Degenerative.Finance + UMA farming of uGasFeb, uGasMar

Degenerative.Finance + UMA farming of uGasFeb, uGasMar

Basic Summary

Yam is about to launch Degenerative.Finance dApp based on the UMA platform, our first few synthetics are going to be uGas tokens. For more information visit our discord chat and links below.

This proposal would use the up to the currently non-utilized ETH in the treasury (~$220,000) to mint uGasFeb / uGasMar tokens on degenerative.finance. Then provide liquidity in order to mine UMA tokens via their developer mining program: UMA Announces Developer Mining. An Evolution of Liquidity Mining: Give… | by Clayton Roche | UMA Project | Nov, 2020 | Medium

Abstract

Degenerative.finance beta will launch on Dec 21st and part of the treasury’s goal is to support the Yam ecosystem which degenerative.finance is a part of. Assets in the treasury should be utilized to gain yield with risk according to our investment strategy. Using the ETH in the treasury for degenerative.finance has two benefits:

  1. Minting uGas tokens and providing liquidity will support the ecosystem for degenerative.finance. The higher the liquidity the more the potential volume and usage for uGas.
  2. By providing liquidity, the treasury will receive UMA rewards.

Motivation

Degenerative.finance’s uGas token is the first of a series of synthetics that Degenerative plans on rolling out to the public. I’ve included a guide on what uGas is below. Adding liquidity to the uGas tokens is important to support the infrastructure and it also gets UMA rewards.

What is uGAS?

  • uGAS is a Synthetic Gas Futures Token.
  • Each uGAS token is named after the month that it’ll expire at the end of (for example, the uGAS-JAN21 token will expire at 0:00 UTC, Feb 1st 2021.)
  • Once the uGAS token expires, it will settle at the median gas price of all Ethereum transactions for the past 30 days.
  • Each uGAS token represents 1,000,000 GAS, so if the median gas price over the 30 days before expiry was 70 Gwei, the uGAS token would be worth 0.07 ETH.

Wait, what’s a Synthetic?

  • Synthetic tokens are collateral-backed tokens whose value changes depending on the tokens’ reference index.
  • In the example above, our uGAS’s reference index is the 30 day median gas price.
  • Synthetics are created by depositing collateral into a smart contract and minting tokens backed by that collateral.

If you have any questions about Synthetics, feel free to drop by Yam’s discord.

Additional resources:

Risks

There is a chance of liquidation which we will mitigate by only minting enough tokens to have a collateral ratio of 3.5 or Global Collateral Ratio, whichever is higher.

A primer on how liquidations, collateral ratios and pricing of uGas token.

There are two collateralization ratios (CR):

  1. Global CR - This is the average collateralization ratio across all token sponsors of a synthetic token. When minting uGas, you must stay above this CR.
  2. Minimum CR – This is the ratio that if you drop below, your collateral could be liquidated to cover your minted assets. For uGas tokens this ratio is set at 1.25.

To mint uGas tokens, you deposit ETH as collateral and it allows you to mint tokens up to the Global CR. For example if you deposit $10,000 worth of ETH and the GCR is 4, that means you can mint up to $10,000/4 = $2,500 worth of uGas tokens. In this example, if you minted 10 uGas tokens, if you return 10 uGas tokens, it will unlock all of your collateral no matter the price of the token at the time of return.

Pricing of uGas tokens is derived from the 2hr Time Weighted Average Price (TWAP) of the highest liquidity AMM pool. TWAP makes it resistant against flash attacks as they only effect a single or a few blocks, then natural arbitrage should return the price back to normal.

What’s the risk of liquidation? If we mint with a ratio of 3.5 and the minimum CR is 1.25. uGas 2-hour TWAP would have to increase by 156% or ETH decrease by 64% to be close to minimum CR, both of which are unlikely.

Specifications

To implement this proposal:

  1. Create smart contract to use ETH currently in the treasury to deposit as collateral. Allocation as follows:
  • ETH split 50/50 for uGasFeb adn uGasMar.
  • Take 75% of the ETH to use a collateral and 25% to pair with uGas token to LP
  1. Mint uGas tokens.
  2. Deposit uGas and ETH as a liquidity provider on Uniswap to mine UMA.

Poll to Measure Sentiment

  • Use Treasury ETH to Mine uGAS on Degenerative.Finance
  • Do Not Mine - Lets discuss

0 voters

1 Like

First up: Yes, great idea. We have to do that. Will be able to make some good fees from LPing on top of the UMA rewards. Some questions below.

  1. Just ran the numbers. Is the below analysis in sync? We’d have ETH left over.

image

Did anyone do a simulation/scenario analysis/back of the envelope? I am just curious to see what would need to happen for Yam not to be able to recover the original ETH. The variables are ETH price, Median gas price and CR.

  1. Risks: Anyone ran a quick analysis in how far short term median gas prices and ETH are correlated? On a daily timeframe TWAP +156% or ETH +64% looks unlikely but might be different on an hourly timeframe.

Given it’s on everyone’s radar: IL . I reckon we should be OK given that higher gas prices should also mean higher ETH, do we?

  1. Found this original write up super helpful for ELI5: uLABS Gas Futures Token. A simple solution to hedge and… | by Kevin Chan | UMA Project | Nov, 2020 | Medium
1 Like

Heya Theo! Yes you are correct, my math got a bit screwed up, we are closer to 100% at 77% collateral rate and 3.5 ratio. If the GCRatio moves up then we might be cutting it close. I’ll revise and do 75% is better utilization rate.

Looking at the pricing of the 2-hr TWAP and 30 day median, anything around 40 gwei is fairly stable, as long as we don’t buy when there’s a huge price spike in gas prices, it should be pretty safe.

I had this same question, unfortunately the 30 day median price is not on-chain so it can’t be coded into the contract otherwise I would set it to only buy at a ± 10% variance.

The other benefit is that Brock is currently running the liquidation bots and that will be turned over to Yam.Finance to run as soon as we have some dev resources. So, in the event of liquidation, there’s a chance it will be by Yam.

Thanks these are great. The website will have some explainers soon.

1 Like

It’s a good timing to develop this product. The model is just like airline company operates crude oil hedging. If the direction is right, the company can save a lot of costs, even makes money. But it would cause huge loss if wrong.
There’s one thing need to highly concern. If the sharding of Ethereum 2.0 can solve the traffic jam, then uGas market will be limited. Because there’s no need to operate the hedging. It might be happened one or two years later. How to avoid that? Need to research.

1 Like

uGas is only one product of many possible. We will be developing more.