Proposal for Implementing Liquidity-Swap Facility for USX-DF
The objective of this proposal is to create a Liquidity-Swap Facility for USX-DF, which enables the protocol to swap its protocol-minted USX for DF liquidity in the market, so to inject USX liquidity via TWAP and recycle DF liquidity in the market. This facility enables the protocol to balance out USX and DF liquidity in the market (i.e expand protocol-owned USX liquidity and reduce DF liquidity).
The strategy is intended to be bidirectional (both from USX-to-DF and DF-to-USX), however, currently we only propose to activate USX-to-DF swap, and the strategy is also subject to market and liquidity conditions below.
Strategy:
-
Open a vault to mint USX and swap into DF via TWAP (time-weighted-average price), USX to be minted is capped at 3m, around 14% of current market value of dForce Treasury (i.e 450m DF token), it ensures that USX minted are always over-collateralized.
-
The strategy needs to always satisfy the following conditions:
- USX/USDC peg stays within +/-1% range, the strategy will be suspended until the peg is restored back to the range.
- Total USX-to-DF swap capped at 3,000,000 USX over a 3-month period, via TWAP (facilitated via Pulsarswap/Fraxswap’s TWAMM)
-
Usage of the Purchased DF
- stake into DF free/lockup staking;
- protocol to provide DF/USX liquidity in DEX to boost DF’s liquidity;
- to enable a future reverse swap (i.e DF-to-USX twap) to combat excessive USX liquidity, subject to governance approval.
Rationale:
USX and DF tokens are two most critical assets within dForce protocol. The current feedback loop between the two are loosely connected, i.e more USX adoption will bring more protocol income, more income to recycle DF etc. DF is the main token for liquidity mining rewards; the liquidity of USX and DF tokens are generally independent of each other.
The liquidity-swap facility is utilized to build a stronger and positive feedback loop between USX and DF token, where 1) funnel DF trading volume into USX liquidity (more fee income); 2) balance out DF and USX liquidity in the market. In a bear market, with excessive DF liquidity, the facility enables conversion of more DF liquidity into debt-like USX liquidity to stabilize the supply and demand and vice versa.
The facility is directly injecting USX liquidity into the system, thereby lowering the overall USX funding cost, benefiting USX borrowers(boost borrowing) and increase protocol income.
The facility is a pilot program, we propose to cap the swap at 3m USX over a 3-month period and subject to governance voting.
In the future and subject to governance, we could enable a reverse swap (DF-to-USX) or expand the facility to cover other assets
Implementation
* Use Pulsarswap or Frax’s TWAMM and other existing TWAP algorithms for USX to DF swap, upto a total of 3m USX over a 3-month period.
* Customized parameter setting: i.e depeg range, total cap, ability to suspend the swap via multisig etc
* Current proposal only enables USX-to-DF swap; a reverse swap from DF to USX is subject to future governance if any.
* Minimum extra coding requirement, mostly rely on existing vault strategy code base.
This is an important monetary policy for dForce, all community feedbacks and discussions are welcome.