curve’s treatment of the various LP leverage platforms could point to a more strategic approach to integrations, systematically favoring protocols that avoid Curve competitors.

MakerDAO Struggles with Growing Stablecoin Exposure

TL;DR: The community is considering several mitigations, including stablecoin reserve diversification and improved terms for borrowers.

Starting with the price crash on May 19, market sentiment has dropped considerably. With this, we’ve seen an increase in stablecoin demand and a sharp drop in leverage seeking. Both of these factors have had a drastic impact on MakerDAO’s collateral pool and loan book.

Makerburn

In order to limit DAI price rises, Maker has implemented a feature called the peg stability module which mints new DAI on demand in exchange for USDC. While this has eliminated the volatility and persistent premium DAI experienced through last year’s defi summer, it also allows for substantial increases in stablecoin exposure.

In the past month, DAI generated from the peg stability module has ballooned by a factor of 3x, from under 800 million to 2.5 billion today. This represents a serious threat to the protocol’s stability, via a few risk factors:

  • Credit and default risk of USDC

  • Potential for regulatory attacks or blacklisting

  • Liability risk if assets can be seized via lawsuits

With over 50% of the DAI supply secured by USDC, it’s now more pressing than ever for MakerDAO to address the imbalance.

DAI Stats

Interest rates are Maker’s primary tool to handle peg imbalances, and Maker’s rates setting group proposed broad reductions in borrowing costs by early June. But as the rates group is an advisory body without execution authority, the process for implementing these changes has presented its own issues. 

Rates changes are generally proposed after the first Monday of each month, but governance votes to confirm the changes are only submitted the following week and can take additional time to receive enough support to pass. As of today, the executive vote to implement these key changes is still pending 5 days after submission. 

In addition to reducing stablecoin exposure in general through borrowing rate reductions, the Maker community is considering addition of new peg stability modules for GUSD, PAX, and BUSD to help diversify credit risk between issuers. While all 4 of the stablecoins are US based and potentially have similar legal and regulatory exposure, they are managed by separate institutions and have varying levels of disclosure of their reserves. GUSD has an additional benefit of short term censorship resistance, as the ability to add a seizure function to the contract is behind a multi day timelock.

Twitter avatar for @jp_koning
John Paul Koning @jp_koning
MakerDAO owns $2.5 billion USDC, which means it is lending $2.5 billion to Circle at 0%. Circle reinvests this at ~0.1%, earning $2.5 million/year off of Maker. If Maker sold its USDC and invested directly in $2.5 billion worth of t-bills, it'd get to keep all of that interest.
7:10 PM ∙ Jun 14, 2021
35Likes4Retweets

There’s also been various discussions of investing the USDC collateral into yield opportunities. But Maker faces considerable challenges in this area as well. It’s still unclear how Maker can own assets off chain (such as US treasury bills) without high risk and custody expenses. And for defi native yield opportunities, investment could lead to further pressure on Maker’s collateral pool; lending the USDC in defi would push down rates and reduce demand for Maker’s core vaults (limiting DAI supply), while supplying to a stablecoin AMM such as Curve would increase demand for DAI to balance out the pool proportions. 

In the short term the focus will likely remain on encouraging more crypto backed loan demand through lower rates. But Maker may also need to shorten the rate setting feedback loop to avoid future spikes in stablecoin exposure. Optimistic execution mechanisms like Tally Failsafe might be able to support more agile decision making without increasing governance or contributor risk by allowing contributors to execute changes directly, subject to token holder veto.


In Brief:

  • Alchemix’s new alETH derivative faces potential vulnerability:

    Twitter avatar for @AlchemixFi
    Alchemix @AlchemixFi
    There has been an incident with the Alchemix alETH contracts. Together with the fantastic team at @iearnfinance, we have identified the error and are both working on a post-mortem and a solution to the problem. Funds are safe.
    3:35 PM ∙ Jun 16, 2021
    274Likes42Retweets
  • Cream money market faces losses on SWAG tokens from loans opened last fall:

Twitter avatar for @wilburforce_
Will Sheehan @wilburforce_
Due to a toxic long tail asset (SWAG) dropping 97% in a day (!!), cream is sitting on ~$1.3m in bad debt
Image
9:06 PM ∙ Jun 10, 2021
188Likes20Retweets
  • Fei and Compound considering proposals to use Chainlink oracles

  • Lido Finance reaches 500,000 ETH staked in their stETH product:

Twitter avatar for @LidoFinance
Lido @LidoFinance
More than 500,000 ETH staked with Lido 🏝️
10:19 AM ∙ Jun 15, 2021
1,219Likes94Retweets
  • Inverse Finance on track to onboard stETH to Anchor lending protocol:

  • Curve community member proposes DAO directed legal action against potential IP violations:

Twitter avatar for @SamMiorelli
Astronaut Sam Miorelli @SamMiorelli
My first DAO forum proposal: CIP#xx: @CurveFinance should start enforcing its IP. (I know, typical, lawyer suggests DAO hires lawyers!) Very happy to hear your thoughts. gov.curve.fi/t/cip-xx-enfor… @CurveCap @bneiluj @charlie_eth @Cryptoyieldinfo @bantg @ConvexFinance @saddlefinance
gov.curve.fiCIP#xx - Enforce Curve’s IP RightsSummary: Contrary to popular belief, Curve has valid and enforceable IP rights in its software code. Pursuant to the LICENSE, Curve can and should protect its position in the marketplace with enforcement of those IP rights. Profits from such enforcement should benefit veCRV. Abstract: Curve has p…
12:33 PM ∙ Jun 16, 2021
36Likes4Retweets
  • Volmex launches tokenized crypto volatility products on mainnet:

Twitter avatar for @volmexfinance
σ volmex.finance @volmexfinance
1/ volmex.finance v1 is now LIVE on the Ethereum mainnet! 🎉✅ app.volmex.finance
Image
2:51 PM ∙ Jun 16, 2021
81Likes29Retweets

Opportunities: 

  • Aave Grants funds first batch of projects, with further funding available:

Twitter avatar for @AaveGrants
Aave Grants DAO @AaveGrants
Proud to announce our first set of grantees 🥳 Each of these projects are thoughtful and will bring immense value to grow @AaveAave 👻 This is a step towards building a thriving ecosystem of contributors that serve Aave protocol
8:34 PM ∙ Jun 15, 2021
321Likes63Retweets
  • Flipside Crypto extends community analytics program to Compound:

Twitter avatar for @flipsidecrypto
Flipside Crypto @flipsidecrypto
And, as usual, we have new bounties from our friends @compoundfinance ❇️ Earn 0.5 $COMP 💸 while learning SQL and data analytics skills ✅ Check them out here ⬇️ notion.so/Flipside-Bount…
notion.soNotion – The all-in-one workspace for your notes, tasks, wikis, and databases.A new tool that blends your everyday work apps into one. It’s the all-in-one workspace for you and your team
8:40 PM ∙ Jun 15, 2021
31Likes7Retweets

Thanks for joining us for issue 36 of the Tally Newsletter. Be sure to check out the Tally governance app and join us on Discord for the latest updates!

Anything we missed? New developments or protocols you’d like to see covered? Drop us a line at newsletter@withtally.com

Best,

Nate, Tally

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The Tally Newsletter, Issue 36

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