[Proposal] Create yDPI vault

Proposals Vaults
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Summary

Create a yDPI v2 vault with integrations into MakerDAO

Abstract

Should this proposal be implemented, a yDPI vault will be created and used to deposit DPI into MakerDAO to mint DAI and delegate to yDAI vault, basically cloning the yETH vault functionality. The generated fees would be used to mint new DPI.

Motivation

Index funds have a significant benefit in that they have lower volatility than individual tokens, and downside protection in case of the failure of a single token. This makes them attractive to both passive holders and protocols looking for robust collateral types.

So far $DPI is the most widely used and integrated crypto index with over $20M in TVL at the time of this post (with liquidity mining rewards for INDEX but a couple million is not staking LP which alone makes it the biggest DeFi index). After INDEX rewards end, DPI holders will be looking for their next yield and Yearn should be the next stop for that $15M. As a long-term motivation, indexes are some of the best long term investment strategies and in TradFi 30% of all equities are held in indexes. If Yearn can capture the assets of these crypto index funds we will have a huge revenue stream going forward that will require less building, integrating, and maintaining than chasing each new token individually. Moreover index products are generally held by long term investors - family offices, retail investors, etc. - so by giving yield opportunities it makes DPI a more attractive asset for hodlers and so increase the AUV for INDEXcoop, MakerDAO and Yearn

Specification

Should this proposal be enacted, a yDPI vault would be created with a strategy based on the yETH strategy using MakerDAO. This vault would accept DPI tokens from users, place them into a community CDP for DPI, mint DAI at a suitable (e.g. 300%) collateral ratio, and then delegate this DAI to the current yDAI vault. Periodically the accrued DAI stability fee will be paid back with yDAI vault earnings and the remaining profits will be used to buy DPI tokens via Uniswap (or issue from the index contract) and added to the yvault.

The yvault will need to be white listed for access to the MakerDAO price oracle to allow active management and prevention of liquidations. As such whitelisting has been given for ETH, this is assumed to be possible.

Each month the DPI fund is rebalanced by INDEXcoop. This happens inside the DPI contract linked above and requires no action on the part of DPI token holders so the yvault and CDP can keep all DPI positions open in yield opportunities.

Alternative strategies based on lending platforms (AAVE, Compound etc) have been considered. However compared to a Maker vault, they could introduce constraints on the $DPI treasury which we would prefer to avoid.

This proposal is made by @kiba and @overanalyser who are both active members of the INDEXcoop community

Proposal

For: Create a yDPI vault with the attached strategy based on MakerDAO

Against: No change

Poll

  • For: Create yDPI vault
  • Against: No change

0 voters

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Note, this proposal is based on the assumption that our proposal for $DPI to be accepted as collateral in MakerDAO.

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So DPI is now usable as a collateral in Maker? Can you share a link to that? I’m having trouble finding it with a quick google search.

If so, this is eminently possible and a good idea in my book. I can start working on it pretty soon.

Edit: OK, so I just saw the above post. I clearly need more coffee :sweat_smile:

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Mo it’s early days, but we face a chicken and egg situation.

$DPI is still pretty smaller market cap (~$20 M), which isn’t that attractive to Maker or Yearn.

However, we (as DPI creators) think that having Maker and Yearn vaults will make holding DPI much more attractive and so Grow AUV.

If Yearn support the idea, it makes it easier for Maker to support the idea as they see an extra driver for AUV.

So we propose to both at the same time and hopefully the three communities agree that it makes sense for them individually and as a group.

A token like DPI has some good attributes as collateral for Maker and Yearn.

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yDPI (or yPumpEveryonesBags) could be one of the Blue Chip ways by which people gain yield in the DeFi ecosystem. Keeping broad price exposure to all of DeFi, while using Dai (Maker) or USDC (Aave) to yield farm.

Huge appetite for this from existing DPI holders as well as others that want such a strategy to exist.

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would be great but i also thing there is not need to rush. Maybe in few months

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I like the idea of an index, been building something similar in 2018.

The proposal is based on assumption that MakerDAO whitelists DPI as collateral and also whitelists Yearn on the DPI price oracle. If any of these assumptions fail, I’d like to suggest an alternative approach for consideration:

  1. Redeem index token for its components
  2. Put each component into corresponding Vault
  3. Add our wrapper into the rebalancing pipeline
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@banteg

Oooh. I like this. But as elon says. The best process, is no process.

There are some assets in there that will be hard to produce yield, but at least they have probable price appreciation,

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HI @banteg,

I think @mattdw has similar ideas with regard to splitting and farming.

This proposal does depend on a Maker Vault and whitelist and, even if agreed, they are likely to take a few months to put in place.

INDEXcoop has a definite self interest in promoting this strategy for the DPI vault, based on a few factors:

  1. It makes holding DPI more attractive as it becomes more productive:
  2. it encourages long term DPI holding and placing in a yDPI.
  3. I think that the Maker / DAI vault strategy is relatively simple for yEarn to implement as it’s based on the (depreciated?) yETH strategy
  4. I think that the breakup and farm strategy is very complex to automate, particularly if you don’t include a lock up as you need to be able allocate and unwind all 11 tokens at once. In addition you need to follow the monthly rebalances of DPI (Basically, I think there are better ways for yEarn to spend Devs time)
  5. You may get a higher yield from Maker /DAI than splitting and farming (simplistic governance staking and lending protocols average about 2% across DPI).
  6. Redemption of DPI for the tokens effectively reduces DPI AUV, so it could be considered a vampire strategy against INDEXcoop.
  7. The Maker based strategy can be combined with lockups that would allow INDEXcoop to farm the underlying tokens and so generate even more yield (See figure below and my blog on the master plan ).
  8. You could have a similar strategy based on AAVE or Cream collateral and stable coin farming. However, that would prevent INDEXcoop farming the underlying tokens as we need to maintain 100% Liqudity for redemptions (so we would have to keep the underlying tokens in the main $DPI treasury).

So, INDEXcoop have a number of selfish reasons for pushing this strategy to the yEarn community. However, I think that this strategy would be good for INDEXcoop, Maker, and yEarn (and our users).

Master plan 3
Master plan 3597×862 70.2 KB

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We have considerd this strategy as well and I think @overanalyser covered everything as to why using Maker is most beneficial to Index Coop and DPI holders.

One small addition is that we are considering updating our fee structure from 95bps streaming. fee (basically annual management fee) to something like 30bps streaming fee and 10-50bps mint/redeem fee on DPI tokens (speculative numbers, we don’t have a proposal yet). This would change the profitability of the unwrapping strategy but would still be a good option, just wanted to make you guys aware of the possible change.

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what’s the reason behind that change?

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I believe most of the conversation can be found on this forum post, sorry should have linked that in my original comment. The idea has evolved a bit over time so you should read the whole thing. It started off as a way to capture some value once DPI/ETH incentives end but after running some data it’s also a better free structure for us as a Coop and for long term hodlers of DPI.

If that post doesn’t answer all your questions feel free to leave a comment there or ask in our discord

1 Like
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+1. An easier alternative (should the Maker proposal fail) would be to propose adding DPI to Aave and/or Compound as collateral, although both lack the advantage of Yearn having access to Maker’s OSM => DPI vault can’t be leveraged as aggressively.

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+2 exactly, my thoughts. Dpi performs well without over leverage.

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@overanalyser mentioned this briefly earlier but Index Coop has seemed to solidify on this idea so I’d like to give some more details and gauge Yearn team’s opinion. This is a proposed DPI yield farming solution that hasn’t been finalized or voted on by Index Coop yet until it’s feasible (once DPI is on Maker and yDPI approved).

Basically DPI users stake their DPI into an Index Coop contract and we deposit DPI + the underlying tokens into Yearn vaults giving Yearn 2x the TVL and maximizing yield for DPI holders. INDEX token is used as a risk backstop in case of hacks, inability to withdraw enough tokens from vaults, etc.

index coop yDPI farm proposal
index coop yDPI farm proposal2700×1600 273 KB

Process

  1. User locks DPI into Index Coop staking contract
  2. Staking contract deposits DPI into yDPI vault and takes underlying tokens (e.g. SNX) with available vaults and deposits them in proportion to the DPI tokens staked (if there are 2 SNX in held in each DPI token then we add 2 ySNX)
  3. Yield earned by all vaults is split between DPI stakers and Index Coop (to be determined)
  4. When a user withdraws from our staking contract we remove both DPI and underlying tokens from Yearn vaults to ensure full 1:1backing of DPI tokens

This approach would require yDPI vault to use MakerDAO instead of Aave to make sure DPI tokens are locked and won’t be redeemed while underlying tokens are deposited into vaults. It seems advantageous to everyone (DPI holders, YFI holders, and INDEX holders) and comes at the expense of 1. some systemic risk which is offset by INDEX staking/slashing and 2. Index Coop losing meta governance power by depositing governance tokens into vaults which we’re fine with.

Thoughts @banteg?

We presented to DPI as collateral to Maker last month and they are going ahead with a vote. If you want the yDPI vault you can vote for DPI to be added to MakerDAO for the next 2 weeks.

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Was the 0,5% redemption fee added?

I still believe the best strategy for a DPI vault is going through redemption and depositing each token into a specific vault.

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Redemption fee has not been added yet.

Maybe my explanation wasn’t clear enough. With this proposed MakerDAO strategy Yearn would also get each token deposited into vaults in addition to DPI itself. This means Yearn has twice the TVL (and revenue) versus if you redeemed DPI tokens as part of the yDPI strategy. If MakerDAO isn’t an option then you could redeem but it seems non-optimal for Yearn and YFI holders to pass up on an extra $20M AUM.

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A quick update on the Maker vote.

The community vote was concluded in November, and the outcome was abstain!. (Which I think is unusual). As I understand it, a Maker Whale voted against us, but then changed his vote (but didn’t want to be fully supportive).

I don’t think the Maker vault is completely dead. We are currently planning to discuss with the various project teams in Maker to look at a way forward. However, it means that the vault will be delaye compared to what we had hoped.

6 Likes