We are delighted to put forth the following proposal to kickstart the Flux Finance markets by supporting USDC, DAI, and OUSG (Ondo United States Government Bond Fund). OUSG is a tokenized fund from Ondo Finance that invests in short-term US Treasuries. At greater than 4% APR and rising, short-term US treasuries provide a higher yield with less risk than can be found arguably anywhere in DeFi. We believe that OUSG can serve as the foundation for a scalable, low-risk, and differentiated on-chain lending marketplace. If our proposal passes, investors would be able to lend and borrow stablecoins over-collateralized against US Treasuries exposure.
Background on Flux
Flux Finance is a decentralized lending protocol built by Ondo Finance. The protocol is a fork of Compound V2 with additional functionality to support both permissionless (e.g. USDC) and permissioned (e.g. OUSG) tokens. Permissions are enforced on a per-asset basis. Similar to Compound, Flux enables overcollateralized lending and borrowing in a peer-to-pool (p2pool) model.
Flux was designed with the idea of honoring the transfer restrictions of accepted assets, so it can onboard tokens with transfer restrictions, like OUSG, without subverting those restrictions (such as by not making freely transferrable cTokens derived from tokens with transfer restrictions).
Background on USDC
USDC is a centralized asset-backed stablecoin issued by Circle. It has a market capitalization of over $40 billion. Circle invests the USD contributed in exchange for USDC predominantly in US Treasuries, including through the new Circle Reserve Fund, a money market fund managed by BlackRock.
Background on DAI
DAI is an algorithmic asset-backed stablecoin issued by MakerDAO. DAI is the largest algorithmic stablecoin with a circulating supply and market capitalization of over $5 billion.
Background on OUSG
OUSG is a tokenized security issued by Ondo I LP that seeks to deliver the return of short-term US Treasuries.
- OUSG invests exclusively in the iShares Short Treasury Bond ETF (SHV) (outside of small USD and USDC positions), a nearly $20 billion ETF from BlackRock holding short-term US Treasury bonds. SHV trades with several hundred million dollars of daily liquidity. OUSG is also highly liquid, servicing subscriptions and redemptions in stablecoins daily.
- SHV has 99th percentile weekly moves since its inception in 2007 of ~0.16%, representing a stable and highly liquid collateral base to build a lending protocol on top of.
- Attractive yield
- SHV has a more than 4.6% portfolio yield, and this is expected to continue to rise, supporting stablecoin borrow and lend rates that are higher than those generally available in DeFi today.
All figures from iShares: https://www.ishares.com/us/products/239466/ishares-short-treasury-bond-etf
Supported Assets and Risk Parameters
We recommend launching by supporting USDC and DAI as assets that can be both lent and pledged as collateral, and OUSG as an asset that can be pledged as collateral but not lent. We recommend the following market parameters for these assets:
USDC & DAI
- Interest rate curve:
- 0% utilization → 0% APY
80%90% utilization (kink) → Overnight Benchmark Funding Rate (OBFR) - 50 bps
- 100% utilization →
2.5 * (OBFR - 50 bps)OBFR + 300bps
- Collateral Factor (LTV): 83% (DAI), 85% (USDC)
- Borrow Cap: No cap
2.8%1.75% (Compound V2 uses 2.8%)
- This is how much of seized collateral during a liquidation is added to reserves.
The Flux Finance codebase also introduces some oracle modifications to increase safety.
We propose that the Ondo DAO appoint Neptune Foundation to act as the de facto OBFR oracle at launch with limited multi-sig rights to update the nominal “borrow rate at kink” if and when OBFR moves by more than 5 bps. We suggest that the Ondo DAO look at automating the OBFR oracle such as with Chainlink.
- Interest Rate Curve: Not a borrowable asset, so N/A
- Collateral Factor (LTV):
- Borrow Cap: Not a borrowable asset, so not applicable
- ProtocolSeizeShare: Not a borrowable asset, so N/A (0%)
Given the extremely low volatility of US Treasuries, we feel that a
90% 92% max LTV is very conservative for OUSG. Since its inception in 2007, the largest-ever weekly price movement of OUSG’s underlying ETF, SHV, was <0.5%. Its average weekly price movement is ~0.03%.
- Reserve Factor: 0%
- Liquidation Incentive: 5% (Compound V2 uses 8%)
Whitelist Application with Ondo I LP
We are proposing that the DAO request a whitelist of the Flux Finance smart contract when it is deployed, which would enable investors who are already appropriately permissioned to hold OUSG to temporarily lock their tokens using Flux contracts. If approved, investors in OUSG would be able to call Flux Finance smart contracts to pledge OUSG as collateral, to liquidate OUSG from other borrowers, and to recall OUSG from their own accounts. In keeping with the design of Flux, the deposit receipt for OUSG, fOUSG, would only be transferrable between the same addresses that are eligible to hold OUSG.
We suggest the DAO look to on-board other stablecoins as quickly as can be safely done. The DAO should also explore what other security tokens or even permissionless assets borrowers may want to post as collateral.