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

[UNI-V2-DAI-YFI] MIP6 Collateral Onboarding Application for Uniswap V2 DAI-YFI 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-YFI LP token is the pair consisting of DAI and YFI. This token currently has only $500 of liquidity, but supply may increase if LPs have access to better capital efficiency.

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-YFI token contract: https://etherscan.io/address/0x3cd132ac73a4043bb4f1674369e70be6f88edd73

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

https://uniswap.org/audit.html

  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-YFI LP tokens allow users to deposit equal values of the two constituent assets and earn trading fees proportional to their liquidity provided. When trading volumes are high relative to price drift, LPs can benefit from higher returns versus simply holding the individual assets. UNI-V2-DAI-YFI 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 YFI token is the native asset of the Yearn Finance ecosystem, and is permissionless with no freezing or blacklisting functionality. Yearn is a decentralized organization, and does not bear legal responsibility for the token.

  1. Where does exchange for the asset occur?

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

  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.

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

  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.

UNI-V2-DAI-YFI value can be determined based on the value of underlying assets. Per convention the DAIUSD price can be set at 1, and YFI price can be evaluated based on the existing oracle implementation.

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

n/a

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

7 Likes

:astonished: Now its getting interesting. 2021 babeeeeeee.

1 Like

I don’t see any value in spending the man hours to onboard this pair with the liquidity it has.

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Agree that there’s essentially 0 liquidity at the moment. But my vision for this is that if Maker onboards a decent amount of LP tokens as collateral, and also implements the peg stability module, DAI could partly displace ETH as the bridge asset of choice for AMMs.

eg. Going from fiat to token on Uniswap/Sushiswap currently costs 0.6% in fees plus slippage on two trading pairs. With the PSM active, users would face only 0.4% fees (0.1% PSM + 0.3% AMM) and slippage on only 1 pair.

I’m hoping that this could be market expansionary and help DAI liquidity.

8 Likes

Love the vision!

Wow that is brilliant. I think that is exactly what we should be trying to do in 2021 and scale DAI like crazy.

I am not sure I follow how adding X/DAI LP pairs plays into this

If we offer leverage against DAI/token LPs, it will be more capital efficient/attractive for people to provide liquidity. People could either lever up on their LP position with less capital, or use the minted DAI to gain additional returns from farming.

If DAI/token pairs gain decent liquidity, aggregators may start routing more bi-directional trade volume through the PSM (instead of USDC/ETH or USDT/ETH AMM pairs) which will give Maker higher revenue and help get better risk compensation for stablecoin holdings.

So yeah there’s a lot of “ifs” but I think in principle this could work.

2 Likes

I just think this is an “after DAI supply is much larger” play. None of this will work or make sense without the supply to do these things. Which then I would circle back to, I don’t think it is worth the time right now.

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ETH on Uniswap is $604M and Dai supply is already +1B. This seems like a fine time to start.

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One benefit of X/DAI pairs is that they can have lower collateral requirements than ETH/X pairs. It makes a lot of sense to borrow DAI with X/DAI LP pair as collateral.

It’s Capital Efficient for LPs and they can also earn trading fees. They get a different return payoff than just being long an asset.

X/DAI trading pairs are a great source of collateral for Maker. Lower volatility than YFI-A. Another benefit is that now there’d also be more on-chain YFI/DAI liquidity in case of liquidations.

4 Likes

With leverage, you end up with something like 2x Uni LP as asset and 1x DAI as liability. So basically you are long YFI and neutral DAI with the yield of DAI/YFI (minus the cost of DAI hich I expect to be lower, probably 0%).

It’s more or less doing what Alpha Homora already does for ETH.

So we can either develop vaults to encourage DAI infrastructure or investing directly on DAI/YFI with our balance sheet. There is pro and cons for both approach.

Promoting DAI should be a priority for 2021 so I like the idea (maybe not for YFI first). WBTC/USDC is 8M (and yielding 8%), WBTC/DAI is 11k (and yielding nothing).

3 Likes