TEMP CHECK - Transfer unutilized USDC from Fluid to sUSDS

Summary

This is a TEMP CHECK to gauge community sentiment for depositing USDC reserves to sUSDS from Sky Ecosystem (ex MakerDAO). The initiative aims to increase Fluid’s revenue which will be redistributed back to the lenders therefore increasing lending APR and enhancing the protocol’s competitiveness and market positioning.

Proposal

The Instadapp & Phoenix Labs teams propose the following:

  • Transfer unutilized USDC from the Liquidity Layer to sUSDS (Savings USDS)
  • Redistribute generated yield back to the lenders

About sUSDS

Savings USDS is the upgraded version of sDAI, which offers a greater yield (currently 6.25 % APY - 0.25 % more than sDAI). Savings USDS are tokenized USDS deposits in the Sky Savings Rate. It’s important to note that there is no difference in risk between sUSDS and USDS, as Sky Savings Rate deposits are not lent out, or used for insurance or staking. It is simply a way to activate savings.

Sky aims to always offer the best risk-adjusted yield on stablecoins in DeFi. Sky does this through its Sky Stars and Allocation System that can deploy USDS into the best risk adjusted yield opportunities depending on the market. For example, when TradFi rates are high, Sky can deploy assets into U.S. T-Bills. On the other hand, when DeFi rates are high Sky can deploy USDS liquidity into DeFi lending markets. This ensures that USD brings a competitive yield in any market environment.

Furthermore, sUSDS is very liquid against USDC, as 25 % of USDS reserves are in liquid stablecoins, meaning sUSDS can be instantly converted to USDC in the size of billions with no slippage. Similarly, there is no limit to converting USDC to sUSDS. This makes sUSDS an incredibly flexible and low-risk yield asset.

Motivation

The primary motivation behind this proposal is to ensure efficient capital utilization. Currently, Fluid USDC lending market is at ~70% utilization, leaving 30% of USDC reserves sitting idle and generating no return for the lenders. Native supply APR is only 3.7% which is subsidized by the protocol’s revenue to increase it to 5.75% APY. There is very low demand for leverage on the market and all major lending markets are facing the same problem for example, Aave supply rates are 2.6% - 3.7%.

By deploying unutilized USDC into sUSDS, we aim to:

  • Increase Protocol Revenue: Idle USDC can generate an additional 6% APY, enhancing overall protocol revenue. The projected 6% yield on $20M idle USDC represents $1.2M additional revenue to the lenders.
  • Improve Efficiency: Idle capital represents an opportunity cost for the lenders. By converting unused reserves into productive assets, we ensure that Fluid remains competitive.
  • Maintain Flexibility: sUSDS can be liquidated into USDC in the same transaction, ensuring that the protocol remains liquid and can meet borrower demand in the event of an increase in USDC utilization or USDC withdrawals.

This proposal aligns with our broader strategy to maximize capital efficiency while managing risk responsibly.

Risks

While the opportunity for additional yield is clear, there are several risks that need to be carefully considered:

  • Smart Contract Risk: Like all DeFi protocols, depositing USDC into sUSDS involves smart contract risk. However, this risk is considered low as Sky Ecosystem (MakerDAO) has been live for many years with a brilliant security track record.

  • Liquidity Risk: In the event of the USDC demand, we will need to liquidate sUSDS to meet borrowing/withdrawal requirements. While sUSDS PSM has $1.5B in reserves, it can dry up in case of force major conditions making it impossible for Fluid users to withdraw USDC.

To mitigate this risk we propose to automatically withdraw USDC from sUSDS when PSM level goes below $0.5B and Fluid deposits should never exceed more than 10% of the PSM.

  • USDS Depegging Risk: Although USDS (DAI) has historically maintained its peg to the U.S. dollar, this risk always exists especially considering exposure to the RWA and regulatory risks it implies.

Next Steps

Gather community feedback to initiate an on-chain proposal to

  • Proceed with the suggested parameters
  • Proceed with the alternative parameters
  • Or not to proceed with the proposal
3 Likes

TLDR; I strongly disagree

Great idea. However, by doing that you’re breaking one of the core principles of a money market by scorning user’s sovereignty. When a user deposits USDC, it’s because he wants to be exposed only to USDC, nothing else. For users that deposit USDS, it would be okay to do that because depositing in the Sky Savings Rate involves no other risks and rely on the same mother project.

Even if we look outside of core principles, at this point, it’s just stacking risks, the SSR rely on others money markets.

By making this kind of changes directly inside of the “Fluid machine”, it’s the perfect way to make it break, and it makes Fluid very vulnerable in any situation of Black Swan or any turbulent situation involving Circle, Sky, Morpho, T-bills regulatory, should I really continue the list ? At this point it’s an asymmetrical bet: small upside for big downside

Phoenix Labs will have others opportunities to leverage Fluid infrastructure and Fluid still has many opportunities to stop these USDCs from being idle while not exposing them directly to other assets but lending them to others assets.

All things considered I would think the risks are pretty low here with the safety measures taken ( max 10% of PSM + automatic withdraw).

Being competitive on rates is crucial for Fluid at this state as it’s trying to gain market share.

I guess borrowers are not affected by the increased utilization though right - their rates stay the same?

I don’t think you really considered the risks I pointed to + it seems okay to do that but in any bad event it could severly affect Fluid and its solvability. For example, during the night of the 10th to the 11th of march 2023, when USDC depegged, DAI wasn’t exactly following USDC price and even had a 3% price differentation compared to USDC.
(source : Curve 3pool UI)(wanted to add a picture but apparently I can’t)
That’s the kind of bad event that can happen.

Fluid is not an hedge fund putting funds where there is the best yield, it’s a money market respecting users’ sovereignty. Genuine question to the team : Why working hard to have one of the best liquidation mechanisms of the industry so the user is never exposed to any other asset that the one he deposits to finally re-allocate fund like you want and stretch direct users’ asset exposure in the assets you choose ?

Fluid is already competitive on rates. DMH wrote this proposal some times ago. Now, utilization rate is 87%, so there is only 13% unused instead of 30% like said, and if we count only unutilization until the optimal rate kink, it represents only 6% of unutilization.

For example, Fluid supply rate on USDC is equal to USDC borrow rate of AAVE. That’s how competitive Fluid is.

Yes borrowers are affected by utilization, the more utilization increases, the more their rates do. But here, this proposal won’t change rates for borrowers.

1 Like

Yes, the borrowing rates will not increase. Utilization will increase only in the case the funds are borrowed

1 Like

Thank you for your feedback.

First of all, it is important to understand that this is not a proposal but a post to gauge community sentiment. It is true that the risks increase and it is up to the lenders to decide if they accept ~20% exposure to USDS for an extra ~20% increase in lending rates. The upside and downside are pretty balanced here.

Fluid still has many opportunities to stop these USDCs from being idle while not exposing them directly to other assets but lending them to others assets.

Could you please elaborate here?

2 Likes

Lending markets are probably the closest relative of the hedge funds because lenders deposit assets and want the lending market to utilize it and make returns.

Yes borrowers are affected by utilization, the more utilization increases, the more their rates do. But here, this proposal won’t change rates for borrowers.

Higher lending rates tend to attract more lenders thus lowering utilization and borrowing rates

1 Like

Won’t respond for the first part because I already did.

For the second part, I was just talking about lending them to new markets, like the cbBTC market recently opened for example. Pendle PTs or LP tokens can really help temporarily to maintain high utilization on stable markets.

Hedge funds allocate funds(i.e convert them into other assets), lending markets lend them.

Yep, but that’s not the goal(lowering utilization)

1 Like

This is a great idea. I disagree with the criticism that USDC lenders would only want to be exposed to USDC, in the sense that sUSDS is generally lower risk than lending on Fluid, I don’t think this would increase perceived (or actual) risk.

2 Likes