Double Dipping Megathread

[BlockEnthusiast]

Summary:

There is community pushback to the dumping of CRV which has created a drive to develop ways to reduce (in some cases eliminate) incentives on specific pools.

While CRV dumping is a topic which is certainly up for robust discussion, the proposed routes to reduce leveraged dumping are ineffective and therefore we should consider carefully if there are any benefits at all to implementing restrictions to these pools.

Defining Double Dipping:

We cannot begin to address Double Dipping unless we define it. I believe I can safely summarize

Double Dipping is leveraged CRV farming

In such a mechanism there are multiple parts.

Vault

In this context, a Vault holds a users liquidity, provides it to Curve, Deposits in Gauges, earns CRV rewards, and sells those rewards for more underlying liquidity.

Collateral

Common implementation is the collateral is a wrapped Vault in which the wrapper grants the ability to draw debt

Debt

Common implementation the debt asset is fungible and unrelated to the Collateralized Debt Position. Holders of this debt note may not have a CDP at all. CDP holders may spend it on other things, such as the famous alUSD boat.

Collateral Ratio

Common implementation provides a limit to the amount of debt that can be drawn against a given collateral. At 50% you can approach 2x exposure. At 95% you can get quite a bit more. The higher the Collateral Ratio, the more an individual user can leverage loop.

Leverage Looping in Action (1 loop)

1. Supply liquidity to Collateral Vault. (dumps crv)
2. Draw debt
3. Deposit debt to debt token curve pool, earn CRV or dump
   
   

Notice how it terminates at USDP since ycrvUSDP can’t be used as collateral

Leverage Looping in Action (2 loops)

1. Supply liquidity to Collateral Vault. (dumps crv)
2. Draw debt
3. Swap debt token for asset that can be used in Collateral Vault
4. Deposit any valid collateral asset in a Collateral Vault. (dumps crv)
5. Repeat till you cant.
   
   

Notice how it loops back through USDN which can be used as additional collateral for further leverage.

Key Points

• All users are earning CRV rewards in proportion to liquidity provided.
• Some users are using their liquidity as collateral to draw liquid debt
• Some portion of those users are using that liquid debt to provide more liquidity to Curve.
• Protocols which provide a higher debt to collateral ratio allow for deeper leverage.
• The collateral is what is earning rewards, not the debt token.
• I repeat the debt token is not earning rewards

The Debt Token Pool

Common implementations do not use their own debt notes as collateral vaults. So users holding a debt note token are often at a place where they can no longer loop. (though admittedly raw AMM positions are becoming more common in major debt protocols and Maker does use DAI in LPs)

As mentioned earlier, some users have famously bought boats, I know someone who bought a car with Alchemix debt. There are many people on the other side of such plays whom are not leverage farming at all who may simply wish to provide liquidity or make trades for these tokens on Curve.

Where’s the money?
So we have established that its not the debt token that is dumping Curve, which means a user is free to trade that debt token for any asset which can be used as a collateral to maximize their leverage.

We have further established that there exists users who are not leverage looping who may be holding these tokens particularly because these debt tokens have no inherit leverage.

If the goal is to prevent double dipping, any move to limit the use of the debt token pool does not have an effect on the potential loops a user may enter, and at present may push them to pools which can be looped again several times over.

Once such Protocols exist the money can be in any asset so long as a vault exists which can be used as collateral.

You can currently Double Dip the following assets

• DAI,
• USDT,
• USDC,
• USDN,
• FRAX,
• BUSD
• UST
• TUSD
• sUSD
• IB

Notably, you cannot Double dip from the starting position of

• alUSD
• MIM
• USDP

So if we are trying to stop double dipping by targeting the above pools, we are missing the forest for the trees. Literally community is seeking to reduce rewards for the set of assets which can’t initialize a Double Dip position, while all the assets that can are being left unhindered.

So what are we even doing here
While protocols might not outright say it, lets put ourselves in their shoes. We are choosing not to incentivize their asset. If a competitor comes along who will, do you think they will exhibit loyalty?

No they’ll move liquidity to a place where they are being treated equally. Particularly because there is no clear justification to why except to show public disrespect to these pools as their liquidity is weighted less than “friendly assets”. If not a friendly asset, how should that be interpreted?

AlUSD liquidity was on the rise, with the 3rd or so highest Liquidity Utilization on June 14th. On June 15th, there was a proposal to delist their rewards. Liquidity started dropping that moment and has never returned, nor has the volume or fees.

It seems these measures may at best be incentivizing competition, and making allies feel unwelcomed, at worst costing CRV holders profits from the trading revenue these additional pools may generate.

• Lets reduce rewards for Double Dip protocol debt tokens
  (BUT NOT REDUCE Double Dipping)
• Lets have universal solutions which treat all liquidity equally
  (since leverage is indistinguishable)

edits
1-typo + add images
2-note images had slight issue
3-images replaced to include row for yearn

[WormholeOracle]

@BlockEnthusiast

If the goal is to prevent double dipping, any move to limit the use of the debt token pool does not have an effect on the potential loops a user may enter, and at present may push them to pools which can be looped again several times over.

As of the MIM gauge, which looks to be passing a DAO vote in a few days, we now have a trend on Curve of applying unique rules to specific pools. Many members may not even be aware that MIM gauge has unique rules assigned to it, because the explanation and proposal for this decision did not make it anywhere on the governance forum.

But it does remind me of ecological mishaps when, say, you find yourself with an invasive species, so you introduce another species to eliminate the pest, only to find there are unintended consequences that cause a bigger cascade of problems down the road. Case in point: USDN pool.

Despite being a niche stablecoin with very little adoption, USDN has become the wunderkind of Curve, maintaining one of the largest gauge weightings since its inception. And doing so with consistently rock bottom utilization ratios. Why has it been so favored by veCRV voters? USDN pool is the first idiosyncratic pool on Curve. Due to a mishap in implementing the pool, it was easier to set admin fee to 0% and pay 50% of USDN native interest to veCRV as a makeshift “admin fee”. By pumping the pool with stagnant USDN liquidity, veCRV can directly increase fee capture. Therefore we have a niche asset making up the 3rd largest pool on Curve, doing very little volume, and capturing a substantial amount of the CRV inflation every week for the privilege.

We should strive for uniformity so that mishaps like this don’t continue to happen. That means we should not arbitrarily limit the effectiveness of assigning gauge weight for a particular pool (MIM gauge 50% of normal type weight). It’s like having a race and making one guy you dont like so much wear lead shoes. If I were that guy, I’d throw my shoe right back at you. But more important are the implications this has to the incentive structure of the entire ecosystem, and I think BlockEnthusiast nails it with that quote above. We are inadvertently incentivizing more leveraged farm and dump strategies by hobbling pools like MIM.

[BlockEnthusiast]

Well it is a mega thread so we should bring up some less pleasant aspects as well.

It’s not just that these double dipping penalties are pointless. It’s that these Curve folks are smart. They are actively leverage farming and host one of the most composible lego’s in DeFi. While it might tie things up nicely to take to assume its just a silly little oversite, I just have to believe they are smarter than that given how they use DeFi.

alETH

So it all starts with alETH. On the surface everything seemed good to go, but last second alETH had to pivot from launching on Curve to launching on Saddle.

Curve team jumps in to attack Alchemix for the move, but the Alchemix team implies Curve had denied them. Many in the thread wonder how that could be without any sort of governance vote or public discussion . Perhaps some private comms from some powerful folks. While no one knows for certain, the dark underbelly of governance can certainly be speculated on.

alUSD

Almost immediately after Curve drops a proposal against a different Alchemix asset, alUSD. It very much appears retalitory, though they claimed it to be unrelated. If we are being honest with ourselves, that feels like a stretch.

Notice how it is proposed by the Curve team, not by any community member, but raised on behalf of the community.

If a concern of “double dipping” was raised by the community, I’d have the expectation the team’s proposed solution addresses double dipping in a fair and reasonable manner. Instead they chose to specifically target alUSD, a double dipper they are specifically not invested in, with an approach of their own suggestion which did not address double dipping.

Peruse the thread and check community sentiment. There is a clear understanding for most participants how DeFi works and I feel it was very clearly explained by many people why this doesn’t work for its intended purpose. I find it very hard to believe the team read that thread seeking community feedback and came out without understanding this.

Then came MIM

A short while later a MIM discussion comes out that does not mention a new gauge type at all.

Then the vote includes the new gauge. The last time such a gauge was mentioned the community rejected it. Now its being rammed through without discussion.

If voters aren’t paying attention to this vote they might have totally missed this.

If users believed this tweet from the team, they may have believed this was addressing collateral dumping, which as we’ve discussed at length, its not, across many Curve twitter threads and forum posts.

Curve Finance

I had raised in the last discussion that such framing misleads voters into thinking collateral dumping as addressed. They updated their framing from double dippers to collateral dumpers but have not made it so it addresses either.

When pressed on what exactly the intention of the mechanism was, they divert to gauge math. I’ve yet to see a clearly stated goal for what this avenue is trying to accomplish.

[

]

Though they later learn to admit that the purpose was go against Curve dumpers, but are careful to frame it with a note no one had brought up in any previous public discussion; How much collateral is being dumped.

Curve Finance

While also denying they think this is making enemies.

Curve Finance

This is odd as we’ve shown this method doesn’t address dumping, nor can I perceive how it would build favor.

What’s. In. Their. Bagsssssss

So I dug a bit into who voted for this proposal so far, since only 12 votes already.

The first vote was from Curve Founder #1 according to Nansen’s labels.

(Un)Surprisingly what we find is they have fat bags in their public wallet of a token that supports double dipping more aggressively than any other protocol. Alchemix maxes at 50%. MIM at 90%. Unit maxes at 95% collateral ratio allowing users to borrow USDP

This is the one double dipping protocol never brought up in double dipping conversations despite a majority of its yield being sourced through alleged double dipping, yet Curve founders are actively minting debt on the protocol frequently enough to suggest they are quite familiar. When pressed, I did get them to admit that they are 40% backed by Curve Dumpers. (Odd 10% below the line they made up earlier in the discussion.)

Curve Finance

Its not like Curve team just forgot about them, as they are the one protocol the Curve Team has actively advertised as being able to do just this:

Charlie Watkins

A gameable distinction

40% is largely suppressed by the 25M debt w/ 95% collateral ratio to arb USDP price. There’s no other purpose to having USD denominated debt against USD denominated collateral with no external incomes, but interest charged.

Alchemix uses a more elegant function imo where the peg is arbed through the transmuter which can hold funds in a vault.

With a c ratio as high as 95%, rolling that whole debt one more loop into farming imo, is nothing but a fake metric to “pass the purity test”. Such accounting tricks should not fool Curve governors.

Its Unfortunate

But it appears the Curve Team is using its influence as stewards of the DAO to mislead voters and community members to hamper the growth of protocols which compete with their preferred double dipping protocol.

I believe it is their duty, as the core team that when the community raises issues they give some semblance of neutrality.

Whether its because of their bags or otherwise, the Curve team is proposing solutions which don’t address the problems raised, and pushing those solutions through without adequate community feedback. These pushes have been targeted at specific protocols.

The best way to avoid this kind of favoritism is with universal solutions.

[michwill]

This is pretty solid piece of research. I need to think carefully if it stays the same when the price is included in consideration (e.g. when you switch from usdp to usdn - you dump usdp, so you create an incentive to return the loan for cheap and disincentive to mint). In the meantime, would definitely encourage everyone to have a look

[EVM.Exchange]

So I am relatively new to the Curve ecosystem, only been going deep since March and this is my first post on the governance forum, I agree strongly that USDN has outsized weights for the governance rewards relative to its utilization, maybe the CRV rewards for each pool should be tied to its trading volume somehow?

[WormholeOracle]

Something like that has been discussed. There are concerns performance weighting is susceptible to being gamed. Gauge voting is chaos but its imo the best system for distributing rewards anywhere in DeFi. I’d prefer out of principle to relaunch USDN pool with 50% admin fee and USDN inflation goes 100% to LPs. But I think nobody is hurting enough from the current way for there to be much support for that

[0xLeibniz]

Fantastic post. Has there been any follow-up on any of this from the Curve team?