ARC: Enable sUSD as Collateral on AAVE V3 on Optimism

Governance New Market
1

Summary :

sUSD is a decentralized stable coin over collateralized by the SNX token. sUSD is already listed on AAVE markets as a lendable asset as well as SNX which can be used as collateral in addition to borrow/lending. There is significant liquidity for sUSD on both Mainnet and Optimism. I am proposing for it to be enabled as collateral on AAVE V3 on Optimism

Motivation

sUSD market cap has grown tremendously over the past year, and the steady demand for decentralized stable coins has contributed to its growth. sUSD is highly over collateralized by SNX, the governance token, and backstop for the Synthetix protocol.

The rise in its liquidity on major dexes has contributed to sUSD stability over the past year, and allowing collateral use would promote its liquidity in aave markets.

Rationale

SNX stakers are incentivized to actively manage their debt relative to their SNX stake and sometimes cause spikes in demand for sUSD on markets including AAVE (especially when there are other Yield generating opportunities with sUSD), this may cause small deviations from the peg but with low volatility.

From a counter-party risk perspective, all underlying functions in relation to sUSD are fundamentally the same as that of SNX.

The SNX and sUSD contracts are fully upgradeable. Still, all changes must go through a formal governance process from SIP to deployment, which would be announced well before the upgrades are made and thus does not present a substantial counter-party risk.

The sUSDv2CRV pool has deep liquidity on L1, and with incentivizes, the L2 pool will soon have deep liquidity.

In addition to sUSD, there are other synth pools on Curve with emission gauges to supplement sUSD liquidity (sBTC, sETH ). All synths are redeemable at their dollar value in sUSD at the ChainLink quoted price through the Synthetix protocol or Curve (via cross-asset swaps); thus they help facilitate the arbitrage sUSD peg deviations.

references:

sUSD/3crv curve pool - TVL $101M/27M sUSD

sBTC curve pool- TVL $198M / $66M sBTC

sETH curve pool- TVL $86M / $39M sETH

Technical Specifications sUSD

Chainlink sUSD price feed: Decentralized Price Reference Data | Chainlink

  • set sUSD max LTV to 60%
  • set liquidation threshold to 75%
  • set liquidation penalty to 5%
  • upgrade interest rate curve to that of DAI/TUSD
  • Add sUSD as collateral on AAVE Optimism V3 (with below parameters)
  • Do not add sUSD as collateral

0 voters

4 Likes
2

Would love to see this on Optimism. Lending sUSD on main net is a big deal, Sparta needs this on Optimism.

3 Likes
3

yes please, we need OP :100: :red_circle:

1 Like
4

Support it! We need OP!

5

sUSD is fundamental part for many Dapps on OP, so would love to see it can be enabled as collateral on AAVE OP.

6

Yes I want to use my sUSD as collateral on AAVE

7

Great initiative Matt! Fully supportive of this!

8

Thanks for this proposal, the suggested risk parameters make sense taking into account depeg events such as the drop to .88$ in September 2021.

sUSD and Synthetix have years of battletesting that show their resilience. Still sUSD holds significant volatility for a stablecoin and is backed by volatile assets. This would make it among the riskiest stablecoins used as collateral. As such I’d recommend a supply cap of 10% of the market size or $800k based on current market conditions. Furthermore as sUSD market cap and liquidity is significantly lower than those of DAI or TUSD, the stable rate should be avoided until the market sizes grows which will lead to less volatile market conditions.

2 Likes
9

Hey Alex!

Thanks for the recommendations here. I appreciate it.

Would that 10% you’re referring to be the market size on AAVE? So 10% of whatever it deposited would be available as collateral?

We’ll move on to the next stage once we clear that side up. Thanks!

There are a few things in the works to significantly increase sUSD’s liquidity (especially on Optimism) - such as Curve Incentives Synthetix & Lyra Incentivize sUSD liquidity on Optimism

10

The Supply Cap would be 10% of current sUSD supply on optimism as of today supply is 92,406,131 sUSD so that would be a 9.2M$ supply cap.

I would support a 10M$ supply cap.

Please note that this supply cap can be later on upgraded as both Aave V3 & sUSD will grow together on optimism.

2 Likes
11

$10m supply cap sounds excellent from my side & then manually updating this once that supply increases.

Excited to give sUSD holders many more possibilities, especially on Optimism.

1 Like
12

As a part of Certora continuous formal verification activity, we have conducted a formal verification of sUSD token code using our generic ERC20 token specification.
It’s important to note that this is strictly a technical analysis of the smart contract code.

How to look at the dashboard
With Certora technology, we write rules that specify how a smart contract should behave and the tool either proves that the rule always holds or finds a counterexample. It’s impossible to specify general rules for all the ERC20 tokens, since they all have different features. We have chosen to specify a set of strict rules for tokens, for example “supply should always be fixed” and “transfer should always work”. As a result, a token with dynamic supply will obviously fail the fixed supply rule, and a token that has a pause and/or a blacklist function (like USDC) will fail the “transfer should always work”.

In the case of ERC20, the point of these rules is usually to present precise information about the token behavior to the community. This is how we should look at rule failures - usually not as bugs but as information about token features.

Having said that, here is our dashboard with the findings:
https://www.certora.com/erc20s/aave-listings/

Here is the rule failures explanation:

  • one rule (“transferFromCorrect”) fails because when the allowance is set to infinite (max uint256), it’s never decreased after a spend. This is a non-standard behavior, but not an issue.
  • Address 0 might receive a token balance from the issue() function, which is controlled by Synthetix system contracts (their correctness was out of scope for this verification)
  • Any address’s balance might be burned using the burn() function, which is also controlled by Synthetix system contracts
  • 3 separate rules fail due to sUSD having dynamic supply by design

In summary, the sUSD token code is sound assuming the correctness of the main Synthetix system contracts.

Community feedback

Our generic ERC20 verification is a work in progress and we’d love to get your feedback about it. What other technical information would you like to see?

1 Like