Gauntlet Market Risk Analysis
To summarize, this proposal suggests both enabling TUSD as a collateral asset with a CF of 80% and updating COMP emissions for other stablecoins. Below is Gauntlet’s analysis on enabling TUSD as collateral. In summary, from a market risk perspective it is safe to enable TUSD as collateral, but the Community should be comfortable with the peg mechanism before adding the asset as collateral.
Note that for future proposals like this, we would recommend creating two separate proposals to decouple the proposal to enable TUSD as collateral from the COMP emissions piece, as they are very different in nature and involve distinct risk considerations. We also would echo @cylon 's recommendation that a reasonable notice period should be given before an on-chain proposal is published.
Distribution speeds
One reason why the Compound community has voiced concern over increasing CFs for DAI or USDC above 80% is that the Community wishes to limit recursive borrows, which users do in order to farm COMP. Below is a table of the proposed distribution speeds. Note the total COMP speed remains the same in this proposal; it just redistributes the speeds.
The distribution speed for cTUSD is 1.5E+15/6.65E+16 = 2.3% of the distribution speeds for cDAI and cUSDC, so all else equal (same supply and borrow volumes & APY, same CFs), there is much less of an incentive for users to recursively borrow cTUSD. The supply APY - borrow APY for all the stables are very similar. However, cTUSD has roughly $0.14B/$4.49B ~ 3.1% of the total supplies and borrows for cDAI. So in the short term while Compound volumes are relatively low, users will gain 2.3%/3.1% ~ 74% of the COMP rewards for cTUSD as they would for cDAI.
Riskiness of stablecoin’s market statistics
Exchange liquidity isn’t nearly as great a concern for stablecoins as for risky collateral assets, since liquidators may not be in a rush to get out of their post-liquidation stablecoin positions. But we should still make sure there’s enough liquidity in case a liquidator does want to exit a stablecoin position they perceive to be riskier than others.
As of now, TUSD has an ADV / Total Supply on Compound of 52% (higher is better in terms of liquidity safety). In this regard, TUSD (52%) is safer than DAI (12%), and riskier than USDC (81%). We assume this ratio of 52% will decrease (become more risky) after enabling TUSD as collateral, since it will incentivize users to supply more. Still, post-liquidation exchange trades are unlikely to pose a significant threat to TUSD’s peg.
Riskiness of this particular stablecoin’s USD peg mechanism
DAI and USDC are established stablecoins with ~$2.7B and ~$2.5B locked in Compound, respectively.
TUSD has been growing and kept a robust peg, but is still a less established stablecoin which relies on distributed USD holdings in various bank accounts that belong to different trust companies. Note that USDT, which is essentially a less decentralized version of TUSD but with more liquidity, still isn’t enabled as collateral on Compound partly due to Community concerns around its peg mechanism.
Parameter values and performance on other lending protocols
Just for reference to the Community, TUSD is listed on Aave with a CF of 80%, with the following other protocol statistics:
Note that TUSD was added to Aave on 9/20/21, before the ownership change on 12/20/21.
Conclusion
All things considered, the market risk associated with enabling TUSD as collateral on Compound is low. Importantly, the more significant risk derives from the reliability of the peg mechanism, similar to USDT as Leshner outlined in the initial proposal. The peg depends on whether there’s enough USD reserve in their custody and the amount of TUSD minted. Understanding the permission of TUSD minting can be done by smart contract review by auditors, so the Community should consult OpenZeppelin for their assessment of the technical risks. In summary, from a market risk perspective it is safe to enable TUSD as collateral, but the Community should be comfortable with the peg mechanism before adding the asset as collateral.