Reserve Fund diversification considerations and sGYD (Gyroscope)

General
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Applicant information

  • Name: Gyroscope (Gyroscope Foundation)

  • Key Information:

    • Gyroscope issues the yield-bearing stablecoin sGYD, which is based on the ERC4626 standard. It aims to provide a boosted yield rate on stablecoins for less risk, taking advantage of Gyroscope’s automated risk control innovations.
    • GYD is a decentralized stablecoin that aims to diversify and limit risk to the greatest possible extent. GYD is collateralized with other stablecoins, which are strategically deployed in risk-segregated manners to generate yield. This yield is then passed on to sGYD holders who stake GYD.
    • RWAs are a core part of GYD as currently calibrated, providing yield uncorrelated to crypto markets. RWAs are to comprise around 50% of the GYD Reserve. The expected yield on the GYD reserve is 8-10%, significantly more than the risk free rate on US Treasury bonds while maintaining a high degree of risk diversification. sGYD yields are expected to start with ˜12% APR, with an amplification rate related to the proportion of GYD staked into sGYD.
    • In addition to a weighted, partitioned reserve with various safety checks, Gyroscope features an advanced two-tiered stablecoin pricing logic and a uniquely robust onchain oracle system.
    • Gyroscope also developed a new concentrated liquidity pool, called ‘E-CLP’. The total AUM across all Gyroscope products is 31mn USD (as of 07 August 2024).
    • GYD is almost certainly the most liquid stablecoin for its size, able to do more volume per day than its total circulating supply while remaining on peg. GYD also leverages Gyroscope E-CLP pools that are the most capital efficient in DeFi. Further, GYD is directly redeemable through a primary market.

  • Expected APY:
    8-10% annually on reserve assets as of 07 August 2024 (subject to variation). The reserve is open ended with no maturity. Since not all GYD will be locked as sGYD, but the whole GYD reserve generates yield, sGYD yields are expected to amplify the underlying reserve yield.

    sGYD yields is hence expected to start at around 12% APR and will be complemented with Gyroscope SPIN points.

  • Underlying asset(s):
    The GYD reserve will comprise of the following crypto assets, in the following proportions, after the GYD AMO, or bootstrapping pool, is unwound:

    • 20% fUSDC (yield bearing USDC)
    • 12% aUSDT (yield bearing USDT)
    • 48% sDAI (yield bearing DAI)
    • 20% LP shares of a Gyroscope LUSD/crvUSD Rehype pool

    The AMO provides a predefined amount of GYD that can be minted against select assets. AMOs will fade out as organic secondary market liquidity grows.

    RWAs are expected to be a core part of GYD, providing yield uncorrelated to crypto markets. RWAs are to comprise around 50% of the GYD Reserve (and are similarly represented in AMOs).

    Reserve asset weights and exposures are expected to evolve through time as the Gyroscope DAO votes on changes to the reserve. This process is designed with a multitude of safeguards in place (see governance documentation).

  • Minimum/Maximum transaction size:
    No minimum, nor maximum.

  • Current AUM for GYD:
    2.7m USD (as of 07 August 2024)

  • Current AUM across all Gyroscope products:
    31 USD (as of 07 August 2024)

  • Volume metrics:
    Since its launch in December 2023, GYD has realised significant volume. The 24-hour GYD volume stands at 60% of its circulating supply. This volume is oftentimes able to outpace GYD supply and frequently connects other stablecoins, acting as a settlement asset despite a currently still low supply.

    GYD has a total trading volume of 194mn USD. Additionally, the 30-day moving average velocity of GYD is at 50%, reflecting the continuous trading activity over the past month.

Proposal Summary

Brief outline of the requested allocation of Ethena’s Reserve Fund to your asset/product and benefit to Ethena

Since there is no minimum nor maximum transaction size and GYD is easily scalable, Gyroscope could process any allocation of Ethena’s Reserve Fund.

Note, Gyroscope’s governance design allows granting voting power to key stakeholders. If Ethena was to allocate assets in excess of 5mn USD into GYD, Ethena would also be onboarded into Gyroscope governance, aligning interests and granting Ethena a voice for future governance decisions.

Further note, Gyroscope has not launched a governance token yet, but strategic partners will have a continuing voice in governance alongside the governance token.

Basics and background

How will this allocation improve the diversification or capital efficiency of Ethena’s Reserve Fund and/or backing assets?

Allocating assets of Ethena’s Reserve Fund into sGYD will significantly enhance diversification and risk controls while providing a competitive risk-adjusted yield. Here’s how:

Diversification and Risk Management

By incorporating sGYD, Ethena’s Reserve Fund gains one-stop exposure to a basket of stablecoins that jointly collateralize GYD. Basket assets are weighted, partitioned to avoid spillover risk, and are deliberately selected to diversify the exposure to any single asset or yield-generating protocol.

In addition to automated risk diversification rules, GYD features further advanced onchain risk controls, such as:

  • optimized minting and redemption bonding curves that guide the protocol on how to use reserve assets to maintain stability: GYD can be redeemed 1:1 to underlying assets if the reserve is fully collateralized. In the event of a collateral shortfall, an encoded minting/ redemption pricing seeks to promote long-term stability, autonomously balancing the goal of maintaining a tight peg with the goal of long-term GYD stability in the face of short-term crises.
  • a new resilient oracle and circuit breaker system: Gyroscope’s oracle minimizes trust on single oracle systems such as Chainlink and improves fault tolerance. The oracle also features flash crash circuit breakers and an excessive flow rate circuit breaker that is designed to act as a last resort to protect against oracle exploits as well as smart contract bugs and unknown exploits. It operates by measuring ultra-short term flows within the protocol and triggering safety mode if they would exceed thresholds. Atomic exploits are also limited by adding a respective threshold amount.

Note, most reserves are currently held in AMOs which helps with early-stage growth. AMOs are designed to loosely mirror the reserve calibration. Protocol owned liquidity from AMOs will be cycled back into the reserve that enforces extra protections (e.g., diversification rules, oracle protections, and smart contract risk mitigations) once sufficient organic secondary market liquidity of GYD exists.

Liquidity and Capital Efficiency

As GYD is entirely non-custodial, Ethena governance can undertake a liquidation at any time. The VWAP GYD price is closely tracking parity, with a maximum deviation of 6bp.

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GYD liquidity management is based on the following three pillars:

  • Primary market: GYD is directly redeemable through a primary market against reserve assets.
  • Secondary market: the total TVL of E-CLPs that include GYD is 3.7mn USD. 83% is currently on Ethereum, 14% on Arbitrum, and 3% on Polygon zkEVM.
  • Bootstrapping pools: GYD is launched with ‘bootstrapping pools’, or AMOs, that allow a pre-set amount of GYD to be minted in a simplified manner against a specific reserve asset. These pools provide deep liquidity on Ethereum (up to 20mn USD), Arbitrum (up to 2mn USD), Polygon zkEVM (up to 200k USD). As organic secondary market liquidity scales up, POL from AMOs will be cycled back into the reserve and AMOs will fade out.

Risk-Adjusted Yield

Gyroscope’s stablecoin, GYD, is not just a tool for stability but also a yield-bearing asset. It leverages a diversified basket of stablecoins, which are deployed to generate yield. This generated yield is then passed on to sGYD holders, offering a competitive yield. sGYD aims to provide a boosted yield rate on stablecoins for less risk, taking advantage of Gyroscope’s automated risk control innovations.

As a reminder, the reserve will comprise of the following crypto assets, in the following proportions, after the GYD bootstrapping pool (which provides a preset amount of GYD which can be minted against sDAI) is unwound:

  • 20% fUSDC (yield bearing USDC)
  • 12% aUSDT (yield bearing USDT)
  • 48% sDAI (yield bearing DAI)
  • 20% LP shares of a Gyroscope LUSD/crvUSD Rehype pool

These vault weights achieve the following risk diversification:

  • 38% exposure to centralized stablecoins
  • 43% exposure to decentralized stablecoins
  • 50% exposure to RWAs

Yield sources:

  • Protocol for Loanable Fund interest (aUSDT, fUSDC, rehypothecated LP shares)
  • Yield from swap fees
  • RWA yield

Please describe any experience your firm has in working with decentralized organizational structures

As Gyroscope itself is a decentralized stablecoin, all implemented processes are oriented towards working with other decentralized organizations.

Gyroscope has a close relationship to the Balancer DAO having received grant funding and routinely engaging on the Balancer forum. Gyroscope has also experience in working with other DAOs such as the Arbitrum DAO (received LTIPP grant, got shortlisted for STEP), the Aave DAO (one of Gyroscope’s E-CLPs was included in GHO’s Stability Module), and various other DAOs (for example, Frax, Mimo, or PrimeDAO).

What is your entity’s current assets under management, assets held in trust, total value locked, or equivalent metric for your legal structuring?

The total AUM across all Gyroscope products is 31mn USD (as of 07 August 2024).

Legal design

Do holders of your product have any shareholder, investor, creditor or similar rights?

N/A

Describe the legal and contractual structuring for your product, specifically naming any regulatory bodies overseeing the product, if applicable.

GYD is governed by a DAO with an associated Gyroscope Foundation.

How would the proposed allocation be treated in a bankruptcy or insolvency situation?

N/A.

Funds are stored entirely on-chain in a non-custodial manner. GYD is fully-collateralized and thus expected to be redeemable 1:1 against reserve assets.

In case the bootstrapping pools are exhausted and the collateralization ratio dropped below 100%, a fallback pricing mechanism would kick-in, reducing redemption prices by up to 30%.

Smart Contract/Architecture

How many smart contract audits have been completed with respect to your tokenized product? Please name the auditors and provide a copy of reports.

The GYD system has been audited 4 times, twice by Nethermind and once each by Runtime Verification and Trail of Bits.

Latest audit reports:

  • Security Review: Protocol - Nethermind - 08/15/2023
  • Security Review: Governance - Nethermind - 08/15/2023
  • Security Review: E-CLPs - Nethermind - 08/17/2022
  • Security Review: Bridges - Nethermind - 25/6/2024
  • Security Review: sGYD - Nethermind - 18/7/2024

Other audits:

Is the asset/product permissioned? If so, how are you managing user identities? Any blacklisting/whitelisting features?

True to the core value propositions of DeFi in general, the on-chain GYD is fundamentally permissionless. Any address is able to mint or redeem GYD through the smart contracts.

In relation to the Oracle Guardians, a whitelist of addresses is able to pause minting (but not redemption) of the protocol. This is a security measure to allow minting to be paused if suspicious activity is detected.

Is the asset/product present on several chains? Are there any cross chain interactions?

At the time of writing, GYD has been bridged from Ethereum to Arbitrum and Polygon zkEVM.

Are the applicable tokens being used in any other protocols? Please describe the various components of the ecosystem.

GYD’s largest use case today is as an asset in LP strategies, many of which are supported by Balancer and Aura. Several other protocols integrate GYD as a pairing asset for secondary market liquidity. This includes Aave GHO in collaboration with Tokenlogic and Karpatkey, as well as integrations with Frax, Mimo paUSD, and PrimeDAO D2D.

Further integrations in lending markets on Ethereum and Arbitrum are underway.

How are trusted roles/admins managed in the system? Which aspects of the solution require trust from users?

GYD is to be governed entirely on-chain by the Gyroscope DAO. Various stakeholders in the Gyroscope community control the system:

  • holders of the Gyroscope protocol’s native governance token, GYFI;
  • holders of the Gyroscope stablecoin who provide it as trading liquidity;
  • Founding Members of the protocol, community members who have been involved since the beginning;
  • Councillors, parties with expertise in DeFi protocol management;
  • other DAOs.

Votes can also be delegated.

Participants in the governance system make proposals, which are discussed and voted on. Some changes need more voters (higher quorum) and of the voters, a higher proportion of agreement in order to pass. This is because some governance actions are low-risk and routine, such as deciding on the recipient of a community grant, while others are high-impact and may implement changes to the entire protocol.

Proposed changes are subject to a timelock - a waiting period - before they are implemented. This is a protective measure to ensure that protocol participants have time to react to any changes they don’t agree with.

Since the risk of code bugs cannot be fully mitigated, it is important that both the Gyroscope community and the development team at FTL Labs, who was mandated to deliver v1 of the protocol, are able to quickly address smart contract issues that may be found. For this reason, a centralized control multisig will temporarily retain control of the system parameters and protocol update and design decisions in parallel with decentralized governance. This multisig is led by the Gyroscope Foundation, a foundation company associated with Gyroscope governance.

Following full decentralization, this centralized control vector will be removed, and further updates to Gyroscope contracts will have to be enacted by Gyroscope governance. This is fundamentally important to launching Gyroscope as a decentralized protocol.

Is there any custom logic required for your token/product? If so please give any details.

N/A

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