[Temp Check] BUIDL/USTB/USYC/TBILL/USDY GSM
Author: Hashnote
Date: 09-30-2024
Summary
The Temp Check proposes a strategic expansion of the GHO Stability Module (GSM) by integrating a basket of money market tokens in a market-cap-weighted “optimal portfolio.” Instead of choosing whatever is being proposed, Aave can follow a Modern Portfolio Theory (MPT) style portfolio structure. The largest money market tokens by market cap according to rwa.xyz are:
- Blackrock’s $BUIDL
- Franklin Templeton’s $FOBXX
- ONDO’s $USDY
- Hashnote’s $USYC
- ONDO’s $OUSG
- Superstate’s $USTB
- Open Eden’s $TBILL
For the purposes of this allocation, however, it may be prudent to exclude Franklin Templeton’s $FOBXX and Ondo’s $OUSG. Franklin Templeton’s product can not be held in a smart contract wallet owned by the GSM. Ondo’s OUSG invests primarily in the BUIDL token, so exposure would be redundant. If anyone in the community knows otherwise on this topic, please feel free to correct us in the comments.
Motivation
The original temp check proposed to integrate $BUIDL into the GSM architecture, Superstate in turn, proposed to not only integrate $BUIDL, but also integrate Superstate’s $USTB and support 50%/50% asset allocation. We at Hashnote propose to integrate a market-cap weighted basket of $BUIDL, $USTB, $USYC, $TBILL, $USDY because this would be the most defensible from a rigorous portfolio construction perspective. To be fair, the MPT optimal portfolio framework does not perfectly fit here, it is a much closer proxy to a safe diversified portfolio than an over-concentrated allocation.
Normally MPT uses the normal distribution of market volatility to construct an optimal portfolio. We can assume, however, that the market cap distribution of the money market tokens still roughly approximates the market implied riskiness of the structures. The main contentions to this statement may be captured aum due to back-door deals, self-attributed aum from vested interests, and sticky money from first mover advantages.
Each project has chosen different characteristics for various reasons. While we believe all participants are structured in a “bankruptcy remote” fashion, the actual characteristics of a legal unwind will differ in all cases. Dollars may be safe, but in some of these structures, it is unclear how long it will take for distributions. Some projects have more duration risk than others, and some have a bit of credit risk to commercial paper. Finally, the liquidity characteristics from a redemption perspective are certainly different.
We should assume the market has allocated capital taking the complexities above into account and their associated risks. Furthermore, a market cap allocation is dynamic, so the GSM should rebalance on a regular (monthly?) basis to update for market changes. MPT’s market cap weighted portfolio gives the GSM a rule of thumb to rebalance to.
A Note on Modifications to MPT
The DAO should consider whether some slight modifications should be made to the MPT optimal portfolio allocation. For the GSM, liquidity may be the most important feature. Similarly, perhaps smart-contract enabled direct redemption is most important. It may make sense to modify the allocations slightly to account for features that are unique to the GSM’s utility function. A similar feature perhaps worth considering- time to redemption. Fiat style redemptions may take T+1 to T+3, so it may make sense to reduce allocations based on how many days a redemption takes in an adverse scenario.
For example, if instant liquidity is important, it may make sense to add 10% allocation to the tokens that are instantly redeemable and pro-rata deduct that amount from other allocations.
Specification
The proposed GSM instance that will run in parallel with already existing GSMs, will enable 1:1 fixed-ratio swaps between stablecoin and GHO. Surplus, in turn, will be used to mint the backing portfolio.
$USYC and $BUILD provide access to 24/7 liquidity facility for redemptions. While $BUILD can be redeemed into $USDC, $USYC can be redeemed into $PYUSD and $USDC. (see footnote 1). The remaining tokens need a fiat leg that may delay withdrawals.
We also offer a slightly altered approach presented by Superstate, and provide immediate redemptions via in $BUIDL and $USYC into pro-rata USDC and PYUSD (PYUSD could theoretically be swapped to USDC via Curve if full redemption in USDC is preferred). Other GSM constituents could be rebalanced once a day back into the optimal allocation. To allow full redemptions (and to avoid a zeno’s paradox like cycle of rebalancing) the GSM can allow a user to choose between instantaneous redemption up to the amount of USYC and BUIDL available or T+1 redemption queued for when the remaining constituents can be liquidated via fiat rails.
Footnote 1: USYC has the ability to create “private tellers” that allow for 100% instant redemption capability to select clients. Hashnote is willing to deploy a private teller for the GSM so that 100% of the USYC held by the GSM would be instantly redeemable via smart contract call.
Next Steps
- Gather feedback from the community.
- If consensus is reached on this [TEMP CHECK], escalate this proposal to the Snapshot stage.
- If Snapshot outcome is YAE, escalate this proposal to the ARFC stage.