[UNI-V2-DAI-PAX] MIP6 Collateral Onboarding Application

[UNI-V2-DAI-PAX] MIP6 Collateral Onboarding Application for Uniswap V2 DAI-PAX LP Token

  1. Who is the interested party for this collateral application?

@monet-supply

  1. Provide a brief high-level overview of the project, with a focus on the applying collateral token.

Uniswap is a decentralized protocol that allows for permissionless asset exchange and passive market making. Uniswap uses an invariant function (x * y = k) to quote prices of asset pairs based upon the relative quantity of those assets in a liquidity pool. If the price differs from the prevailing market price, arbitrageurs are incentivized to trade against the pool to correct the price discrepancy. Any user can join a liquidity pool by depositing equal valued amounts of each asset.

To incentivize users to provide liquidity, 0.3% of each trade is retained by the pool as a fee, increasing the underlying token balances of all participating LPs. However, being an LP is not without risk, as the pool will programmatically buy assets as the price falls or sell as the price appreciates. This leads to a phenomena known as “divergence loss”, where larger price moves cause LP tokens to underperform versus a benchmark of simply holding 50% of each asset.

The UNI-V2-DAI-PAX LP token is the pair consisting of DAI and Paxos Standard USD (PAX). This token currently has $20 of liquidity with only a single LP (yours truly :slight_smile: ).

Uniswap v2 pool contracts are mostly permissionless and non-upgradable. However, UNI governance has the ability to activate a 0.05% protocol level swap fee (reducing swap fees received by LPs from 0.3% to 0.25%) after a 180 day timelock, which could make participating as a Uniswap LP less economical. Uniswap’s contracts have been audited and are among the most battle tested of any application, but it is possible that an undiscovered flaw could lead to loss of funds.

  1. Provide a brief history of the project.

Uniswap was first deployed to the Ethereum mainnet on November 2, 2018. On May 18, 2020, Uniswap v2 was launched. Liquidity increased sharply beginning in late August when Sushiswap began incentivizing deposits. The UNI governance token was launched in September, partly in response to liquidity migrating to Sushiswap, and incentives helped Uniswap regain primacy in decentralized exchange liquidity. Incentives have now ended as of November 17, 2020, and it’s unclear if/when they will be reinstated.

  1. Link the whitepaper, documentation portals, and source code for the system(s) that interact with the proposed collateral, and all relevant Ethereum addresses. If the system is complex, schematic(s) are especially appreciated.

Whitepaper: https://uniswap.org/whitepaper.pdf

Documentation: https://uniswap.org/docs/v2/

Website: https://uniswap.org/

Source Code: Uniswap · GitHub

UNI-V2-DAI-PAX token contract: https://etherscan.io/token/0xa3b9fe842d176a86528a00fe12be2df042e14350

  1. Link any available audits of the project. Both procedural and smart contract focused audits.

.Uniswap V2 Audit Report

  1. Link to any active communities relating to your project.

Twitter: https://twitter.com/UniswapProtocol

Forum: https://gov.uniswap.org/

Discord: Discord

  1. How is the applying collateral type currently used?

UNI-V2-DAI-PAX LP tokens allow users to deposit equal values of the two constituent assets and earn trading fees proportional to their liquidity provided. Both assets track USD, so depositors can earn from trading fees with relatively low risk of impermanent loss. UNI-V2-DAI-PAX is not currently integrated with other defi apps.

  1. Does one organization bear legal responsibility for the collateral? What jurisdiction does that organization reside in?

UNI LP tokens are permissionless assets, with no legal issuer or freeze/blacklisting functionality.

The PAX token is Paxos Trust. Further details can be found in the collateral application and risk assessment.

  1. Where does exchange for the asset occur?

UNI-V2-DAI-PAX can be exchanged for its underlying constituents permissionlessly via the Uniswap v2 contracts and front end UI. DAI and PAX are traded on a wide variety of decentralized and centralized exchange venues. Users can also mint or redeem PAX for USD directly via the Paxos platform.

  1. (Optional) Has your project obtained any legal opinions or memoranda regarding the regulatory standing of the token or an explanation of the same from the perspective of any jurisdiction? If so, those materials should be provided for community review.

n/a

  1. (Optional) Describe whether there are any regulatory registrations for the token and provide related documentation (including an explanation of any past or existing interactions with any regulatory authorities, regardless of jurisdiction), if applicable.

n/a

  1. (Optional) List any possible oracle data sources for the proposed Collateral type.

n/a

  1. (Optional) List any parties interested in taking part in liquidations for the proposed Collateral type.

n/a

Disclosure: I hold tokens mentioned and am a participant in Uniswap governance. This collateral application is for informational purposes only, and does not constitute advice of any kind.

Copyright and related rights waived via CC0.

3 Likes

These are great and all but I know 50/50 LP tokens aren’t very efficient for stablecoins compared to Curve. Are there ways we can incentivize liquidity between DAI/PAX/GUSD from curve lp tokens? Not sure if everything has to run through 3pool (USDT exposure) or if there’s a workaround that is less risky. Wondering if you’ve given this some thought. I know we’d need a whole new oracle assessment/build for that.

3 Likes

Agree, curve is more efficient for stablecoin swaps. In the short term, these Uni LPs could be easy to onboard and manage so I think they could still be beneficial. But we should probably add support for Curve LPs as well, the main blockers I see are most Curve pools have USDT exposure or lending protocol exposure which increases risk.

One other benefit of Uniswap pools is they provide more liquidity for DAI when it is trading off peg. Curve has lots of liquidity around 1:1 ratio, but a side effect is much greater slippage for stablecoin trades when the pool is unbalanced. So Uniswap LPs with DAI can serve as a backstop in these cases.

1 Like