FIP 01 - Introduction of fUSD - a hard pegged USD stablecoin

f(x) Protocol Improvement Proposals
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After extensive discussion in the Discord and last Community Call, we are calling on the Aladdin and f(x) community members to share their opinion about a potential expansion of the f(x) stablecoin strategy to include a dollar-pegged coin in addition to fETH. We refer to this as a “beta=0” coin, whereas fETH is a “beta=0.1” coin. This is a complex question with a lot of implications, so the team has tried to boil it down to a few broad options for discussion.
The community should keep in mind that this is all in service of our high level mission: to use the f(x) mechanism to create the deepest liquidity decentralized stablecoin in DeFi. Given that, this change should be viewed completely through the lens of:

  • (1) growing TVL (and liquidity) for our stablecoin(s)
  • (2) maximizing adoption now and in the future

A few high level points regarding fUSD:

  • The f(x) model easily and simply supports beta=0;

  • fUSD will offer the strongest peg mechanism in DeFi as it is always pegged to $1 mathematically. The pegging mechanism is also reinforced by trading activities as the stable token can be arbitraged both ways;

  • Any f(x) pool offering fUSD would require slightly more conservative stability mode thresholds; CR=133 instead of CR=130. This means we need slightly more xETH to support the same quantity of stablecoin;

  • There are two ways to implement this; either fully isolated with its own reserve and its own “x” token, or expand the current fETH model to a 3-asset system, where both fETH and fUSD are volatility-controlled, and xETH continues to absorb all uncontrolled volatility from the reserve.

Important side note:

  • f(x) will very soon be rolling out new f/x pairs for yield bearing DeFi tokens. For these pairs, the fXXX tokens will have beta=0 so in fact f(x) will be launching 0-beta tokens, however DeFi tokens have lower liquidity, and these are meant for farming rather than scaling. This discussion is about a second scale-worthy stablecoin to complement fETH.

Option 1: Add a second two-asset pool (equivalent to fETH) that is fUSD-xxETH

Pros:

  • Fastest to launch, simplest; technically possible with no further code;
  • Isolated risk (esp. regulatory) between fUSD and fETH.

Cons:

  • Creates a second xETH (xxETH?) which will diverge from first in both NAV and leverage at any given time, potentially confusing users, fragmenting liquidity on x side;
  • fETH and fUSD are in direct competition with each other for hearts and minds as well as fragmenting reserve asset liquidity.

Option 2: Expand the current fETH pool to a 3-asset model fETH-fUSD-xETH, with existing xETH absorbing volatility from both fUSD and fETH

Pros:

  • No fragmentation of reserve;
  • Only one xETH required to absorb volatility of both fETH and fUSD.

Cons:

  • Significant development work required, would take ~2 months at least;
  • Potentially brings regulatory risk to fETH.

Option 3: Don’t do fUSD at this time

  • Does not preclude doing fUSD later. Moreover, one long term possibility is a factory pool system that would allow permissionless creation of pairs with arbitrary reserve token and beta.

In the end, all users seem to be aligned that the discussion must center around maximizing sustainable adoption and growth, measured by TVL. Does USD-pegged stable availability or specific mechanism dilute narrative of f(x) or fETH more than it benefits? There doesn’t seem to be much argument in the community about whether fUSD is a good thing to have or not; most seem to think we should offer it sooner or later in some form, but the decision about whether we implement it right now and how must be based on what we think can sustainably drive TVL growth, given the tradeoffs (practical, narrative, regulatory) discussed.

Pooling

  • Add a second two-asset pool
  • Expand the current pool to a 3-asset model
  • Keep only fETH for now
0 voters

posted on behalf of Aladdin DAO team

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In future, the concept of an asset for spending, an asset for saving and an asset for investing is great.

However, my current concern regarding this proposal are:
A. We already have low TVL, we should focus on growing this. Even more so now that we’re on Arbitrum. Building integrations around fETH will naturally increase its demand
B. Creating a third asset now will split resources on developing moats around these assets
C. We are going to fragment liquidity even more

How is fUSD going to keep up with the other LSD backed stables we have in crypto already? They’re incentivised by gov tokens for now. Are we willing to devalue FXN at the expense of liquidity?

In future, fine, I see the value but for now when we’re such a small protocol, should we not focus on what we have and scale them more?

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In my opnion 3 token model is definitely a better option than creating a separate product that competes with each other. If our assumption is right and fusd will be a more popular option than feth , that would help xeth drag the leverage higher and become more attractive. One reserve and one xeth

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For option 2 m what does it mean by potentially brings regulatory risk to fETH?

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We don’t know how the regulatory landscape for stablecoins will look like. But we can assume there will be some regulations in the near future.
As of now fETH is not a stablecoin (keeps 10% of ETH volatility) so in theory it shouldn’t be affected by any stablecoin regulations. But if we add fUSD (which will be pegged to $1) this might all change.
Probably minimum risk anyway, but worth to keep in mind!

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Is there a need to come out alladdinDAO legal team if worry about the regulatory landscape for stablecoin? If talking about regulations, I am more worried about the alladdinDAO itself as $ALD is more like security as it owns the other three protocols.

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It may come as no surprise to anyone here, but I fully support development of the 3-asset model. FUSD completes the suite of products that f(x) offers and in my view will only clarify FETH further. It is certainly worth 2 months of development time.

The marketing strategy should be something like this…

FUSD is for spending.
FETH is for saving.
XETH is for speculating.

Larger Addressable Market
The TAM for a USD peged stablecoin is in the billions if not trillions of dollars. Sharlyn noted that FUSD could be the first decentralized stablecoin that reaches 1T in TVL and does so with a perfect peg, solving the “stablecoin trilemma”. This is massive! I see abandoning this idea as a missed opportunity for Aladdin DAO and opens us up to more forks down the road.

More Options
I also think a 3-asset model provides more options for different types of users. For users who want to make payments with a USD pegged asset they can mint some FUSD. For users who want to hedge against inflation they can choose FETH and ride the waves of Ethereum. DAO’s and treasury managers who want a stable asset based on ETH might pick FUSD or they may prefer a non-pegged asset like FETH. It could go either way for them. With the 3 options you’ve created an asset people want to hold during both bull and bear market cycles. FUSD in a bear market, XETH in a bull, and FETH in either one depending on what type of exposure the user is looking for.

Yield Farmers
Yield farmers will like the idea of minting FUSD with 0 volatility and earn the underlying Staked ETH yield in the rebalance pool. So even the LSD farmers who want to earn the ETH staking yield but don’t want exposure to ETH’s price volatility will gravitate towards FUSD.

Extra Leverage
FUSD will also add extra leverage to XETH, making XETH more attractive.

Peg Mechanism
FUSD will have the BEST Peg mechanism of all Stables. Because of the way the invariant formula works, it will maintain its peg to a perfect 1.00. not .996 or .997. ONE USD EVEN!!! Teams from all over the world struggle with their peg mechanisms including gigabrains like Mich from Curve! Here we have an elegant solution that solves the problem.

Deep Liquidity and Aggregators as a Front End.
FUSD, like FETH will draw upon already deep liquid pools such as STETH/ETH curve pools. In addition, Aggregators like Cowswap can be used to direct mint FUSD on demand as needed. Other LSDs can be used for diversification in the future.

Low Fees? Can they be raised?
If we keep the low 0.25% mint fee for FUSD like we have for FETH, the demand for FUSD will be through the roof. We saw what the demand looked like for MkUSD, reaching 300m in TVL in a matter of weeks with a 1% annual interest rate which btw was raised to 4% recently. I can only imagine what a 1 time 0.25% mint fee would do for FUSD! I argue that the fees could be raised to 0.5% for FUSD. But maybe keeping fees low allows FUSD to be used in common routes on Curve?

Either way FUSD is a Fee printing machine! And all this revenue would flow back to VeFXN lockers or CVXFXN stakers which adds tremendous value to the FXN token holders.

Regulatory Issues
I saw a few comments in here about regulation and how it may affect FUSD. Sure, it’s a big concern for sure, but let’s think about it in more detail.

  1. FUSD is full backed by ETH LSDs. We know this is a main point of contention for the regulators.
  2. Aladdin is a DAO and there is NO central office.
  3. Aladdin is not incorporated in any jurisdiction.
  4. FUSD is based on ETH with no blacklist function.
  5. There is no centralized entity to subpoena.

There are risks with everything in life, including taking your first breath as a baby. But it should not deter us from providing an amazing product that the market wants. Because of the points mentioned above I don’t feel like we have huge legal risk.

Liquity V2 and Other Forks
I said this on the community call, and I will reiterate it here. If we don’t want to move forward with FUSD, that’s perfectly ok, BUT I am confident someone else will gladly do it. I’m not saying it would be easy for them, but I can see a team forking the code and using the invariant formula as their peg mechanism. They likely would use a 2-asset model and rename the tokens for speed and ease. I don’t think as a DAO we want to see this happen.

In addition, Liquity v2 looks very similar to FUSD/XETH but it has some different mechanics. It is something to consider and keep on our radar. Their new stablecoin will be released early next year in Q1/Q2.

As you can see there are many reasons to launch a 3-asset model including FUSD, FETH, and XETH. Hopefully this covers most of the concerns the DAO may have. I would be more than happy to answer any questions.

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I don’t think there is a need to bring out the legal team. See my full post below. Here are some reasons why we should not be too overly concerned.

  1. FUSD is full backed by ETH LSDs. We know this is a main point of contention for the regulators.
  2. Aladdin is a DAO and there is NO central office.
  3. Aladdin is not incorporated in any jurisdiction.
  4. FUSD is based on ETH with no blacklist function.
  5. There is no centralized entity to subpoena.
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I think that ideally, we continue to focus on a two token model (fToken and xToken) for every Token and focus on the go-to-market aspects of f(x) to increase TVL. New tokens can be introduced following the same model. i.e. fCRV and xCRV.

That said, if there is strong support of a dollar-pegged stable token, I think that using fUSD is suboptimal name because it will be confusing to the market. We can use another letter such as s (for stable) such as sETH, z (for zero beta) such as zETH, or usd such as usdETH. This would allow for a naming convention that extends to other Tokens. For example, we could have a usdCRV and xCRV derivative for CRV.

As to whether there are 3 token derivatives (fETH/xETH/usdETH) or 2 x 2 token derivatives (such as fETH/xETH and usdETH/uxETH), I actually think the 3 token derivative is better than the 2 x 2 token derivative if nothing else because I want all the leverage to go to xETH and multiple ETH derivatives would be just as confusing as a 3 token system.

That said, we could also leave fETH/xETH alone for now and introduce the next Token, say it’s CRV, as usdCRV/xCRV. Then usdCVX/xCVX, usdFXS/xFXS, etc. That would allow the usdCRV, usdCVX, etc. to be reasonably fungible in terms of value. If people ask about a usdETH, we can then introduce it, but for many, it may be a gateway to fETH. The narrative then would be that it’s a two token derivative system.

Even if we do introduce fETH/usdETH/xETH, from a narrative and maybe UI perspective, I’d still try to promote the fact that we are primarily a two derivative system and treate fETH as a one off (and not introduce fCRV or other fTokens).

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As I’m a little out of touch I don’t have a strong oppinion, so just some toughts.

In my experience is worth to reduce complexity as much as possible. Option 2 is complex. It makes the “product” hard to understand and the risk side maybe even harder to manage.

If option 1 is like an V2 of f(x) this should be tried.

If fUSD finds traction in Option 2, the outcome may be that built into f(x) now to complex and the lecacy part (fETH) hinders its growths.

I think the best option would be start to build Option 2, while launching an experimental option 1 on a L2?

Mainnet has is not the future for popular protocols. Minting my xETH did cost me $6 with 10 gwei. This will cost $300 with 100 gwei and 10 K ETH (50x)!

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Humm, this is actually a counterargument as no legal structure gives regulators the ability to qualify the association the way they want. In most cases in the disfavor of its members. This can be a choice if the core team is perfectly anonymous, but if not this is the worst scenario.

This is probably the first targeted DAO’s. Some already have been convicted.
And the ones that get caught are the tokens holders and people with strong influence on the protocol.
The best structure is an incorporated DAO that has contractors such as a development company.

Although there are some good arguments for a usd stablecoin, the legal risk is definitely present as the protocol would address two of the most regulated products: leverage and USD stablecoin.

Edit: Cyrille here, created this account a while ago, can’t change the nickname

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For now I’m more in favor of a two assets model in order to seperate risks of the different products/markets, avoiding diluting the fETH rebalance pool yield and keep briging awareness on the new paradigm an ETH based stablecoin represent.

In fact announcing a potential 12% APR on a USD based rebalance pool is appealing but has to be verified by market conditions.

It doesn’t change the fact that on an UX it can still be presented as:

  • stable for everyday → USD based
  • stable for ETH believers → fETH
  • Boosted exposure for ETH maxi → pick your X
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IMO we should really aim to find PMF first and focus on gaining TVL + liquidity for fETH and xETH. Adding fUSD now deviates us from making fETH and xETH mainstream, and fUSD’s success is dependent on the TVL from fETH and xETH as the TVL will cap the upper limit for fUSD.

I am not convinced that having fUSD will bring us a flywheel effect, if we look at frax we know that just by having a algostable that relies on defi yield is not scalable, they have to pivot to RWA yield so that they can break the ceiling of current scalability. Liquity v2 is moving to delta hedging position for scalability as well.

(I do think what the team can focus on next should be hiring BD to contact different DAOs and focus on DAO2DAO market for holding their treasury in fETH, while having a high liquidity market for xETH trading to attract degens, but I think that would be out of the scope here.)

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I vote for option 1 (add two-asset pool).
I think that the potential of fUSD is huge and I agree with its implementation.
However, there is not much in the fUSD concept that can only be achieved with a 3-asset model.
If we are conscious of the arrival of forked versions and improvements to other protocols, it’s best to release fUSD immediately and allocate resources to the scaling up.
And there is no doubt that a wide variety of pools will be added in the future.
I think the unified principle of 1 pool, 1 beta, 1 fToken, 1 xToken is an excellent design, with clear risk boundaries and easily understood.

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Totally agreed! I just changed my vote to option 1 (2 asset system)

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VOTE CHANGED!!

I just changed my vote to option 1 the 2-asset system.

Here are my reasons why.

  1. Speed to implement.
  2. Less complex system
  3. Isolates the risk to the Feth/Xeth pair.
  4. Easier to get Factory pools setup.

The only real negative is you end up with 2 x-tokens and you have some fragmented liquidity. Both are not major reasons to start with a 2-asset system.

The 2 x-tokens issue can be solved by changing the naming convention.

Feth/Xeth remain the same.

Some propose we create this pair - Fusd/xxETH which is an option.

I personally think this might be too confusing and propose we call it…

FxUSD/FxETH

I like the idea of having the protocol name in the Symbol of the pairs for marketing purposes.

The Fragmented liquidity issue is a non-issue when you think about it. We only have 8m in TVL right now, this is hardly a dent in ETH liquidity. LUSD is over 100m and they are working on a second stablecoin.

I also like the idea of isolating the risk with a 2-asset system.
You have 2 pairs, Feth/Xeth and FxUSD/FxETH if something were to happen to the stablecoin pair from a regulatory perspective or peg issue, you still have the the Feth/Xeth pair unharmed surviving in its own lane.

For these main reasons I have changed my vote to a 2-asset system.

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I agree with this - having only one actually USD-pegged stablecoin, not one 0 beta for each pair.

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I went with option 1

We have a good thing going with fETH and xETH. Why disrupt that momentum?

Adding a second two-asset pool gives us some risk isolation from the current core product (that’s working). Expediting the 3 asset model could work, but a bit worried about unknowns without a proper risk assessment and modeling (maybe that’s been done?)

Lastly, I don’t have a strong opinion here, but sometimes names matter. Is fUSD the best name? Should the name even include “USD”, does that paint a target? I don’t have a better option right now, just thinking out loud.

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I believe that agile iteration is a very important factor. In the blockchain world, spending two months experimenting without proven Product-Market Fit (PMF) seems to me to be a huge cost. I would prefer that we allocate resources to the development of new underlying assets, rather than entering the already crowded race of USD stablecoins.

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Read through all the discussion here and discord. I also change the vote to quickly add a second two-asset pool. It is a best way to test the actual market demand for hard pegged USD. The only thing we need to align with is the naming part

Also another idea related fUSD is the ability to flow between the pools under specific rules (quotes or CR for the pool).

In the current design, it is hard to control the xToken leverage within the range if we have multiple pools. One con of holding xETH is the customer bought xeth when eth is 2000, one month later, price up and down, he might (small chance) loss money when eth is back to 2000 due to the xeth leverage change. If the protocol can make the leverage within the range would be a huge advantage for any type of xtoken holder.

I am intentionally want to change the leverage on the xToken between pool. Like Sharlyn mentions the xToken demand is high and sometimes the leverage is not enough. With the risk management rule, allow the fxUSD to flow between pool would adjust the leverage of token. it might be the way for Aladdin to do fix leverage xToken.

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