Proposal to lower A parameter on pUSD pool to 25

Summary:

Proposal to lower A parameter on pUSD pool to 25

Abstract:

Lowering the A factor will reduce systemic depeg risk from imbalance of pUSD in the pool.

Motivation:

Lowering the A factor will reduce systemic depeg risk from imbalance of pUSD in the pool.

Specification:

Lower the A parameter from 50 to 25 on pUSD (Curve.fi)

For:

Lowering A will disincentivize excessive imbalance of pUSD in the pool, avoiding tail-end depeg risk and keeping pUSD’s value more inline with it’s 3CRV pairing.

Against:

Do not lower the A parameter of the pUSD pool (do nothing)

Poll:

Post a link to your proposal if it’s already been created

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This proposal comes from the JPEG’d team, creators of the PUSd coin. The A parameter for this pool was recently reduced to 50, and this proposal is to further lower A to 25.

While lowering A can reduce risk to LPs by incentivizing pool balance and reducing divergence loss (i.e., “impermanent loss”), there are some important risks that must be considered in this case. In particular, this proposal could:

  1. exacerbate the current upward depeg of PUSd price (from $1.07 to $1.14, given current pool balance/size)

  2. drastically increase slippage for LPs (~3% for 3CRV deposits; ~9% positive slippage for PUSd deposits) and traders (~3.6% for $1m buy of pUSD, ~2.7% for $1m sell)

  3. reduce the value of the pool (by ~0.6%).

In general, these risks stem from the current imbalance of the pool (currently: ~20% PUSd, 80% 3CRV) and the limited availability of PUSd to balance the pool (see Risk 1).

Therefore, it is likely safer to avoid lowering A until:

  1. more collateral is onboarded to JPEG’d and more PUSd is minted/deposited into the pool, or
  2. enough 3CRV is withdrawn to balance the pool

We are currently in discussion with the JPEG’d team, who are developing plans to ameliorate these issues.



As it stands currently, the major risks to be addressed are:

-Risk 1: Upward Depeg of PUSd Price
Given the large imbalance of the pool, the price of PUSd has already depegged upward to ~$1.07 worth of 3CRV. Assuming the same imbalance, lowering A to 25 would push this price to ~$1.14.

While this issue would be ameliorated by either removal of 3CRV or deposits of PUSd, current PUSd debt ceilings (5m PUSd for CryptoPunks + 400k PUSd for EtherRocks) limit the ability for the pool to be balanced. With A = 50, depositing the whole 5.4m PUSd would only reduce the price to ~$1.03. With A=25, the price would be ~$1.07.

Additionally, because minting PUSd requires ownership of typically expensive NFTs, there may be further limitations to how much PUSd is minted to balance the pool.

-Risk 2: Slippage
Currently, a typically-sized 3CRV deposit would incur slippage of 1.5-2%, while similarly sized PUSd deposits would incur a positive slippage of 3.5-4%. Lowering A to 25 would produce ~3% slippage for 3CRV deposits, and ~9% positive slippage for PUSd deposits.

For a $1m trade, slippage would go from ~2.2% to ~3.6% for buying PUSd, and from ~1.5% to ~2.7% for selling PUSd.

-Risk 3: Reducing Pool Value
Whenever A is reduced while a pool is imbalanced, D (the total value of the pool when it is balanced) is reduced. Given the current pool imbalance, lowering A to 25 would reduce the total value at balance by about 0.6%.

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There are three tools JPEG can use to bring balance back into the pool in preparation for A25

  1. Mint pUSD and/or withdraw 3CRV liquidity
  2. Reduce CRV rewards in the next voting cycle
  3. Imminent launch of the MAYC/BAYC vault in the next two weeks

A combination of all three would bring the pool back to 40:60 which is within the safety limits of A reduction

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These actions should be sufficient to significantly reduce the identified risks. We thank the JPEG’d team for their prompt response.

LPs should continue to pay careful attention to PUSd supply and debt ceiling when considering depositing.

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