[Discussion] Should GRO add FPI to the strategy whitelist

Yield Strategies
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Hey gromies, I have been doing some research on FPI lately due to the attraction of inflation pegged yield (7% APY in Q4 2021). After doing some reseach I would like to share it with the wider community and discuss if GRO should farm FPI in order to improve our yield exposure.

Summary

Create strategy to directly invest into FPI.

Abstract

To expand GRO’s on-chain yield source during this extended bear market, we have explored the option of investing into FPI, a product from FRAX protocol:

FPI offers US inflation pegged yield, which realised 7% APY in last quarter in 2021. Anyone can mint and redeem FPI with FRAX based on the latest peg price with by paying a fixed 30bps fee.

FPI is 100% collateralized by FRAX, with yield backed by AMO strategy earning and FPIS auction. It has a current circulation of 77m and a track record of pegging since launch in early 2021.

Motivation

As we continue to dip in the bear market, the realised yield of GRO protocol has been quite weak in the last quarter. It is due to the weakness in price of $CRV and $CVX, as well as a general stagnation of stablecoin inflow.

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This goes hand in hand with the yield in the wider stablecoin landscape, with reference to weekly report from Serenity Fund:

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In such a macro environment, FPI offers an attractive yield that is pegged to the US inflation, which realised 7% APY in 2021. Anyone can mint and redeem FPI with FRAX based on the latest peg price with fixed 30bps fee.

If GRO incorporates this strategy into the core protocol, let’s say, replacing FRAX/3CRV with FPI, the total system yield can improve by +1.25% (assuming 25% of system exposure improves APY from 2% to 7%).

Since currently all strategy contracts are investing into metapool (pool with 3CRV on one side), investing into FPI would require some additional strategy development and testing from the Product Groda.

Specification

This is a preliminary discussion post that if supported, would lead to a proposal that whitelists FPI into the GRO strategy list, and sponsor the Product Groda to develop the necessary smart contract and monitory tool to incorporate exposure to FPI into the G2 protocol.

For

  • Offers an attractive yield source that is pegged to the US inflation rate
  • Yield is supported by FPIS liquidity.
  • 70m+ circulation with track record of pegging to target price
  • Marginal additional risk as GRO protocol is exposed to FRAX already.

Against

  • Redemption NOT fully decentralised (details refer to the research article)
  • Concern over the sustainability of underlying yield sources
  • Lack of clarity surrounding the accounting during the migration to the current ControllerPool.

Poll

Poll coming after thorough discussion

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Would be great to have some input from our freshly created Strategy, Finance, and Risk Pod on this!

Chris, I noticed your messages in the Frax TG group so I know you are up-to-date but for the benefit of others, there is a Trail of Bits audit on veFPIS that is currently ongoing as well as new features coming to FPI and FPIS soon (apparently). In my non-expert opinion, I think it would be wise to wait for more clarity on these developments from a risk assessment perspective.

1 Like
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Hey @chriswong, thanks for the proposal. The analysis is insightful.
I think adding strategies that offsets dollar inflation makes a lot of sense.
some comments from my side as someone trying to get a better grasp of this strategy-

  1. would FPI share the same behavior to aTokens in that supply expansion benefits token holders equally (ie. as a rebase asset). Thus this strategy would effectively be to purchase and hold FPI?

  2. Given that custom integration is required, do you have an idea of how much engineering effort is needed for strategy to be implemented?

  3. there appears to be a large areas of concerns around both redemption mechanic, degree of trustlessness and how the protocol reliably keeps up with inflation. I think it’s worth proceeding with cautions.

I agree with @jaypow that the FiRST pod should provide some input on this. That said we do not have a framework in place for protocol/asset risk evaluation yet, this is something that we will be working on.

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Indeed, the Frax team is having audit with veFPIS now so i guess it’s around the corner! There is also active but minor updates on the public veFPI repo!

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  1. No, FPI is only pegged to a “peg_price” which comes from an oracle, it does not “rebase”; but the design effectively benefit token holders equally
  2. Need to consult the smart contract team in Product Pod to comment. My initial guess is it would take 2-3 sprints.
  3. Ya as specified in the articles, part of the fund(treasury) sits in a multisig which is concerning, secondly the “revenue” comes from transaction fee, Curve/Convex bribe clearly not covering the current 7% APR at the moment.
    Having said that, it does not mean the future income would NEVER cover the return, and FRAX team can always increase FXS emission on the bribe side to support the inflation yield. The yield premium relative to our current FRAX strategy, is quite significant, it is probably worth some more indepth investigation from the risk pod team :slight_smile: