Community Feedback Request: compUSD, a safer, revenue generating stablecoin

Hello - its James Glasscock from Reserve Protocol.

TL;DR:

Reserve Protocol would like to invite a conversation with the Compound community to explore the deployment of an ecosystem stablecoin (“compUSD”) that provides increased safety mechanisms and drives revenue to Compound DAO. The purpose of this post is to start a conversation and receive feedback from the community.

This proposal primarily focuses on the question of whether compUSD should exist. The detailed discussion regarding the establishment of a Compound v3 market for compUSD is not within the scope of this proposal. If there is enough community support and feedback for compUSD, it would be appropriate to address the topic in a separate forum post at a later date.

About Reserve

Reserve is a free, permissionless platform on Ethereum mainnet to build, deploy and govern asset-backed currencies referred to as “RTokens.” RTokens are always 1:1 asset-backed, allowing for permissionless minting and redeeming on-chain by users without the need for any middlemen. Overcollateralization is provided by RSR governance token stakers. Each RToken can have an entirely different governance system and is governed separately by ecosystem stakers. The Reserve Protocol launched on Ethereum mainnet in Oct 2022 and completed its fifth audit in Feb 2023. See audits at bottom of this post.

Three of the RTokens already live on the protocol are High Yield USD (hyUSD) is a secure high yield savings dollar with up to 8% APY expected to outpace the rate of inflation in over 100 countries around the world. ETHPlus (ETH+) is a safety-first diversified ETH staking index with up to 4.5% APY. Electronic Dollar (eUSD) is a hyper-resilient stablecoin built to endure black swan events, recently proving itself during the run on Silicon Valley Bank.

In order to help bootstrap the ecosystem, Reserve has made a strategic investment in the Convex Finance (CVX), Curve Finance (CRV) and Stake DAO (SDT) governance to incentivize deeper on-chain liquidity for RTokens.

Observation

Compound’s USDC v3 lending market could unnecessarily expose users to concentrated and centralized counterparty risk, as illustrated in the March 9th run on Silicon Valley Bank and its impact on USDC. Moreover, the borrowed assets leak opportunity and network effects, benefiting other ecosystems without reciprocating value for Compound. Additionally, the process of establishing new lending markets requires significant effort, and with a solitary issuer to represent the debt token, the market has limited flexibility to evolve with changes in demand. Although we acknowledge the deliberate precautionary measure of employing the single base asset design in v3, we propose an additive approach to further enhance risk mitigation.

Solution: Introducing compUSD

compUSD is a dollar-denominated stablecoin concept that features 1:1 diverse asset-backing, emphasizing capital preservation and safety through umbrella overcollateralization to guard against depeg and black swan events. The compUSD (RToken) provides natively generated revenue to fund Compound ecosystem growth, with independent and flexible governance by the community, launched on the Reserve Protocol.

compUSD can provide increased safety through diversified and decentralized asset-backing, LP incentives attract liquidity providers to participate in the compUSD ecosystem, and the yield generated is used to provide affordable loans and facilitate capital activation within the Compound ecosystem. Lastly, the name “compUSD” is a placeholder for discussion purposes and we expect naming, like all RToken parameters, to be decided by the community.

Asset Backing: Diversified, Capital Efficient, Yield Bearing

The proposed compUSD RToken has the flexibility to accept any ERC-20 token as collateral, which includes aTokens, cTokens, LP Tokens and tokenized RWAs. The value peg of compUSD remains stable through permissionless on-chain minting and redemption of the underlying collateral at a 1:1 ratio. This mechanism creates an opportunity for any market participant, even with no prior relationship to compUSD such as a debt position, to capitalize on arbitrage if the secondary market price of RToken deviates from the net asset value of its underlying collateral.

compUSD preserves capital through diversification. Security comes from hedging risks. This cannot be done from a single custodian or mechanism as those are points of concentrated risk, which can lead to complete collapse. We’ve entered an age which offers many choices on the issuer front, but few choices which diversify those risks. compUSD fills in the gap by drawing in coverage while remaining maximally capital efficient.

To minimize risks and ensure sufficient collateralization for compUSD while generating revenue for the ecosystem, the suggested initial basket may consist of assets external to the Compound ecosystem. This basket could include 33% aUSDT (Aave v2), 33% fUSDC (Flux Finance), 33% sDAI (DAI Savings Rate).

sDAI (Maker DSR) - sDAI is created when users deposit DAI into the Dai Savings Rate (DSR). The DSR yield comes from profit generated by MakerDAO. A primary source is the interest paid by those borrowing DAI against a variety of collateral. The interest earned on the loaned DAI is then distributed to the DSR depositors.

fUSDC (Flux USDC) - fUSDC is created by depositing USDC into Flux Finance (Compound v2 fork), a clever innovation that permissionlessly enables access to the risk-free Treasury rate by letting stablecoin holders lend to KYC whitelist investors who wish to get more exposure to US Treasuries via OUSG the Ondo Short-Term US Government Bond Fund.

aUSDT (Aave USDT) - aUSDT is created by depositing USDT into Aave v2 that allows stablecoin holders to lend permissionlessly throughout the Aave ecosystem.

As of this writing, the collective net yield of the proposed basket is generating approximately 3.3%, and varies according to market conditions.

The above referenced asset basket is for illustrative purposes of diversification and yield generation. Any persons launching compUSD or any RToken should carefully consider risk/reward tradeoffs in asset basket construction. Once launched, asset backing can be reconfigured and further diversified through governance at any time.

Revenue Generation & Growth Flywheel

With yield bearing collateral asset backing, compUSD shares auto-compounding revenue (yield) with stakeholders. Revenue shares are programmable at the launch of compUSD and again anytime through a governance vote.

The trend of stablecoins utilizing revenue to incentivize usage is gaining momentum This trend is only accelerating as projects like DAI Savings Rate and USDC pass through revenue to those using its custody service. compUSD positions itself to capture the passthrough rewards of its underlying collaterals in order to power its own incentives layer.

Table 1 illustrates a potential revenue share scenario to stimulate overcollateralization, independent governance and ecosystem growth through refilling Compounds treasury for incentives.

Table 1: compUSD Revenue Share Projections

According to the Table 1 example, 0% of revenue is allocated to compUSD holders, 20% is assigned to RSR stakers for governance and umbrella overcollateralization, and the remaining 80% is directed to Compound’s treasury (for incentives - discussed below).

If a percentage of compUSD’s yield were given to holders, it could reduce the attractiveness of borrowing debt tokens. This is because the actual cost of borrowing would additionally include the compUSD holder yield, on top of the interest charged on borrowing.

Instead, we suggest compUSD structures its incentives to activate capital rather than to commit to holders during its earliest stages (this can be modified later through governance as market traction evolves). Compound has led innovation of supply and borrow rewards using COMP emissions from the treasury. COMP rewards/emissions are up to governance and the current annual COMP reward run rate is about 600k-700k COMP per year.

compUSD revenue can be directed to Compound treasury for use as v3 compUSD supplier or borrower incentives based on current utilization rate strategies and variables. This excerpt in the Compound Discord illustrates flexibility with incentives and outcomes:

Per Paul | Gauntlet#1009 in referring to v2->v3 migration “we could allocate all the COMP to USDC borrows and none to suppliers, which would incentivize users to borrow USDC, thereby increasing utilization and supply APY, incentivizing users to supply USDC, and continuing until equilibrium is reached. But similarly, we could allocate all the COMP to USDC suppliers and none to borrowers, which would incentivize users to supply USDC, thereby decreasing borrow APY, incentivizing users to borrow USDC, and continuing until equilibrium is reached, at which point theoretically we’d have the same amount of USDC borrowed, except at a lower utilization rate. The question then becomes which utilization rate we expect to reach at each equilibrium, and which utilization rates yield the best reserve growth.”

As compUSD TVL grows, the native incentives generated create a sustainable lending market which is decreasingly reliant on traditional COMP incentives from the treasury.

The revenue generated by compUSD incentives can be converted into COMP before distribution or distributed directly as compUSD, aligning it with the currency used in the lending market. This approach can contribute to driving network effects for the new Compound v3 lending market.

At a $1 billion market capitalization, compUSD could generate revenue of $26.6 million for the Compound treasury, about 60% the current COMP emissions rate used for incentives.

Umbrella Overcollateralization

Although certain assets in the compUSD collateral basket may have their own safety mechanisms (e.g. Surplus Buffer Maker DAI, FDIC on some USDC), RTokens provide added umbrella overcollateralization covering the combined assets backing in the basket . The RSR governance token holders play a crucial role in providing umbrella overcollateralization for the compUSD RToken. This overcollateralization serves as a safeguard for compUSD holders in the unlikely event of a collateral token default. It is important to note that umbrella overcollateralization functions as first loss capital.

RSR holders have the flexibility to choose whether to stake their tokens on a single RToken or divide their RSR tokens among multiple RTokens. By staking on a specific RToken, they can earn a portion of the revenue generated by that particular RToken.

If any of the assets in the compUSD basket were to default, the protocol would sell the failing collateral to purchase a predetermined emergency collateral basket. This process may temporarily result in the RToken being below its targeted peg. As a subsequent step, RSR stakers who have staked on compUSD would have their RSR seized, and those funds would be used to make up any shortfall. The ultimate outcome of compUSD redemptions can be reliably predicted due to the on-chain overcollateralization.

Similar to RTokens diversifying risk, the RSR overcollateralization mechanism is distributed and siloed across various RToken staking opportunities. As of this writing other RTokens eUSD, ETH+ and hyUSD have an overcollateralization buffer of 18%, 5% and 17% respectively. Comparatively, the FDIC provides about 1.3% coverage on deposits socialized across all member banks. Similarly, the Maker DAO Surplus Buffer provides 1.7% coverage socialized across all stakeholders.

Permissionless Mint & Redeem

Anyone can mint or redeem compUSD 24/7 on-chain at Register.app or alternative user interfaces developed for the Reserve Protocol, as well as by directly interacting with the underlying smart contracts on-chain.

Anyone can deposit the required collateral baskets to mint compUSD. In return for depositing the required collateral baskets, the depositor receives 1:1 equivalent amount of compUSD. Anyone can deposit the required compUSD to redeem their collateral. In return for depositing compUSD, the depositor receives a corresponding amount of collateral assets

The gas fees of minting and redeeming compUSD on Ethereum may discourage retail users, who have alternative options such as swapping compUSD from a CEX or DEX with minimal slippage or accessing it through a lending market.

Additionally, there is a question as to why collateral holders would be willing to deposit their assets to mint compUSD if it means giving up a percentage of their yield.

The process of minting and redeeming compUSD will mainly be driven by two groups:

  1. Firstly, market makers and yield farmers who have calculated that the combined yield from compUSD (which is zero in this proposal) and Curve LP yield is higher than the original collateral receipt token yield. Minters would be exchanging a 3.3% collateral yield for a much larger LP yield. For example: The eUSD, an RToken with around 2.3% yield-bearing collateral, directs its entire revenue towards overcollateralization and does not provide any yield to eUSD holders. However, the LP yield on Convex Finance currently ranges from 9% to 20%, meaning LPs are leveraging the 2.3% yield on the collateral for the higher LP yield.

  2. Secondly, arbitrageurs play a role in equalizing the price across markets. Since RTokens like compUSD will always mint and redeem on-chain at $1, arbitrageurs capture the difference between the mint price and the trading price. For example: consider a RToken that is pegged to $1.00. If its price falls to $0.98, arbitrageurs would buy it from the open market and redeem it at the protocol for $1.00 worth of collateral, earning $0.02 per bought RToken. On the other hand, if the price rises to $1.02, arbitrageurs would mint it at the protocol for $1.00 and sell it on the open market, earning $0.02 per sold RToken.

In summary, the minting and redeeming of compUSD will primarily be carried out by specialists, while the majority of compUSD users will acquire the token through CEX, DEX, or lending markets.

Governance and Censorship Resistance

The Reserve protocol, which underpins compUSD, operates autonomously to manage the asset backing and emergency collateral. The protocol’s functionality including asset-backing and behavior can only be modified through governance parameter changes, which are subject to the decision-making of a decentralized community of RSR stakers. This decentralized governance structure ensures that no single entity can unilaterally control or manipulate compUSD.

compUSD exhibits censorship resistance through multiple avenues. Firstly, compUSD is minted on the Ethereum blockchain in a permissionless manner, there are no intermediaries.

Furthermore, compUSD’s asset backing is diversified and securely held in decentralized smart contracts. Any attempt to blacklist or restrict compUSD would necessitate blacklisting a significant portion of the DeFi ecosystem. This broad distribution of assets makes it challenging for any entity to censor or manipulate the value of compUSD.

Liquidity Incentives

Stablecoins need liquidity to enable direct access to market opportunities. Loans need liquidity to reduce external costs of liquidations. In many cases, liquidity providers prefer isolating risk to a single side of a liquidity pair, but are open to more exposure to risk. As such many liquidity providers migrate to service the highest paying opportunities. Liquidity incentives play a crucial role in bootstrapping liquidity and ensuring it is available when you need it.

Reserve Protocol recently announced a $20m DeFi investment in Convex Finance (CVX), Curve Finance (CRV), and Stake DAO (SDT) governance ecosystems. By boosting its CVX, CRV and SDT holdings, Reserve can incentivize deeper on-chain liquidity by redirecting Curve ecosystem incentives to compUSD pools on Curve.

A future endeavor may include governance electing to direct a portion of compUSD revenue towards additional liquidity incentives.

Complexity Wrapper

As a Compound v3 debt token, compUSD can act as a complexity wrapper to reduce market fragmentation.

The market can service compUSD, which can rebalance internally as needed to reduce exposure and resolve defaults while maintaining a single unit of account for debt. This allows a simplified market experience while allowing the debt note to adapt to risk collectively. compUSD wraps asset-backing, diversification, overcollateralization and revenue generation into a single dynamic package, governed by the community.

Adoption: Why Hold compUSD?

The incentives for adopting compUSD vary depending on the levels of compUSD supply and demand. This can be observed at different milestones such as 0 to 20 million, then to 100 million, then to 1 billion supply. As compUSD integrates different use cases, its flywheel and network effects start to take shape.

Increased safety. compUSD offers increased safety through its diverse and more decentralized asset-backing. This approach mitigates concentration and counterparty risks associated with a single collateral issuer. Additionally, compUSD implements umbrella overcollateralization provided by the RSR governance token holders, offering an added layer of protection against potential collateral defaults.

LP incentives. Reserve has made a substantial investment in incentivizing on-chain liquidity for RTokens deemed safe with strong community backing. As one of the top holders of governance power in the Curve ecosystem, Reserve directs incentives towards liquidity providers, which encourages existing LPs supporting RTokens to mint and provide liquidity for compUSD. This strategy aims to attract a significant number of the 60+ LPs already engaged in supporting RTokens to participate in the compUSD ecosystem.

Affordable loans. compUSD’s purpose is to expedite capital activation within the Compound ecosystem. To achieve this, 80% of compUSD’s revenue is allocated to the Compound DAO to be used as incentives for a compUSD v3 lending market (to be proposed separately), thereby enabling the lowest borrower interest rates in both DeFi and TradFi. Initially the TVL and revenue of compUSD will start from zero and be insufficient to drive organic incentives. Considering the long term benefits for the Compound DAO, we will propose separately (out of scope in the proposal) allocating COMP incentives during an initial bootstrapping of the compUSD v3 lending market.

Savings, remittance, payments (future). We envision compUSD adoption extending beyond the crypto-native community, and Reserve have already demonstrated the potential in this regard. The first RToken, eUSD, initially deployed by MobileCoin for the MOBY payments app, was recently adopted by the RPay app in Latin America. RPay was recently recognized in a 2023 IMF Working Paper for its contribution to preserving savings and safeguarding livelihoods against volatility caused by hyperinflation. Since its 2020 inception, RPay has facilitated over $5.8 billion in cumulative stablecoin volume with non-crypto users across Latin America.

Holder yield (future). As compUSD scales to higher supply and larger revenue generation, compUSD governors may elect to direct a portion of revenue back to the compUSD holders, accruing directly on-chain, accessible in any wallet, in effect creating a DeFi savings account.

Additionally, grants and hackathons can be directed towards the development and integration of new payment methods for compUSD, expanding its range of use cases.

Reserve Protocol Audits, Bug Bounty and Testing

Reserve Protocol has prioritized security of the platform and its users by undergoing multiple audits conducted by leading security organizations. These include:

  • Trail of Bits: Report date: Aug 2022, review report: (link)
  • Solidified: Report date: Oct 2022, review report: (link)
  • Ackee: Report date: Oct 2022, review report: (link)
  • Halborn: Report date: Nov 2022, review report: (link)
  • Code4rena: Report date: Mar 2023, review report: (link)

Reserve additionally offers a $5M Immunefi bug bounty (#3 in bounty size at the time of writing), and obtains ongoing audits with Code4rena for every new protocol release. This culminates in a smart-contract ecosystem tested and verified in real-world scenarios, and which is designed to prevent loss.

The first RToken, eUSD, was recently stress-tested with inclusion of USDC in its asset-backing basket at the time of the run on Silicon Valley Bank. Circle’s USDC reserves were held at the bank, which led to USDC depegging from $1 down to 88 cents. Through eUSD’s decentralized ‘self-healing’ capability, eUSD was able to autonomously recapitalize and return to $1 peg without the need for regulator or bank backstops.

Call To Action: Request for Comment

In 2021, Compound had been developing Gateway - an initiative that combined a new stand-alone distributed ledger and a multi chain bridge with a new unit of account CASH and CDP like Maker. Our understanding is in 2022, Compound put Gateway on hold and pivoted to launch a Compound presence on EVM-compatible chains as fragmented markets, initially. This is Compound v3 Comet.

However, now that v3 is launched and scaling, we believe the Compound community may have renewed interest in launching a native stablecoin, seeking a design that diversifies risk, amplifies Compound network effects, and provides revenue to the ecosystem.

Given the increasing availability of diverse real world assets, coupled with innovations in complexity wrappers for asset baskets, incentives and safety, this is a request for comment from the community to discuss the merits, risks, and opportunities of Compound deploying its own stablecoin and potentially utilizing the Reserve Protocol in the aforementioned design or a modified design.

Suggested Development Approach

This proposal primarily centers around the existence of compUSD and the desired asset backing and revenue sharing configuration. The main objective of this discussion is to gather feedback from the community rather than providing an extensive development plan. However, for context, we outline three initial phases: Explore, Deploy, and Bootstrap Supply.

Explore: The exploration phase focuses on determining the level of support from the Compound community and incorporating their feedback. Discussions revolve around the composition of the asset backing basket for compUSD, as well as identifying variables for a risk assessment with Gauntlet. Strategy, liquidity, and incentives for the associated compUSD v3 market are discussed and vetted. A detailed proposal is prepared, outlining the specified parameters for the deployment of the Compound v3 market for compUSD. If there is sufficient community support, an on-chain vote will be submitted to support the launch of compUSD and its associated Compound v3 market.

Deploy: During the deployment phase, collaborators within the Reserve ecosystem work on developing any necessary collateral plugins. The Compound community takes the lead in evaluating and designing the branding for compUSD. The Compound community also configure the parameters and proceed with deploying the compUSD RToken, which can be done in just a few minutes at the only cost of Ethereum gas fees…

Bootstrap Supply: The goal in the Bootstrap Supply phase is to reach a supply of 50 million compUSD tokens. Efforts are made to assist with DeFi liquidity through collaboration within the Reserve ecosystem. COMP emissions allocation is specifically initiated for the compUSD lending market. Additional mechanisms and initiatives are explored to develop a growth strategy from 50 million to 500 million compUSD tokens.

We estimate the above development approach can be completed in 45 to 120 days at negligible external incremental costs to Compound DAO.

If you are still reading, THANK YOU. We would welcome your critical feedback or improvised ideas on this post.

3 Likes

Hello & thanks for providing a space for thoughtful discussion around this topic.

I believe Compound has aligned with USDC on purpose. Compound is if not the, one of the most conservative DeFi protocols in existence. I understand this thought has been passed on many years ago. Of course, it’s not a bad idea to supercharge growth CDP-style. That is why Torque is building on Comet.

Maker has Spark Protocol as a sub-DAO. I see Torque as an unofficial Compound sub-DAO, although we may not receive the same amount of co-marketing which is not the end of the world because our goal is to bring new liquidity to the ecosystem Of course, it would be appreciated. We’re still early though. This is my 2 cents & I wish only the best for Reserve Protocol.

Sincerely,
Cameron

Hello, 0xJXMG. This proposal is very interesting.

I recommend aUSDT (AaveV3). The Aave community is currently in the process of migrating from Aave V2 to V3, and it is likely that V3 will be better in terms of liquidity, yield, etc. in the near future.

Hi @0xlide,

The basket idea is a good one, but why should Compound feed a competitor? There are many better strategies. For example, GMX V2 or Uniswap V3 liquidity which we are working on dynamic vaults for.

Sincerely,
Cameron

2 Likes

Hi @cmrn ,

Adopting many CDP protocols (Maker, Aave, Compound, etc.) will ensure the diversity of compUSD’s collateral.I don’t know how 0xJMG chose the Protocol or why it’s not aUSDC.

1 Like

Please correct me where I’m wrong in my understanding.

  1. The proposed CompUSD uses Compound’s direct competitors, and not Compound, as backing strategies. The only thing Compound about the actual product it is the name/branding and a revenue share?
  2. Governance of the new token would be RSR holders, not COMP holders?
  3. Compound would then list CompUSD as an allowed collateral on the v3 USDC market, and provide COMP incentives to it?
3 Likes

Agree @cmrn Compound very conservative (which I love) but all eggs concentrated in any basket does not feel conservative. Will def check out Torque.

Excellent note @0xlide on focusing on Aave v3.

Regarding @cmrn 's question we thought long and hard on this. On one hand, a stablecoin backed by cTokens would drive more demand for cTokens and increased utility for the Compound ecosystem. On the other hand, it concentrates asset backing of the stablecoin as well as dilutes resilience and decentralization of the stablecoin. We decided to initiate this idea with emphasis on diversification and decentralization. But I am hopeful our friends in the Compound ecosystem with a more passionate pov will weigh in with more nuance.

Sidenote: with less than 10 million MAU in global crypto on a planet of 8 billion humans, Compound does not need to focus much on Aave. IMO much bigger opportunity to grow together, collaborate, and innovate far beyond TradFi.

Very excited to look into your suggestions @cmrn on “GMX V2 or Uniswap V3 liquidity”, as I believe both will work in RToken asset backing.

Hi @dvf see above for the initial avoidance to back the RToken with cTokens. Its totally possible but I prioritized resilience and decentralization in the initial RFC. Revenue share to Compound IMO is a pretty big deal, with a compUSD at roughly $1 billion marketcap, the revenue can roughly either (a) replace current COMP emissions or (b) double down on COMP emissions for the Compound ecosystem to grow faster.

RToken governance is very customizeable. Out of the box, RSR staker governance (“Alexios”) is tested and ready, read more here.

RSR stakers also bring network effects. But there could be some creative ways to explore doing this with COMP governors, subject to some tradeoffs.

On your 3rd point, will be back to you on this soon.

2 Likes

Thanks to the Reserve team for the proposal and for restarting the conversation around a Compound-specific stablecoin. The opportunity is really interesting and we’d love to see this happen. We wanted to highlight a few important points here that we still contend with and to propose some alternatives.

  1. Yield to RToken (compUSD) holders - we think that to best incentivize usage of the stablecoin, the protocol should be redirecting most of the yield from the underlying tokens to the holders of compUSD. We propose that 60% of the underlying yield goes to compUSD holders, 20% to RSR stakers, and 20% to the Compound treasury.

  2. We think that a fully collateralized stablecoin where the collateral is idle is capital-inefficient. The collateral itself could be lent out for a rate of interest (stablecoins currently yield 2-3%) that would significantly increase the yield attributed to compUSD holders. This could be designed similar to Compound v2, where users post volatile collateral and borrow stablecoins that collateralize compUSD. In the event of a default, liquidators would re-capitalize compUSD with the missing collateral and claim (a portion of) the defaulted user’s volatile collateral.

  3. We were wondering why the basket of tokens used as collateral should be limited to 3. It seems that diversifying the risks would create a much more robust compUSD where a depeg in one of the tokens does not create a large enough hole in the balance sheet which RSR stakers would be unable to cover. We propose having 5 tokens, so as to strike a balance between sufficient diversification and excessive complexity.

  4. compUSD should tap into the yield earned by collateral in Compound v2. By using cTokens as collateral, we could improve the composability of Compound as a money market and create a flywheel effect that raises the value locked in the protocol. Specifically, if we use cTokens of stablecoins in compUSD, it will unlock additional borrowing capacity in Compound v2 and reduce utilization rates on stablecoins.

  5. In order to expand discussion, we wanted to propose a couple more stablecoin collateralization options for the community.

  • OUSD: Origin Dollar smart contracts deploy underlying capital (USDT, USDC, and DAI) to a diversified set of yield-earning strategies, rebalancing over time to achieve great yields while diversifying risk. Earnings automatically accrue to tokenholders and compound continuously while they hold OUSD.
  • eUSD: Lybra Protocol’s eUSD is an interest-bearing, over-collateralized stablecoin that is backed by a basket of Liquid Staked Derivatives (although, currently, just Lido’s stETH). eUSD currently earns 8.83% in APY coming from the overcollateralization of stETH.

Looking forward to hearing Reserve team’s and the community’s feedback and engaging in further discussions!

3 Likes

here are some pros and con to @0xJMG proposal as a defi user i personally think reserve is the better choice.

Pros:**

  1. Diversified Asset Backing: The proposed compUSD stablecoin would have diversified asset backing, which can enhance its safety and resilience against single-point failures.
  2. Umbrella Overcollateralization: The umbrella overcollateralization from RSR governance token holders adds an extra layer of security and risk mitigation for compUSD holders.
  3. Revenue Generation: The revenue generated from compUSD’s collateral assets could be used to incentivize deeper on-chain liquidity and drive growth within the Compound ecosystem.
  4. Incentives for Liquidity Providers: The proposal includes incentives for liquidity providers, attracting them to participate in the compUSD ecosystem, which can enhance liquidity and market stability.
  5. Complexity Wrapper:** The concept of compUSD acting as a complexity wrapper simplifies the market experience while allowing the debt note to adapt to risk collectively.
  6. Decentralized Governance:** The decentralized governance structure ensures that decisions are made by a community of RSR stakers, preventing single-entity control.
  7. Use Case Expansion:** The proposal envisions potential use cases beyond the crypto-native community, including savings, remittance, and payments, which could broaden adoption.

Cons:

  1. Complexity: The proposal is highly complex, potentially making it difficult to implement and understand fully by the wider community.
  2. Gas Fees: The high gas fees on the Ethereum network could discourage retail users from directly minting or redeeming compUSD on-chain.
  3. Dependency on Liquidity Providers: The success of the compUSD ecosystem relies heavily on liquidity providers and market makers, which might limit its initial adoption.
  4. Early Stage Adoption: The proposal acknowledges that early-stage adoption might be driven by specialists and arbitrageurs, which might not create a user-friendly experience for the broader community.
  5. Regulatory Challenges: Expanding use cases beyond the crypto-native community could introduce regulatory challenges in various jurisdictions, which could impact adoption.
  6. Integration Challenges: Integrating with other DeFi platforms and achieving cooperation could be challenging, potentially delaying the realization of proposed liquidity incentives.
  7. Risk Mitigation: While the proposal outlines various risk mitigation strategies, no system is immune to unforeseen risks and potential vulnerabilities.
  8. Ecosystem Fragmentation: The proposal suggests redirecting incentives from other DeFi ecosystems to compUSD, which could create competition among different protocols and potentially fragment liquidity.
  9. Community Adoption: Achieving community support and consensus for such a complex proposal might be challenging, especially given the need for a decentralized decision-making process.

In summary, the proposal presents a complex and innovative approach to creating a stablecoin backed by diversified assets, with a strong emphasis on decentralized governance and liquidity incentives. While it offers various benefits such as risk mitigation, revenue generation, and potential use case expansion, it also presents challenges related to complexity, gas fees, dependency on liquidity providers, and regulatory considerations. Ultimately, the success of the proposal would depend on the Compound community’s willingness to adopt and implement such a multifaceted system.

1 Like

@0xJMG there are several areas where you could consider improving the proposal to make it more feasible, understandable, and attractive to the Compound community. Here are some suggestions:

  1. Simplicity and Clarity: While the proposal is detailed, it might be overwhelming for community members who are not deeply familiar with all the concepts. Simplify the language and structure to make it more accessible to a wider audience. Use clear headings, bullet points, and diagrams to break down complex concepts.
  2. Technical Feasibility: Provide technical specifications and details about how the proposed mechanisms would work on the Ethereum blockchain. Include code examples or pseudo-code to illustrate key processes such as minting, redemption, and revenue distribution.
  3. Risk Assessment: Conduct a comprehensive risk assessment of the proposed stablecoin design. Address potential vulnerabilities, attack vectors, and risks associated with the new mechanisms introduced. Offer potential mitigation strategies for these risks.
  4. Gas Fee Considerations: Given the current high gas fees on Ethereum, propose potential solutions for mitigating the impact of gas fees on users. Explore layer-2 scaling solutions or other networks that could offer more cost-effective interactions.
  5. Market Adoption Strategy: Detail a clear adoption strategy for compUSD. How will you attract users, liquidity providers, and developers to the ecosystem? Highlight partnerships, marketing efforts, and community engagement plans.
  6. Governance Implementation: Provide a step-by-step guide for how the decentralized governance process would work. Outline the voting mechanisms, quorum requirements, and decision-making processes in a clear and concise manner.
  7. Developer Ecosystem: Describe how developers can contribute to the compUSD ecosystem. Provide guidelines for creating collateral plugins, developing user interfaces, and building integrations with other DeFi platforms.
  8. Testing and Auditing: Outline your plan for thoroughly testing the smart contracts and auditing the proposed mechanisms. Highlight your approach to security and the measures you will take to ensure the safety of user funds.
  9. Real-World Use Cases: Expand on the potential real-world use cases for compUSD beyond the crypto-native community. Provide case studies or examples of how the stablecoin could be adopted by non-crypto users.
  10. Community Feedback: Before finalizing the proposal, consider seeking input and feedback from the broader Ethereum and Compound communities. This can help identify potential concerns and refinements before implementation.
  11. Implementation Roadmap: Develop a clear roadmap for implementing the proposal. Break down the process into distinct phases with milestones, estimated timelines, and goals for each phase.
  12. Visual Aids: Use diagrams, flowcharts, and illustrations to visually explain key concepts. Visual aids can help readers better understand complex systems and processes.

By addressing these areas and providing a well-structured, technically sound, and user-friendly proposal, you can increase the likelihood of gaining community support for your compUSD initiative within the Compound ecosystem.

is this a chatgpt response @defi_milli?

1 Like

yes it is a chat gpt response

1 Like

killed the convo, which is unfortunate. @defi_milli

2 Likes

Thanks @0xJMG for starting this interesting discussion! I have a few questions about the proposal:

  1. From the governance perspective, it seems strange that you are asking COMP holders and delegates to create something that they will then have no control over. Do RSR holders understand how Compound protocol works, and what aligns RSR holders’ interests with those of Compound? Is it possible for compUSD to be governed by COMP holders, while RSR stakers only get the financial rewards?

  2. Will there be a new risk manager for the parameter recommendations of compUSD? I believe Gauntlet works for Compound DAO, not RSR stakers.

  3. When users / arbitrageurs mint and redeem compUSD, do they get to choose which which collateral (out of the 3) to deposit / withdraw, or would it always be in the fixed ratio (1/3 sDAI, 1/3 aUSDT, 1/3 fUSDC)

  4. “If a percentage of compUSD’s yield were given to holders, it could reduce the attractiveness of borrowing debt tokens. This is because the actual cost of borrowing would additionally include the compUSD holder yield, on top of the interest charged on borrowing.” Could you unpack this quote? Are you referring to a Compound v3 market for compUSD? In that case, would the compUSD holder be the supplier in this market? If a percentage of compUSD’s yield were given to holders, then the supplier would still be able to get that yield, because he’s also the holder?

  5. I’ve always been confused about how Convex generate yield. Is it just minting the yield out of thin air?

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Hello @Guangye thanks so much for your questions. Will answer below.

  1. Regarding governance by COMP or RSR holders: compUSD as discussed is deployed on the Reserve Protocol and technically does not require the Compound protocol. If there were a deeper Compound lending market integration, this is where COMP governors would be most active. The proposed RSR governance (Governor Alexios) is tested, ready and free to use out of the box. There may also be ways to align COMP and RSR incentives through a bi-directional token loan or swap.

  2. Regarding the risk manager: Here is a link to the default risk parameters for deploying RTokens. Subject to refining goals, the parameters could be modified before a deployment. If compUSD is deployed by the Compound community and integrated with a Compound lending market, we would expect Gauntlet to play a role in risk assessment. But open to alternative ideas.

  3. Regarding mint/redeem: When users / arbitrageurs mint and redeem compUSD, they have should have the choice to redeem to 100% of the available collateral of their choice via “zap” or redeem the compUSD Rtoken in its exact basket proportions of collateral. This will apply to minting as well. Minting Rtokens via Zaps is currently live on Register.app. Redeeming via Zaps is coming soon.

  4. Regarding “If a percentage of compUSD’s yield were given to holders, it could reduce the attractiveness of borrowing debt tokens. This is because the actual cost of borrowing would additionally include the compUSD holder yield, on top of the interest charged on borrowing.”

  • (4a) The yield referred to in the quoted excerpt is the holder yield of an RToken just for any user holding it, in any wallet, which does not require any lending market, DEX or other instrument. RTokens are bearer instruments and when they have holder yield, the user does not need to take any action other than hold in order to accrue the yield. In the specific case of compUSD we are proposing a 0% holder yield since this yield would increase the cost of borrowing the asset, for example if compUSD had 2% holder yield and were supplied to a Compound v3 market, borrowers’ liabilities would grow by the 2% + the borrowing interest rate. By keeping the holder yield to 0%, this is Part 1 of a strategy to make Compound the most affordable borrowing platform in DeFi. Part 2 of the strategy involves taking the underlying yield of compUSD and directing it back towards the Compound Treasury to be used as incentives for compUSD on Compound v3 – furthering Compound as the most affordable borrowing platform in DeFi.

  • (4b) One might wonder, why would anyone mint compUSD? We think DeFi yield farmers and market makers would mint compUSD on the Reserve protocol, then either supply compUSD to the Compound v3 market to earn yield, or LP compUSD on the Curve DEX to earn yield. The yields in either case could be materially better than just holding the underlying collateral, and this is demonstrated in current market example Electronic Dollar (eUSD) with LP opportunities on Curve/Convex. A sufficiently liquid compUSD market would also serve as a venue for interest rate arbitrage relative to Compound’s USDC market, so borrowing demand would generate yield, and thus incentive to mint compUSD.

  1. Where does Convex yield come from? Convex Finance does not play a role in this proposal other than as an optional/additional LP opportunity for compUSD holders. So neither compUSD nor Compound will have any reliance on Convex. But to answer your question, yield on Convex and Curve come from the CRV emissions in the Curve ecosystem. Convex is a meta governance layer atop Curve and holding 50% CRV, reflected in the CVX meta governance token. CRV incentives to LP pools are directed by the owners of CRV, CVX and a few other assets, of which Reserve is one of the largest holders of this governance power in the Curve ecosystem. For more background I suggest reading this general overview on the Curve Wars and Reserve’s recent Defi announcement. It is fairly dense material for new folks onboarding and I’ve found the Curve telegram group to be the best place to uplevel understanding.
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Thank you for the thoughtful questions, Guanye!

To add to @0xJMG’s answer on Question #1, it is quite possible for compUSD to be governed by COMP holders, with RSR stakers participating in only the financial aspects. It just requires a tiny tweak to Reserve’s default contracts.

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My post sounded to ChatGPT like for some people … i hope this fits and suits better … english is not my mother language and i only speak 4 languages … so if somebody uses GPT as a translation tool … doesnt mean the text and his thoughts are not from him … here we go:

I’m really intrigued by this idea and see a lot of potential for both protocols to complement each other in various ways. This could significantly bolster the security of Compound, the Reserve Protocol, Ethereum, and the wider DeFi ecosystem, ultimately adding more value and usefulness to them.

Introducing a distinct governance token like RSR for the Compound Dollar would bring several advantages for Compound:

  1. Stability and Independence: Having a separate governance token would give Compound a higher level of stability, less susceptible to market fluctuations that could affect the original COMP token.

  2. Clear Governance Focus: This move allows for a clear separation of governance functions from other economic aspects of the platform. This would improve efficiency and transparency in how governance operations are carried out.

  3. Encouraging Engagement: A dedicated governance token could offer specific incentives to motivate active community involvement in governance decisions, potentially leading to wider acceptance and increased participation.

  4. Smoother Regulatory Adaptations: A specialized token for governance could make it easier for Compound to respond to specific regulatory demands, making regulatory compliance more straightforward.

  5. Opportunities for Integration with Other Protocols: A separate governance token could potentially integrate more seamlessly with other DeFi protocols that use similar token systems. This would encourage interoperability between different platforms, contributing to a more robust DeFi ecosystem.

I just wanted to share some positive aspects about considering a different governance token choice… I hope you all find it interesting!

check my twitter if u still think Iam a bot …

kamehamehaaaaaaa :sweat_smile:

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Adding a few additional resources:

Link to Reserve Protocol Ecosystem Factsheet

Link to Reserve Protocol Documentation

Helpful videos on Reserve protocol and deploying RTokens:
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