The Gelato Network has submitted their MIP6 application for the G-UNI token. I would like to make an argument for fast-tracking this collateral to replace a good chunk of the PSM-USDC exposure. First, I’ll explain how G-UNI works and its relation to Maker.
G-UNI is an ERC20 tokenization of a Uniswap V3 position. It works for arbitrary pairs with arbitrary ranges, but for the purposes of Maker we are going to focus on a fixed range for the USDC-DAI pair. There are many projects building ERC20 tokenizations of Uniswap V3 positions, but G-UNI is the most straight-forward implementation I have found so far. G-UNI does not have farming rewards of random tokens, admin upgradability (it technically does, but they will turn this off) or large/complex code. It makes our job much easier for doing the analysis to protect vault user’s funds.
G-UNI takes the standard approach of having an operator (Gelato Network nodes) re-invest the profit back into the pool. Node operators get 1% of the profit re-invested, so they are incentivized to do a good job. Node operators do not have access to funds beyond a portion of the immediate profit. Since re-investment will occur fairly frequently the amount of funds at risk from a malicious node operator at any given time is minimal.
My idea is to provide a standard vault with very high leverage on this DAI-USDC G-UNI pair at a fixed spread of
0.9994 - 1.0014. This range should cover most of the trades where the peg is breaking high. The specific numbers are a feature of Uniswap in that the price ranges are bucketed to certain numbers. This is actually to our advantage as the only prices available are 0.9994, 1.0004 and 1.0014 which means actively managed positions can’t really outcompete us by much.
Looking at recent Uniswap numbers, APRs on this pool are around 4% based on the 140M TVL. If we offer 100x leverage (101% CR) then this APR raises to 400% which should attract a lot more capital. This should be enough to attract a couple billion TVL into the pool (depending on the SF) which will indirectly unwind the PSM as minted DAI is sold for USDC. Furthermore with such a massive amount of liquidity, the Uniswap pool will become a great place to do trades between USDC and DAI of virtually any size. This will help to increase fees and attract even more capital.
I see two advantages of not just using the USDC in the PSM:
Complexity. The fee re-investment in Uniswap V3 is not trivial. It requires front-run protection mechanisms to ensure that rebalancing the two tokens doesn’t result in excessive loss of fees. So far the common strategy I’ve seen is to have a trusted operator take care of this. Building this internally at Maker will take a lot of time. By using a third party solution with external token we can minimize the amount of work required on our end.
Blacklist risk. It’s not clear how much of a concern this is, but at the very least it is causing hesitation with some folks in the crypto space. By adding the G-UNI token as just another vault we no longer have USDC on our books. USDC does not touch any of the Maker smart contracts, so Circle would not be able to blacklist the Maker protocol directly. They could still blacklist the G-UNI token, but that becomes more like blacklisting a Uniswap pool which seems like a very bad PR move as there is collateral damage. As of right now the PSM USDC is entirely owned by the protocol - this change would make the vault users owners of the USDC again.
- Unwind the PSM
- Start earning fees on the USDC that would otherwise be sitting in the PSM
- Blacklist risk mitigation
- Uniswap USDC-DAI swaps can take very large trades
- Minimal work to onboard (Standard GemJoin and Oracles are straight forward)
- High leverage is much more risky to the protocol
- Giving up some fees to users in exchange for blacklist mitigation
- Takes some time that is otherwise used for other more productive collateral
This poll will run until Thursday July 8th, 2021. If accepted (and the MIP6 vote is greenlit) then the relevant Core Units will begin work onboarding G-UNI as a high priority item.