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

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

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

@smaugho and members of the MakerDAO community

2. 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.

The UNI-V2-DAI-USDC LP token is the pair consisting of DAI and USDC. This token currently has $21,279,810 of liquidity across 270 holders at the moment of writing this post (Dec 29, 2020).

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.

3. 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.

Uniswap it is the 4th protocol by total value locked following DeFi Pulse

4. 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: https://github.com/Uniswap

UNI-V2-DAI-USDC token contract: https://etherscan.io/address/0xae461ca67b15dc8dc81ce7615e0320da1a9ab8d5

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

Audit report: https://uniswap.org/audit.html

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

Twitter: https://twitter.com/UniswapProtocol

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

Discord: https://discord.com/invite/XErMcTq

7. How is the applying collateral type currently used?

UNI-V2-DAI-USDC LP tokens allow users to deposit equal values of the two constituent assets and earn trading fees proportional to their liquidity provided.

8. 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 USDC token is issued by regulated financial institutions, and backed by fully reserved assets (redeemable on a 1:1 basis for US dollar). USDC is governed by Centre

9. Where does exchange for the asset occur?

UNI-V2-DAI-USDC can be exchanged for its underlying constituents permissionlessly via the Uniswap v2 contracts and front end UI. DAI and USDC are traded on a wide variety of decentralized and centralized exchange venues.

10. (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.

I am not aware of any publicly available legal opinions addressing the project or token’s regulatory standing.

11. (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.

There are no regulatory restrictions for the token directly, but the underlaying asset (USDC) has a blacklisting functionality and it is regulated by USA authorities. A possible risk would be blacklisting the UNI-V2-DAI-USDC contract address which would make impossible to recover the funds within the contract. There is no precedence of USDC regulators requesting to blacklist a smart contract address and given the huge economical impact it could have for USDC holders, it is expected to be a very extreme case scenario.

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

UNI-V2-DAI-USDC value can be determined based on the value of underlying assets. This said, USDC is a stablecoin also pegged to the US dollar similar to DAI, therefore it is expected that the token value only grows while it collects swap fees. Variations in DAI price (since it is the more volatile of the pair) are the major contribution to negative changes in value.

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

n/a


I’ve used most of the information provided previously by @monet-supply on MIP6 applications for other collaterals

Would like to remark that even if the PSM could have a lower fee than Uniswap (which would make it a direct competition for swapping DAI-USDC), I would not expect that we keep that swap fee so low since it will increase our exposure to USDC directly. I would expect that in the future the tin parameter of the PSD be reverted to something like 1% (which would permit us to collect further fees and in the case that the DAI price grows again, we’ll be motivated to put it back to 0.1% earning more fee in the process).

Also the fact that USDC-DAI pair be collecting so much fees shows that typical users would prefer to exchange through Uniswap, plus Uniswap could use this LP as a route for other swaps which increases the swap-traffic in that LP (at the moment of writing the pool it is returning a 22% in fees based on volume in last 24 hours annualized).

Adding this collateral could have a huge impact in the amount of DAI generated from it, and it’ll increase the liquidity of DAI greatly which is all positive for us.

17 Likes

Like this proposal, low risk high rewards, with a low CR given they are stablecoins we could charge some very nice fees on this one and still be heavily used given the very low risk of liquidation for LPs

1 Like

thanks for picking up this initiative @smaugho!

bringing another DAI-LP will also increase DAI being provided to Uniswap + will help on the mission of making DAI a frequent pair for swaps.

3 Likes

Thanks @smaugho! Great work!

Just one question, to make sure I understand what you wrote.

was this a copy and paste from a general LP MIP-template?

Because, under the assumption that divergence loss is what used to be called imparmanent loss, there should be a predictable ~0% loss on the DAI-USDC pair (assuming the their pegs stays around 1:1usd).

Or is divergence loss something different?

thanks again!

@iammeeoh you’re right, there would not be divergence loss (which is as you say the impermanent loss), assuming of course that the DAI and USDC keep their peg).

I’ve made this amend to the MIP text to avoid any further confusion.

Yes, this was copied from previous LP MIP “templates” and I didn’t realize this detail, thanks for letting me know!