[RFC]: Yield Token Depeg Cover using RAI

[stefan]

Nexus Mutual – Yield Token Depeg Cover – RAI Proposal

Author: Stefan Ionescu

Thank you to @BraveNewDeFi and @Gauthier for mentioning Yield Token Cover as a potential avenue for RAI.

Basic Summary

RAI was created as an alternative to USD-pegged coins and as an experiment in peg-less stability. The project began as a ethresear.ch post and was then picked up and built into the system we see today by the newly formed Reflexer Labs team.

RAI is an incarnation of the early (and abandoned) design for Single Collateral Dai: it is solely backed by ETH, meant to have less governance as times passes and uses a funding rate to automatically balance market forces and keep itself stable.

This funding rate can be either positive or negative. A negative rate can compel market participants to sell RAI when it is traded at a premium compared to its floating “target price”, something that is missing from all pegged coins currently on the market. The target price is the price that the protocol wants RAI to have on the open market.

Motivation

Nexus offers cover for depeg events that might happen in Yield Bearing Tokens. At the moment, cover for USD-pegged coins can be paid for in DAI (and NXM) which by itself is a pegged coin. This creates a circular dependency where one scenario is covered by an asset with a similar risk profile.

The main motivation for this proposal is to put forward the idea of replacing DAI and having RAI as a payment option for depeg cover. Given that RAI is a peg-less stablecoin (and may I say, the only true stablecoin) and has a mechanism in place to stabilize itself autonomously, it also has a unique value proposition for the Mutual and for those seeking Yield Token cover.

Considerations

Depending on feedback, I can provide an analysis using the framework provided in this proposal so the Mutual can get a general idea about using the RAI in the capital pool to get yield.

Voting Rules

I would like to gather feedback from the community about this post and invite everyone to discuss about the potential benefits to offer RAI denominated cover for Yield Bearing Tokens, particularly for pegged coins.

Note: the initial intent was to write a proposal about diversifying the Community Fund with RAI and subsequently lend RAI in Aave or the upcoming Curve RAI-3Pool. After discussing with the community on Discord, I decided to lead with this proposal which can currently bring a more tangible benefit to the Mutual.

[stefan]

To learn more about RAI you can check the official docs and this short video explainer.

[jv-nz]

I love RAI and the idea of having a stable token that doesn’t define itself by fiat currency.

I don’t know about replacing DAI but I think the idea of allowing people to pay for cover denominated in RAI would be awesome. I don’t think this should be limited to just the depeg cover and we should just allow any cover to be denominated in RAI.

My only concerns are the cost of implementing the change vs the amount of interest people have in buying RAI denominated cover. I don’t know if it would be a very easy or very hard task to add a new paymentn currency right now, or if that difficulty would change with Nexus v2.

I also wonder what we could do before any change to test people’s appetite to purchase cover in RAI

[Hugh]

Thanks @stefan !

The main issue with using RAI as the depeg currency for existing tokens is that RAI is not designed to always = 1 USD. This means if we offered cover in RAI for other (USD) stablecoin based yield tokens then the mutual is taking risk it wasn’t designed for, specifically the risk that RAI moves vs USD. Of course this doesn’t apply to RAI based yield tokens, which would actually require RAI as the depeg currency.

So introducing RAI as a cover currency (allowing covers to be purchased in RAI) is interesting and it’s something that can be done, with the main argument against being RAI based cover demand. Which honestly I see as very low right now though I’m very much hoping that changes.

Other RAI options are Nexus could potentially use RAI as part of the capital pool, unlikely just simply holding RAI, but this becomes more interesting if there is a yield bearing version.

[stefan]

Thanks Hugh!

Do you think I should make a separate proposal for the capital pool? Currently a safer way to get RAI yield is Aave, then we have Fuse, Idle and soon Curve.