[FIP-008] - Basket Diversification

This FIP follows up a post put up earlier this month on the topic of Utilising the Basket - Flash Loans + Basket Diversification

Adding ETH pegged yield earning assets to the Basket of the Protocol is an easy way for the Protocol to be more capital efficient and generate revenue with the ETH it has sitting around. A simple way of doing this is replacing some of the ETH in the basket with sETH or stETH which yield a calm 5+% when at rest. One could take this further and utilise Basket Bags as containers for other yield bearing assets to be added to the Protocol’s Basket and thus increasing its effective Basket Factor. The quicker the Basket gets to its target factor of 100% the quicker BANK burns commence. For context, the Protocol is very efficient at accruing ETH via the Dutch Auctions. Since the Launch of FLOAT the Protocol has accrued hundreds of ETH while ETH has been dropping - a FLOAT buy with ETH during genesis was certainly a great move.

This initial step of Basket diversification is a simple way to have an additional method of increasing the Basket Factor of the Protocol while laying the pathway via the Basket Bags to add other assets to the Basket in the future.

Some of the initial ETH-yielding assets were discussed on discord to add to the basket include:

  • StakeWise sETH

  • LIDO stETH

  • Alchemix alETH

  • Saddle alETH-ETH LP

  • Ankr ankreth

  • Yearn yETH

  • Curve stETH-ETH LP

  • Convex + CRV + stETH-ETH LP

  • Stafi rETH

  • Curve V2 TriCrypto (Not pegged)

Please post below (shill) if we missed your favourite ETH pegged yield earning asset, or want to support a particular protocol. Please also share with the respective communities so we can see who’s most interested.

Currently the core team is leaning towards:

  • LIDO stETH
  • Curve V2 TriCrypto (interesting opportunity, but more risk & usdt component)

However the DAO holds the power - you get to decide

Based on the positive support for this proposal, we will proceed to organising a Scattershot vote on which assets to add to the Basket.

I’m in favor of this proposals. You listed the main ETH pegged yielding assets and I guess everybody has his favorite.

I shill for:

  • stETH
  • alETH
  • yETH

Not a big fan of curve TriCrpyto as USDT is involved which is not relly pegged 1:1 by USD and there is a non negligible risk USDT will fail his 1$ peg in the future.

Is there a planned limit for maximum allocation in each asset?

Is Curve V2 TriCrypto pegged to ETH? I thought it has IL.

And I would sugget not to allocate too much to those custodied ETH2 tokens. There was a news that some staking pool lost their private key a week ago…

We were thinking of starting with a diversification of 20%, and the allocations within that would be completely open.

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TriCrypto isn’t pegged to ETH - we should still be able to support it as the assets are all well-known oracled assets.

It’s definitely one of the more exotic suggestions (and I don’t love the centralised USD component), but think it’s got good linking opportunities.

  • LIDO stETH
  • Alchemix alETH
  • Saddle alETH-ETH LP
  • Yearn yETH
  • Curve stETH-ETH LP
  • Convex + CRV + stETH-ETH LP

I am fairly familiar with all of these assets (pretty much LP for all of them myself) and their mechanics and would vote in favor of any of them.

Maybe TriCrypto is something to explore a bit down the road when ETH-pegged assets are implemented.

edit: there more I think about it we should definitely do alETH.
Imho Alchemix has one of (if not the) best community in crypto and would get good getting exposure there.

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Is the purpose of this proposal to diversify assets away from ETH, or trying to gain additional ETH-based yield?
If its the former, then looking into tri-crypto would be the best choice. Otherwise, Lido stETH seems to be the best alternative.

The primary purpose is ETH-based yield - as that is something which has very few implications.

Diversifying away from ETH is also important, but not vital at this stage. We’ve all seen how correlated the market is at the moment.

We were thinking of starting with a diversification of 20%, and the allocations within that would be completely open.

I agree with this approach. I would say initially diversify 20% of total holdings to staked ETH as there is still significant risk across the various approaches including smart contract risk, slashing risk and liquidity risk.

Of that 20% allocation, that could be split across say 2 or 4 of the above options. The question then becomes does the DAO hold onto any governance tokens it’s earning or sell them down for additional ETH. I would personally lean towards holding those governance tokens particularly if the DAO is going to be holding these assets longer term, but I can see the argument for selling them down to reduce complexity.