Element DAO

EGP-14 Title: Onboard yvBalancer-BoostedAaveUSD Authors: @Max | FIAT DAO Type: Asset Onboarding Proposal Date proposed: July 28th, 2022 Date revised: October 1st, 2022 Date ratified: TBD

References

1. Yearn Strategy
2. Balancer Boosted Pool
3. Aura Finance

Sentence Summary

This proposal calls for the addition of a Yearn Finance strategy that auto-compounds deposits of the bb-a-USD Balancer Finance pool via Aura Finance as a supported yield originator.

Paragraph Summary

Balancer Finance allows for the rehypothecation of liquidity provider assets into yield-bearing strategies via its Asset Manager functionality. Its flagship proof of concept is the Aave-boosted pool, which deploys USDC, DAI, and USDT into Aave in accordance with its trading volumes. This allows for higher yields and reduces the opportunity cost present in underutilized stableswap pools.

In parallel to this development, not only has Balancer Finance implemented its veBAL system, but Aura Finance has also committed to subsidizing governance-favored Balancer pools. This means that bb-a-USD LPs can receive i) trading fees, ii) rehypothecation yields, iii) $BAL emissions, and iv) $AURA emissions. Accordingly, Yearn Finance has developed a strategy capable of a) depositing bb-a-USD Balancer Pool Tokens into Aura Finance, and b) auto-compounding the position as it earns $BAL and $AURA.

Motivation

bb-a-USD represents the second largest pool on Balancer Finance with $140M in TVL (between two pools) at the time of writing. It typically deploys between 80 and 85% of its liquidity into AAVE, implying a blended 0.71% yield with current lending rates. Factoring in both $BAL and $AURA emissions, this comes out to ~6.5% APR prior to any auto-compounding executed by Yearn Finance. As an originator, it presents a compelling combination of organic yield as well as consistent governance token emissions.

Furthermore, we at FIAT DAO see a clear win-win-win opportunity for ourselves, Element Finance, and Balancer Finance should bb-a-USD come to be supported. We would look to add support for principal tokens as collateral for minting $FIAT, which has liquidity primarily on Balancer Finance via our “FUD” pool. Users would be able to leverage their exposure to the bb-a-USD pool, resulting in locked TVL for both Balancer and Aura. If that strategy proves popular, we believe Balancer and Aura governance would have an incentive to subsidize $FIAT liquidity in order to increase the strategy’s capacity.

The end state of such a scenario playing out would be:

• Recurring TVL for Element
• Greater interest in secondary liquidity for $FIAT
• Locked TVL for Balancer, Aura

Specification

Asset Classification

1. Name of proposed asset: Yearn Vault Boosted Balancer Strategy for bb-a-USD (yvBlpbb-a-USD)
2. Strategy or single yield source.
   1. Underlying asset classification:
      1. Interest-Bearing Stablecoin Deposit
   2. List of all underlying asset:
      1. USDC, DAI, USDT
   3. If the underlying asset(s) is a stablecoin.
      1. What mechanisms does it use to maintain stability?:
         1. For USDC, USDT: Redeemable Reserve Backing
         2. For DAI: Collateral Liquidations, Peg Stability Module
      2. If it’s not a stablecoin, what drives the underlying asset(s) price?
         1. N/A
      3. Yield source(s) according to each underlying asset.
         1. Organic (e.g. lending, borrowing, underwriting risk).
            1. Trading fees from bb-a-USD pool
            2. Aave lending yield for USDC, USDT, DAI
         2. Emissions.
            1. Sell and reinvest Balancer governance token ($BAL)
            2. Sell and reinvest Aura governance token ($AURA)
         3. Inflation.
            1. N/A
      4. Enumerated underlying asset(s) liquidity.
         1. USDC: Redeemable reserves overview
         2. USDT: Redeemable reserves overview
         3. DAI: Peg stability module dashboard
   4. Can the asset(s) protocol economics be modified? Yes
      1. What economic protocol parameters can be modified?
         1. Yearn Finance Take Rate
      2. What are the requirements to change protocol parameters?
         1. Yearn Finance Governance Vote
      3. Asset strategy fixed or flexible. Fixed
         1. If flexible, who/what is able to modify the strategy?
            1. N/A
         2. List all modification requirements and scenarios.
            1. Modified strategy would require a new vault deployment and users migrating funds

Proposed Term Duration

The proposed term duration for this new asset would be six months starting from mid-to-late October 2022, implying an end date of April 24th, 2023.

Technical Implementation

The Element Core Team has previously onboarded Yearn Finance vaults as eligible assets. We would look to follow the same process previously conducted.

Test Cases

N/A

Security Considerations

The proposed asset interfaces with the following protocols:

• Yearn Finance
  • Trail of Bits
• Balancer Finance
  • Trail of Bits
  • OpenZeppelin
  • Certora
• Aave
  • Trail of Bits
  • ABDK
  • OpenZeppelin
  • Certora
• Aura Finance
  • Code4rena Contest
  • Halborn Finance Audit

Only Yearn Finance has previously had an exploit that lost user funds. The corresponding vulnerability has since been patched and Element Finance currently supports the updated version of the hacked asset (i.e. yvDAI).

For the purpose of the Security Pod review, it is worth noting that the bb-a-USD pool itself is underway with a migration to a patched version. More on this migration can be found here.

Technical Review Plan

The Element DAO Security Pod will give its final opinion regarding the onboarding of the proposed Yearn Finance vault.

Next Steps

1. Conduct off-chain vote via Snapshot
   1. “Yes” Vote: Proceed with Steps 2-5
   2. “No” Vote: Do not proceed with Steps 2-5
2. Security Pod to conduct its Due Diligence Report
3. Confirm finalization of both vault deployment and successful migration of bb-a-USD
4. Conduct on-chain vote for onboarding
5. Deploy Element Finance pool for yvBalancer-BoostedAaveUSD with an initial maturity date set for March 23rd, 2023