Discussion for Further AUSD Pegging Mechanisms

Community Discussion & Proposal
1

Simple Summary: Develop new ways to peg AUSD at $1, including implementation of using 40% of the developer’s fund profit to buy back AUSD, as per Alpaca’s AUSD Commercialization Plan

Motivation: The stablecoin market is huge, and will potentially keep growing in the future as more and more institutions move real world assets onto the blockchain. Think DAI, which has a similar model to AUSD, currently has a circulating supply of close to 7 billion. If AUSD were to achieve even 10% of this, we would have approximately 663k additional Alpaca (@$0.203 per Alpaca) burn per week, just from using 50% of the 2% stabilization fee to burn alone. This isn’t even considering the fact that loans are overcollateralized, hence that figure is severely under-estimated.

Discussion: Giving utility to the AUSD3PS LP tokens like access to leveraged AVs will not help increase the peg, since users can simply supply BUSD, borrow AUSD, and supply it to the LP. This process actually pushes down the price since adding only AUSD into a liquidity pool has the same effect to price as selling a portion of it, therefore in my opinion, AIP 8 was actually quite detrimental to price as it incentivizes further sell pressure onto AUSD, rather than buy pressure. We need utility for AUSD, not AUSD3EPS LP tokens.

As per Alpaca’s AUSD Commercialization Plan, there needs to be a consistent buyback of AUSD from the open market to truly support this peg. The team had dedicated 40% of the Dev fund earnings to a Peg Insurance Fund yet there has been very little information regarding if and how much AUSD has actually been bought back.

Furthermore, in the event AUSD actually rises above $1, users have the option to mint 1 AUSD with 1 BUSD. Therefore, we only need to worry about limiting the downside action as it is impossible to ever rise above 1 BUSD. Thus, in the event a user needs to close their AUSD loan, if their price impact causes a price appreciation of AUSD to be greater than 1 BUSD, they can simply use BUSD to mint AUSD to pay back the loan rather than buying AUSD for more than $1 (in the event it goes above peg due to price impact).

Proposal/Implementation of Proposal:

  1. Implement consistent buybacks with dev fund profits (as per the Commercialization Plan)
  2. Transparently display how much AUSD has been bought back on the AUSD page
  3. Ensure AUSD that has been bought back is used before new AUSD is minted via the AUSD Stable Swap Module

3.1. Alternatively, simply burn the AUSD that has been bought back, display the current amount of AUSD open loans and AUSD in circulation on the AUSD page and users can simply mint more AUSD with BUSD if required to pay back AUSD loans.

The above is simply one of many potential ways to improve the AUSD peg, discussion of variations of this idea, or completely new ones aimed at pegging AUSD is welcome in this thread.

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Hi, thanks for the proposal.

-Dev fund backstop kicks in below .95

“Giving utility to the AUSD3PS LP tokens like access to leveraged AVs will not help increase the peg, since users can simply supply BUSD, borrow AUSD, and supply it to the LP.”

-That’s not accurate. There will be a cap on AUSD borrowing when the exchange rate is low. So if investors want to collateralize 3eps for AV allocation, they’ll have to deposit non-AUSD stables

As per Alpaca’s AUSD Commercialization Plan, there needs to be a consistent buyback of AUSD from the open market to truly support this peg.

-The price is actually determined by the asset ratio in the pool. Since Ellipsis/Curve allows for single-asset deposits, you can also efficiently move the price by depositing non-AUSD stablecoins into this pool. So AIP-8 is well-targeted.

  1. Ensure AUSD that has been bought back is used before new AUSD is minted via the AUSD Stable Swap Module

-I didn’t understand this part. The two don’t seem related. The protocol does not mint AUSD for its own use case.

3.1. Alternatively, simply burn the AUSD that has been bought back, display the current amount of AUSD open loans and AUSD in circulation on the AUSD page and users can simply mint more AUSD with BUSD if required to pay back AUSD loans.

-Dev Fund backstop does not burn AUSD and this fund still belongs to Dev Fund after initiating, not governance. It’s like if someone told you they would support the price of something by buying it, you wouldn’t be justified to then tell them to burn it to make it permanent; It’s not a donation, and they aren’t minting the buying funds to out of thin air.

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3

Thanks for the response!

-Dev fund backstop kicks in below .95

I see, has this been activated in the past? Personally, I believe it should be activated above .95 to actually achieve AUST stability.

-That’s not accurate. There will be a cap on AUSD borrowing when the exchange rate is low. So if investors want to collateralize 3eps for AV allocation, they’ll have to deposit non-AUSD stables

Given the current market conditions, I personally don’t believe AV allocations are actually that attractive and I doubt anyone would be pairing stables with AUSD solely for AV allocation.

-The price is actually determined by the asset ratio in the pool. Since Ellipsis/Curve allows for single-asset deposits, you can also efficiently move the price by depositing non-AUSD stablecoins into this pool. So AIP-8 is well-targeted.

Although that is true, the same point as above holds. Although I have been supplying BUSD/USDC/USDT into the AUSDEPS pool, it is mainly as a way to help the protocol and earn Alpaca, not for AV allocation (though I can’t speak for everyone of course). I fear once Alpaca’s emission rate decreases again, there will be even less utility for AUSD.

-I didn’t understand this part. The two don’t seem related. The protocol does not mint AUSD for its own use case.
-Dev Fund backstop does not burn AUSD and this fund still belongs to Dev Fund after initiating, not governance. It’s like if someone told you they would support the price of something by buying it, you wouldn’t be justified to then tell them to burn it to make it permanent; It’s not a donation, and they aren’t minting the buying funds to out of thin air.

I think there may have been a miscommunication with this part. Here is my thought process in more detail:

  1. We need to buy back AUSD to help support price
  2. However, this may inhibit AUSD minters repaying their loan if too much has been bought back
  3. In the above case, they will need to mint new AUSD with BUSD to pay back their loans, the BUSD will be paid back to the dev fund (capped at whatever the dev fund spent). Even if the AUSD is burned, it will all need to eventually be paid back to repay the AUSD loans to get back the user collaterals, so the BUSD will be sent back to the dev fund when AUSD is minted eventually anyway, thus leading to the same outcome as burning or holding.
  4. If more BUSD is used to mint AUSD than the dev fund has spent, the additional BUSD will be allocated to the Stable Swap module (already built in), which is why it’s important to transparently display how much the dev fund has spent.

Hope that makes more sense! The dev fund will not be “donating” anything, it’s simply an investment in AUSD that will be repaid in BUSD at a later date. However, if the burning aspect leads to an uncomfortable situation, the dev fund can hold it and simply use their holdings first in the Stable Swap module first, which will lead to the exact same outcome.

Let me know if that makes more sense!

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I see, has this been activated in the past? Personally, I believe it should be activated above .95 to actually achieve AUST stability.

EPS AUSD price has not dropped below .95 yet. The dev fund alone isn’t going to bring in enough capital to fix the peg. It’s just an extra support. To do that, AUSD needs utility like AIP-8 to create buying demand or demand to stake other stables in the 3eps pool. Or we simply raise the interest rate and force paybacks of AUSD to increase the AUSD price.

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Although small buybacks alone may not be able to sustain the price at $1, merely announcing a higher price at which buybacks will occur will set a higher mental floor in my opinion, since users may buy AUSD just for speculative purposes. I believe at this stage even just reducing volatility is a win for AUSD.

Furthermore, increasing the 3EPSAUSD pool’s interest rate is another good idea to help the peg, but making the stability fee a function of the AUSD price might be more effective. For example, 2% when AUSD is $0.99+, then shifting between 10% to 2% between $0.95 to $0.99? Just an example of a potential structure.

Furtheromre, since there are 3 other stable coins in the 3EPSAUSD pool, if AUSD were to be pegged at the $1 mark you would need $3 worth of stablecoins per 1 AUSD, whereas in the old LP you only needed a 1:1 match of stablecoins. Therefore, this might need to be kept into account when making changes as it’s much more difficult than before to keep the AUSD peg.

Lastly, I believe there is a lot opportunity for AUSD to be a main stablecoin in the BSC ecosystem if we position it correctly and form some strategic partnerships with new and existing DEXs.

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I may agree on shifting the interest rate automatically depending on the AUSD value, that could help balancing AUSD price.
It would be similar to how the market finds a balance between lending and borrowing on our platform.
If a lot of people are borrowing so much AUSD to do the loop strategy it could mean that 2% of borrow fee is too low.

The thing I don’t know is if people would be fine in having an unstable borrow fee, they are fine for LYF borrowing, would it be the same with AUSD?

7

I think it’s too early to adjust the interest rate.

There is barely 3.5M AUSD outstanding at the moment. What we need to do is increase the utility of AUSD so that there is more demand for it which would help drive the price up.

We should just wait for AIP-8 to be implemented and go from there. Let’s not make a drastic decision that might completely kill the product.

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Thanks for the reply.

Personally, I don’t believe AIP-8 will actually provide any noticeable benefit to AUSD’s peg since access to x8 vaults aren’t very sought after in these market conditions, hence why I believe further discussion is required.

However, you make a very valid point in saying we should at least wait until after the implementation to make any decisions. Furthermore, I don’t believe an increase in interest rate will “kill” the product per se, but I do agree rewarding participants with more utility is probably a better approach than punishing participants. The most glaring band-aid fix is just activating the buybacks at a higher peg, but as Sam mentioned it’s not really a scalable long term solution.

I will perhaps revive this thread or make a new one after AIP-8 has been implemented for some time so we can analyze the results :slight_smile:

9

I believe sufficient time has passed since the AUSD staking implementation went live to make a decision regarding its effect, and as expected there has been little to no increase in AUSD price. Therefore, I believe it is safe to say AUSD staking has failed to strengthen the peg.

As mentioned earlier, I believe there needs to be more ways to support the peg.

Below are some suggestions:

  • Increase the Alpaca allocation for the AUSD LP (especially since emissions are going down soon)
  • Change the stability fee structure to a dynamic fee, being lower than the current fee when the price is above $0.99 but dramatically increasing as the price of AUSD goes below
  • Stop all new AUSD positions if price is below $0.99
  • The dev fund to buy back below $0.99 instead of below $0.95

If all of the above is implemented simultaneously, we would see an increased financial incentive for holding AUSD, more incentive to close out AUSD loans when AUSD is below peg and the inability to create more AUSD when it is below peg.

As AUSD circulation increases and the value becomes more stable, we can slowly increase the threshold price for being “out of peg”. For example, we may initially increase the stability fee and stop minting when AUSD falls below $0.99, but as we become more stable the above may be triggered when AUSD falls below $0.995.

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10

If you noticed, AVs TVL has not increased recently, probably due to their performance during that horrible bear market.
Before getting to a conclusion I think we need to wait and see how the new rebalance optimization will work out.
Once AVs performances are attractive again we can see if AIP8 was good enough to increase AUSD utility.

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AUSD staking hasn’t gotten adoption because AVs need to be more profitable which is what we’re working on.

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