[For Discussion] What should happen with AUSD going forward?

Community Discussion & Proposal
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Summary: The community must discuss and decide what happens next with AUSD.

Abstract: With ALPACA emissions coming to an end in just under 2 months (or before if the remainder of ALPACA emissions are used to bootstrap the upcoming perp + AF2.0 products) there will be no incentives to provide liquidity on Ellipsis for the AUSD3EPS pool. We must decide what the future of the AUSD product looks like.

Motivation: There aren’t many BSC native protocols offering mintable stablecoins. Off the top of my head there is Venus’ VAI and Helio Protocol’s HAY. We have a good shot at outclassing both of them if we act now.

VAI has been off-peg since inception, has very low liquidity both on-chain and off-chain and only just recently introduced the stability fee mechanism to maintain its peg. The current incentives to mint VAI are to achieve leverage in other tokens or to earn ~2.5% return in the VAI vault.

HAY is relatively new and has been fairly good at maintaining peg except for that one time when it got exploited for 15M HAY during the Ankr debacle. HAY can only be borrowed using BNB and BUSD as collateral with interest rates at 2% and 10%, respectively. Minters are incentivized to mint HAY be receiving HELIO tokens and the price is kept “stable” by supply and demand and a little bit of rewards adjustment. The incentives for liquidity providers come from outside of the protocol and could diminish and even disappear completely on a whim.

Rationale: AUSD already does what both VAI and HAY do but with the added advantage of sitting within the Alpaca Finance platform where user can also participate in LYF, AVs and more.

AF2.0 will bring improvements that will make AF extremely competitive with Venus.

We should capitalize on our competitive advantage over these protocols to legitimize and grow AUSD.

Implementation: In order to grow AUSD we must incentivize liquidity providers as well as introduce a mechanism (buy pressure) to counterbalance the primary use of AUSD which is leveraging other assets (sell pressure).

In the spirit of the recent tokenomics discussions, I propose that we repurpose the cashflows generated by the stability fee as well as the AUSD Peg Insurance Fund outlined in point #2 in the AUSD commercialization plan.

The stability fee would be redirected to liquidity providers as a temporary measure to grow AUSD. Once AUSD becomes an established product, liquidity providers will be compensated solely by trading fees.

The AUSD Peg Insurance Fund (+ a portion of the stability fee if it’s not enough) could go towards financing a savings rate on AUSD balances.

Conclusion: I hope we can find a way to not only keep this product alive but also grow it without modifying ALPACA’s tokenomics.

Please note this is meant to be a conversation starter, I don’t pretend to have all the answers. With that said, I await your comments on the matter eagerly!

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AUSD is a difficult one.

While we could further incentivize liquidity providers by increasing the rewards (e.g., adding the 3.15% stability fee to the LP APR), does it really benefit us?

First, we need to ask the question, why does someone want to mint AUSD? Is it to farm LP rewards, or is it a way for someone to secure a loan?

When looking at DAI, the APR does not really seem to matter that much, as most users are simply using it as a way to collateralize their assets and are even willing to pay for it.

In my opinion, the primary issue is the peg and how we actually achieve and maintain it. One solution is to raise the incentives, but how do we, as a platform, benefit from this? From a quick glance at the docs of HAY and VAI, they seem to pay more in incentives than what they actually earn in fees from it. Simply raising the incentives will result in the same situation with slightly more minted AUSD (e.g., same scenario with different TCL) and us just footing the bill to keep it inflated.

I think a better approach would be to start actively repurchasing and gradually regaining the peg (not .96, but 1.00 this time). Based on the last few discussions, one of the issues we are seemingly facing is the lack of a budget for future incentives. Let us start by building some kind of reserve (in AUSD) by using these fees (stability and other sources?) in a constructive manner.

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I think growing AUSD, even at a short term deficit, will ultimately benefit the protocol in the long term. This is the same line of reasoning as what the core team proposed to bootstrap the perp and AF2.0.

The DAI Savings Rate does not exist to incentivize liquidity providers, it exists so that people can buy DAI and park it in a savings account. It’s added buy pressure on DAI. It’s financed by CDP holders (minters) and backstopped by minting more MKR in case of bad debt (something we can’t do because of the nature of ALPACA’s tokenomics).

Having AUSD at peg without deep liquidity is not better than being slightly below peg with deep liquidity. We already know that a stablecoin can survive for a long while below its peg, VAI has already proven that. Even DAI was below peg for a long time back in the days.

Achieving peg is indeed one of the priorities but not the only one. It’s a balancing act between having sufficient liquidity and trading at-peg for long enough for people to trust that the price will always revert to the peg. Without adequate liquidity, AUSD will de-peg every time someone tries to sell for any reason and that’s not very good for building trust.

I think an AUSD Savings Rate would achieve the same result in a socialized kind of way. Also, maybe the stability fee could be spent on buying back AUSD when below peg? The bigger AUSD gets, the easier it will be to maintain the peg even with high volume.

I’m not sure what you mean here. What would the reserve be for?

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In my opinion, we could creat some usages for AUSD in future (but I don’t know what’s the best way) to attract people to buy AUSD in public market or mint AUSD themselves. It’s hard to regaining the peg in this situation: what you can only do with AUSD is selling it to market to trade other asset. We are new, must do more to make people come for AUSD.
But for now, I don’t think the team is focusing on improving AUSD’s performance. They are busy with AF2.0 and prep product.
Also, shutting down the whole AUSD system is not a good way to solve problems. I believe AUSD is a great product. Just need time.
Maybe waiting other new products in AF2.0, we can find something, someway that can improve AUSD’s value and make the whole platform perform better.

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This is not that different from incentivizing LP, except it doesn’t help with liquidity. The point is APR should not be the main attraction for AUSD, but rather its ability to collateralize crypto.

It is indeed an issue of both a lack of liquidity and difficulty in maintaining a peg. Which I believe is more a scaling issue that can be resolved with sufficient users and TCL (find an equilibrium between minting and repurchasing). So how do we attract more users/funds to achieve this critical mass? we could try again with incentives, but it didn’t really seem to work that well. I can’t recall the exact numbers, but let’s say we had somewhere around 8-10m AUSD once when the APR was around 12%? Once the incentives decrease, why would the end result be any different?

So maybe instead of incentivizing LP indirectly, we could use a portion of the revenue generated from stability fees and other sources to actively repurchase AUSD from the market and (add it as LP?). IMO the main detractor for users atm is the 4% cost of minting and swapping it to something useful (busd, usdt,…). Even if the peg is only reached occasionally, it may still encourage users to mint more AUSD. Slowly building the userbase and deepening the liquidity.

If one of the challenges AF is facing is not having sufficient budget for marketing/incentives of new products, why don’t we direct a portion of the revenue to actually building such a reverse/warchest for future projects and make it useful in the meantime (by helping the peg/liquidity)

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It’s different in the sense that it does not target the same group of people. A savings rate would target savers, outside of the protocol, who are seeking stability and to earn a small return on their balance.

They will come when AUSD is regularly at-peg with sufficient liquidity. Liquidity is sticky as long as the trading volume is adequate.

This is why i’m advocating for using the protocol revenue (our only option really since the tokenomics are what they are) to incentivize liquidity until that critical mass is achieved. This would be a temporary effort and is not at all different from what’s happening with the Perp/AF2.0 launch.

Deep liquidity promotes stability. We need stability in the price in order to grow the TVL.

It sounds like you’re suggesting a move to protocol owned liquidity. It was mentioned in the past and it was not well received.

Why not just use the revenue directly? Why do we need to build a reserve? We don’t even build a reserve for bad debt insurance, we use future revenue instead.

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Seems more like an UX issue, the difference between LP and simply gaining some interest on AUSD is not that different (besides some exposure to other stablecoins?). Creating an easy-to-use interface for swapping in and out of LP, will likely attract the same users.

Yea, but Why do you think the result will be different this time? is the plan to simply try it again with higher incentives?

I have always been a proponent of POL, where the protocol holds tangible assets that can be used for various use cases (like this). But, it indeed appears that not everyone shares this perspective. The main objections raised against it seem to be: the significant effort required to manage it, the potential negative impact on users’ yields, and the possibility of legal issues arising in the future. But if no one is seemingly willing to take the risk of arbitraging the peg, why shouldn’t AF step in and take advantage of it? Regarding the “negative impact on users’ yield”: liquidity is liquidity, and at least with POL there is no need for further incentives.

Why do we need a reserve? Just look at the discussion surrounding the upcoming products. The estimated cost is $475k - $625k, and where will this come from? ITAM, collected fees, and Alpaca emissions. Two of those three options will not be possible in the future. So, how will the next products be incentivized? Are we just hoping that something like ITAM happens again and that we somehow gain another $417k? If, as stated in that discussion, the revenue is around 20-25k per week, it would take 4-5 months to build back a reserve that can be used for incentives on that level (if all revenue is used). While we build this reserve, we might as well do so in the form of AUSD.

maybe we should look into building a reserve for this as well? :smile: (but let’s keep that for a different discussion)

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Despite being a major AUSD liquidity provider, I honestly think the team should not over extend themselves and focus solely on the AF2.0 and Perps launch.

AUSD was a good idea, but it just simply did not gain enough traction. We could even try a launch 2.0 later down the track once AF2.0 and Perps are successful, since the team will have a lot more capital and market presence to ensure there are more AUSD market participants and AUSD stays at peg.

However, I believe right now the cost to benefit ratio of reviving AUSD is too high and all resources should be used to make sure AF2.0 and Perps are a success. I will be happy as long as I can exchange my AUSD near peg which should not be a problem, since we are still incredibly over collateralized.

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