This proposal summarizes a plan to make ZAI yield bearing with backing from RWA assets and USDe
Proposal
It’s now been two months since the launch of ZAI and we’ve seen decent growth for ZAI on Base. Amongst all the networks that ZAI has been deployed to, ZAI has seen new users and TVL coming from the Base ecosystem.
With integrations on lending protocols like ZeroLend, we have seen ZAI hit the borrow caps multiple times. However one of the main issues with ZAI is the lack of proper yield on the underlying collateral backing ZAI. This lack of yield makes minting ZAI unattractive.
Combined with it’s availability as debt on lending markets like ZeroLend, this creates a net negative sell pressure on ZAI which creates a decline in growth for ZAI.
In this proposal we propose to convert the backing of ZAI to include high yielding stablecoins such as:
USDe by Ethena (currently yielding 13% APR)
TBILL by OpenEden (currently yielding 4% APR)
USDY by Ondo Finance (currently yielding 4.9% APR)
All the yields generated from the various stablecoins will get redirected to the sUSDz Safety Pool. Since sUSDz represents a portion of the staked USDz, this creates a yield amplification effect that encourages more users to stake their USDz.
Yield Generated
% of ZAI locked
sZAI (Amplified) Yield
15%
50%
30%
15%
25%
60%
15%
10%
150%
10%
50%
20%
10%
25%
40%
10%
10%
100%
5%
50%
10%
5%
25%
20%
5%
10%
50%
To ensure growth, we propose distributing yields from the underlying collateral to sUSDz holders every 3 days. This duration can be extended or decreased depending on the market feedback.
This also creates more risks for possible failures if something happens there.
Is this only intended for a specific chain or generally for all collateral on every chain where ZAI is?
If we deposit the collateral (100% of it or only x%?), what if a lot of people want to redeem USDz at the same time ? Can we get the collateral back fast enough? Otherwise, we will quickly lose the peg in such an event and then lose confidence, which could lead to a downward spiral in the USDz price.
We’ll be holding the collateral on the ETH mainnet but distribute yield on a specific chain (Base).
Redemption of ZAI should always be possible because ZAI is either backed by the underlying assets or by loans from ZeroLend.
As of right now, ZAI is backed by 100% USDC.
We would initially start focusing on USDe (Ethena) as the source of yield, but then quickly diversify into other treasury bills. The choice of asset backing we choose will also be quite strict.
If there are any risks we foresee coming with any of the backing, we can always make a new governance proposal to make any changes to it.
Hey all, thanks for this proposal Steven. Thought I’d take a closer look at it and share some feedback and questions.
I’ve yet to look at TBILL & USDY as the sizeable chunk here is focused on USDe (Ethena). If I understand this correctly, the 13% yield via USDe is mostly being generated from perps funding rates, Futures/spot spread & staked ETH yes?
(Ethena FAQ’s - Section 7. - Source of Value)
I can see it has a good/long history of sustainable yield, but something we need to be mindful of is that their reserve fund is quite small relative to the TVL, which is the backstop for prolonged negative funding rates if staked positions are not closed out. In short, there is a temporary depeg risk albeit a minor one.
(Ethena FAQ’s - Section 10.i - Risks)
Last point I want to highlight, is that Ethena does use Third-Party custody via ‘Ceffu’, ‘Copper’, ‘Cobo’ and Coinbase – with holdings of mostly concentrated (>80%) in Ceffu and Copper; both of these Institutions residing in Switzerland. Ethena does acknowledge the custody risk here, and states its measures to mitigate it is to spread across multiple asset manager; however the distribution is not well dispersed over the 4 options. Ethena Custodian Attestations OCT 2024
Of course, everything carries risk and that is relative to the reward – to sum this up for the overall proposal put forward here, I think it would be prudent to leverage multiple options for yield on USDz and nominate a smaller % of locked ZAI for USDe. I would be happy to consider 10% and perhaps 25%, but 50% or more I don’t think is a good option purely for the custody risk of third party, and minor potential of USDe depeg.
Overall, would prefer to see use of multiple protocols for generating yield as opposed to any concentration into one or the other. For example, $JLP on Solana could be something to also consider along with Treasury Bonds.
Final point is that it would be better in my view to withhold voting on significant proposals until Maha V2 of Governance is completely functioning and launched – as we want to have open opportunity for both new and old participation potentially through new staking locks and voting power.
Thanks all Has been a while. If I’ve misunderstood anything here, do clarify. Cheers.
Regarding the intended use of the revenue with the implementation of MIP-0034, I only read the part for the buybacks and burns (MIP-0035). I assumed that the rest would be spent as interest for ZAI farmers/stakers etc. to increase the ZAI TVL. Which would create a loop. More rewards for ZAI = more TVL = more revenue.
I would split it up as well. I would consider the following possible uses:
Imo, sUSDe (Ethena) is a risky asset with the potential to achieve really high yields. Stablecoins that farm the open interest have and will continue to have high demand.
As of now sUSDe offers a yield of 20-30% which is absurd for a stablecoin. But that yield justifies the risks of the stablecoin.
I would like to propose that we use sUSDe initially as collateral and then later on explore switching into more safer forms of yield.
sUSDe itself should be able to drive the collateral backing for ZAI to upto 100-200mn imo. Beyond this we can start to explore other safer alternatives for ZAI backing.
I think this proposal we can execute it internally, but the revenue sharing one definitely needs to go through a vote
Has been a while. If I’ve misunderstood anything here, do clarify. Cheers.