Update the yETH vault strategy to mine UNI in the ETH:DAI pool
Should this proposal be implemented, the yETH vault will update its strategy to use ETH as collateral in Maker to generate DAI, and then provide DAI and ETH into the ETH:DAI Uniswap pool to mine UNI. Half the UNI will be sold for increased yield, and the other half will be used to build a vault for Uniswap governance.
Currently the highest risk vault in yearn.finance is the yETH vault. The vault takes deposits of ETH and puts them in a Maker CDP vault, mints DAI, and then deploys that DAI to become working capital and provide a return on investment. However, this is an inherently risky venture, as it takes out a loan of stable value (DAI, theoretically) against a volatile asset as collateral (ETH). Should the value of the loan exceed the value of the collateral, this will cause a liquidation of the vault and generate a loss against the depositors. Furthermore, DAI is frequently in higher demand than other stablecoins, leading to a potential DAI crunch and an inability to unwind the loan. Currently, the yETH vault is closed for deposits, with an unknown date for reopening.
Should this proposal be enacted, the strategy would be updated to mine liquidity on Uniswap. The detailed schematic is below. The ETH would be used to open a Maker vault to generate DAI. An amount of ETH of equal value to the amount of DAI generated would be held separate. These assets would then be generated to Uniswap’s DAI:ETH pool to mine UNI. Half of this UNI generated would be held in reserve to be used in UNI governance for the betterment of the yearn ecosystem. The other half of this generated UNI would be sold for ETH to compound the return on the vault.
This methodology has notable improvements to significantly reduce the risks associated with the Maker vault. First, by holding an amount of ETH outside of the Maker vault, we have a supply of collateral that we can use to add to the vault in case of a drop in the value of ETH. Furthermore, by utilizing the DAI:ETH Uniswap pool, we have multiple benefits. In the case of an ETH price drop, the pool would sell DAI and accumulate ETH to supply to the vault - same story in case of a DAI price spike. With this strategy there will be far less risk of a DAI crunch - we will always have some available to unwind the loan in this Uniswap pool.
In the unlikely case of maximizing the Maker vault, we can follow the same logic for other lending platforms. By supplying ETH to Compound, for example, a stablecoin (whichever is cheapest) can be borrowed, converted to DAI, and supplied to the Uniswap pool as well. Generated COMP would then be sold for ETH to compound the value. This second strategy would only be used in the case of profits being greater than the loan rates, and if the Maker strategy is maximized.
For: Use the above strategy to mine liquidity on Uniswap in the yETH vault.
Against: No change.