TL;DR
- XAI is the DAOs’ main source of revenue; more XAI borrowed = more revenues = more TVL.
- Today, XAI is mostly borrowed, and only ~25 users use it as collateral to borrow other assets.
- XAI’s growth is hindered by the size of XAI collateral in our markets in relation to its DEX liquidity (depth and balance between XAI and USDC/FRAX).
- I propose to disable XAI as collateral in all markets. As a result, we eliminate any systemic risk and expand our credit lines and revenues.
Proposal
With the introduction of markets for Curve LP tokens, and expanding our incentive program, we have a great opportunity to scale XAI’s total borrowed value. We can theoretically create a flywheel:
- More XAI borrowed → more revenues → larger buyback and incentives → larger TVL
However, scaling XAI’s total borrowed amount has been hindered by its DEX liquidity, specifically the balance between XAI and Frax/USDC. The XAI/FRAXBP Curve pool has about $6.3M depth, 69% of which is XAI - the pool is imbalanced in favor of XAI. The imbalance is the result of users borrowing XAI and exchanging it to USDC. The imbalance has slowed down our marketing efforts to increase XAI use given that there would be bad debt risk if the Curve pool didn’t have enough FRAXBP (FRAX/USDC) to cover all XAI collateral locked in our markets. Although the risk is NOT present today, it could be if we were to push XAI borrowing aggressively.
Why is it important to have a balanced XAI+USDC/FRAX pool?
XAI is a universal collateral in our lending protocol. When XAI is locked as collateral to borrow other assets, liquidators should always find enough USDC/FRAX depth in the Curve pool in order to liquidate XAI collateral for the loan asset. However, liquidations are not be possible, or profitable, to perform if the Curve pool doesn’t have enough XAI/USDC such that a liquidator sells the seized collateral of XAI for USDC. In short, the more XAI is used as collateral in the system, the more risk our markets have.
The opposite scenario, where XAI is more borrowed than locked as collateral, doesn’t pose any risk when the Curve pool has too much XAI because it will be cheaper to sell the collateral asset (gOHM for example) to buy XAI and repay the loan.
For that reason, and given that XAI is mostly the borrowed asset rather than collateral, I propose disabling XAI as collateral in the protocol.
Disabling XAI as collateral brings a number of advantages and disadvantages.
Advantages
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We can scale XAI borrowing without creating any systemic risk. For example, Our markets would not experience any risk if XAI/FRAXBP Curve imbalanced to 95% XAI and 5% USDC/FRAX. In fact liquidations would be much cheaper and profitable to perform.
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XAI no longer poses risk in case it de-pegs in the Curve pool.
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More XAI borrowed = more revenue (flywheel already established)
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We strengthen the narrative of risk isolation.
Disadvantages
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XAI cannot be collateral. To borrow base assets (RPL for example), users will have to use ETH collateral.
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Arbing ETH rates between silos is not possible anymore with XAI collateral and users will have to long a base asset to borrow ETH.
Counter argument to disadvantages
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ETH is a great collateral to borrow base assets with, especially LSDs.
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We are not seeing XAI being used as collateral except in two markets: OHM and rETH.
How is XAI used today?
- We have around 38 XAI collateral positions, mainly in OHM and rETH markets. A few users deposit XAI in rETH market because of SILO incentives, a behavior we don’t see in other non-incentivized markets. In the OHM market, XAI is used as collateral to borrow OHM for SILO borrow rewards - and other reasons. However, with gOHM native staking APY down to 2.3%, we expect OHM borrows to go down, effectively closing XAI collateral positions organically.
- Over 118 wallets borrow XAI, mainly in markets like USDC, cbETH, wstETH, etc.
Here is a breakdown of all XAI collateral positions:
How do we go about deactivating XAI?
We can set maxLTV = 0 for XAI. This will be enough to disable XAI as collateral. maxLTV is a value that can range from 0%-100% in our markets. The process poses no risk.
We can affect the change gradually, starting with silos where XAI is not collateral. As far as markets with XAI collateral, such as OHM and rETH, we can wait for users to repay loans and then affect the change.
Share your feedback
Reply to this post with your thoughts or join Discord to engage with community members in the #proposal-discussion.