AIP #17: Creating the MIM-USDT Overpeg Defense Mechanism (ODM) on Arbitrum

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AIP #17: Creating the MIM-USDT Overpeg Defense Mechanism (ODM) on Arbitrum

tl;dr In order to ensure that we never overpeg during periods of high liquidations / repayments, we want to mint MIM to create a single-sided Uniswap V3 position on Arbitrum where users can trade 1 USDT for 0.9994 MIM.

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Motivation and the Current Situation

Abracadabra has recently been focused on developing new cauldrons to support and expand the Arbitrum ecosystem. All of our upcoming products, including the recently launched MagicGLP, require $MIM liquidity to function.

Currently, the main source of $MIM liquidity is the Curve Pool on Mainnet, which has a balanced pool ratio between MIM and 3CRV tokens, and a total value locked of over $130M.

In comparison to the deep $MIM liquidity in the Curve Pool on Mainnet, the main source of liquidity for $MIM on Arbitrum is a MIM-2CRV pool with only $10M of TVL.

This shallow liquidity on Arbitrum makes it vulnerable to large increases or reductions in the supply of $MIM on the chain.

Extreme Volatility Scenarios

During periods of high volatility, we expect loan positions to be repaid or liquidated. In order to do either of these actions, users and liquidators need access to a large supply of $MIM. However, given that Abracadabra is multi-chain, there is no guarantee that there will be enough $MIM on a particular chain to ensure smooth repayments and liquidations.

Without sufficient $MIM, the price of $MIM could go above $1, which would make liquidations more costly and inefficient. This presents a risk for the protocol, because underwater positions must be closed before bad debt is incurred.

In order to prevent this situation from happening, we are proposing to introduce a MIM-USDT Overpeg Defense Mechanism (ODM) on Uniswap V3.

The proposal

The following proposal is to allow the minting of up to 40M MIM tokens, bridge them onto Arbitrum, and deposit them into a single-sided MIM-USDT UniV3 position (100% MIM / 0% USDT) using the 0.05% fee tier, pricing MIM 1bps above peg.

This would allow users and liquidators to trade 1 USDT for 0.9994 MIM.

The amount of MIM minted towards the ODM will be dependent on the total outstanding MIM on arbitrum.

Such a setup would ensure that if $MIM ever over-pegs, liquidators would always be able to route through the Uniswap V3 ODM to acquire MIM tokens with minimal fees.

Each MIM token emitted by the ODM in a situation of stress for the protocol would be backed by USDT inside the Uniswap V3 position. Later, MIMs could be sold back into the ODM for USDT until it reaches its initial state.

The advantage of building such an ODM using a Uniswap V3 position, rather than a custom made contract is that trades will be automatically routed through this pool and indexed by aggregators such as 1inch or Matcha. Abracadabra’s leverage engine will also route through this Uniswap V3 pool to ensure that users never overpay when they are deleveraging positions.

This simple yet powerful design allows the protocol to continue expanding onto sidechains without worrying about an overpeg situation.

Technical Details

The Uniswap V3 position will be opened on Arbitrum and controlled by the protocol multisig that is typically used to mint MIM for topping up cauldrons. Its signers can be found here.

Any USDT collected in the Uniswap V3 position will only be used for backing the MIM emitted through the ODM. This ensures that every $MIM in circulation will always be over-collateralized.

The position parameters will make sure that the price at which the ODM will be selling MIM is 1 bps above $1.

The amount of MIM minted towards the ODM will be variable and correlated to the amount of MIM emitted on Arbitrum.

It should be noted that during normal situations when MIM is trading below the $1 mark, the ODM is not expected to be utilized. It will simply remain idle until a large amount of $MIM liquidity is needed (e.g., period of high liquidations).

In the future, the DAO will be able to change the AMM used to set up the ODM, thanks to a speedlaned vote (24 hours).

Conclusion and Voting

The following proposal will remain as an AIP for the following days and then be moved to voting on a 72 hours period, it will be amended following community feedback!

Voting is now live, and can be found here.

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Only the best ideas coming from the abracadabra team… sounds good to me!!! Let that magic flourish!! :open_book::man_mage::magic_wand::dizzy::sparkles::star::star2::sunny:

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Generally, loving effort to stay ahead of the market. Is there a reason that only USDT was proposed where other stablecoins such as USDC are excluded?

On another thought, how is this different from the Luna Foundation Guard (LFG), where they spent $2.2 billion and still failed to defend the peg in times of crisis.

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I agree that perhaps we should consider USDC since our protocol already has a lot of USDT exposure in the protocol owned farms.

Apparently 10k BTC was not used to defend the peg and ended up in a swiss bank account in the Terra collapse. Our use would be different as the capital will be immediately available and likely automatically used by bots in the situation of a depeg to the upside. Additionally, there is no negative feedback loop between MIM and the collateral assets like there was with LUNA/UST. The feedback loop was the key to UST/LUNA’s growth and also the cause of their crash.

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Love the strategy! It helps Abra save on emissions on other chains which can lead to more aggressive expansion of MIM utility.

I’d like to hear about why USDT instead of USDC? Would we be better off with a more diversified exposure (given the USDT exposure on our stargate POFs)? USDC seems to be the more stable asset lately which might help prevent the pool from being arbed in the event of a USDT/C depeg when MIM stays stable.

If USDT/C were to depeg temporarily and our MIM position is converted to USDT/C, would we look to redeem the USDT/C through tether/circle or wait for a repeg? Is Abra able to redeem through tether/circle? If we did redeem, that means that during redemption, a portion of MIM is unbacked by onchain assets right? If we don’t redeem, then would we adjust the position in any way?

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Good plan, but depends on the USDT staying at peg. USDT has been solid, but not risk free. Perhaps it make sense to spread the risk across USDC and USDT.

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So the reason why we decide to start of with USDT, its that USDT has been unparalleled for years both in terms of Market Cap and Daily Volumes. It has been able to strongly defend the peg, and less prone to blacklist smart contracts. Additionally, we have a direct line of contact with their team in case somethings would arise.

You can easily check on the largest coin analytics websites how exactly better has USDT performed in the last year compared to USDC, in all the major statistics.

Lasty, consider the stance of the SEC in the last few weeks, I would focus more prominently on USDT.

This being said, MIM is paired to both stablecoins on curve, and has USDC specific pairings on Velodrome, Camelot and Solidly.

Despite this, the ODM architecture allows easily to switch from one centralised stablecoin to the other, if the need would arise.

Secondly to address your doubts on the LFG, these USDT would be kept inside the LP, hence users would be able to buy them directly without the need os us deploying any funds. Also being a stablecoin, quick deployment wouldnt create a price crash and the LFG did. And lastly, MIM would be backed by these USDTs only in situations of stress for the protocol and an overpeg scenario.

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I agree @hms154, but as mentioned here, remember that MIM is already paired against USDC solely on very prominent DEXs, hence distributing the risk.

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@BrabDdy I added a couple of reasons that made us start off with USDT here.

For your second question: when creating the ODM, we are intrinsically assuming that the token which we are paired against is not at risk of a long depeg. I see 0 chances that USDT depegs for large portions of time, hence the best move would be to simply wait for it to regain the peg and let market participants to arb the ODM back to normality.

In particular situations, where the ODM is constituted only of USDT, the multisig could pull the LP position, bridge the USDT back to mainnet, swap it for MIM, and then redeposit such MIM back in the ODM. It is basically an ODM rebalance, despite being a good feature to have, I personally think it will ever happen and that arbers will take care of it.

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Sounds good. I know USDT has had some scares, but have processed all redemption requests. I also like that it isn’t in the spotlight of the SEC which can only be a good thing. Let’s go!

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