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Balancer/Aura Boosted Stablecoin Strategy

This document goes over the specific risk and return drivers of the Balancer/Aura Boosted Stablecoin pool strategy.

Motivation

The Balancer/Aura Boosted stablecoin vault allows users to borrow USDC or DAI on Notional, deposit those stablecoins into the Balancer boosted stablecoin pool, place the LP tokens on Aura, and automatically harvest the incentive token rewards. Learn more about Balancer boosted pools here.
The Balancer Boosted Stablecoin pool holds USDC, aUSDC, DAI, aDAI, USDT, and aUSDT. The pool allows Balancer users to trade between different stablecoins, thereby generating trading fees for LPs. The pool also lends part of its stablecoin holdings on Aave to generate additional yield and incentivizes LPs by giving them BAL tokens. To generate additional yield this strategy puts the the Balancer Pool Tokens (LP tokens) on Aura finance to get an increased amount of BAL incentives while also earning additional AURA tokens.
For example, consider a user that borrows USDC in the 6 month maturity and enters the Balancer Boosted Stablecoin pool with the proceeds. The vault allows users to profit from the spread between the returns of the pool's swaps fees, boosted APRs, and incentives, versus the user's fixed USDC borrow rate on Notional.

Return drivers

The return of the Balancer Boosted Stablecoin pool strategy has two main drivers:
  • The value of the pool's incentives (ex: Bal, and Aura incentives)
  • The Balancer Pool Token (BPT) to USD exchange rate. The BPT value is positively impacted by:
    • The pool's swap fees
    • The pool's boosted Aave APRs
For example, consider a vault where a user deposits $100,000 of USDC, borrows $400,000 of USDC on Notional at a net 3% interest rate for 6 months (incl. slippage and vault fees), and enters the Balancer Boosted Stablecoin pool with the $500,000 and then deposits the BPTs in Aura. If the balancer pool generates 0.5% in swap fees, 1.0% in Aave APR, 3.0% in Bal incentives, and 4.0% in Aura incentives, the strategy would generate $21.25K in pool rewards. When accounting for the borrowing interest cost of $6K, the strategy would net $15.25K or 30.5% annualized.
Let's note that the strategy will harvest incentives and sell them automatically for additional BPTs over time.
The profitability of this strategy can be summarized with the following formula:
profit=incentivesInUsdc+(endingBPTvalueInUsdstartingBTPvalueInUsd)BPTbalanceusdcInterestusdcDepositprofit = \frac{incentivesInUsdc + (endingBPTvalueInUsd - startingBTPvalueInUsd) * BPT balance - usdcInterest}{usdc Deposit}

Risk factors

Price risks

Exchange rate risk

This strategy is subject to exchange rate risk as the exchange rate between any of the 3 stablecoins could change. For example, if a stablecoin like USDT depegs, the pool will hold more USDT. Such an event would cause the USD value of BPTs to decrease leading to a higher leverage ratio.
If a user's leverage ratio is ever higher than the vault's maximum leverage ratio, the account would become eligible for liquidation. An account leverage ratio can be calculated at all times using the following formula:
leverageRatio=vaultShareBalancevaultShareValuedebtdebtleverageRatio = \frac{vaultShareBalance * vaultShareValue - debt} { debt}
For example, consider the following account:
  • BPT balance: 1,000,000
  • BPT value: 1.00 USD
  • USDC value: 1.00 USD
  • DAI value: 1.00 USD
  • USDT value: 1.00 USD
  • fUSDC debt in: -900,000
  • Maximum leverage ratio: 0.08 (12.5 X leverage)
  • Vault shares balance: 1,000,000
The value of a vault share at any point in time can be calculated using the following formula:
vaultShareValue=BPTbalanceBPTvalueInUsdc+incentivesValueInUsdcvaultSharesBalancevaultShareValue = \frac {BPTbalance * BPTvalueInUsdc + incentivesValueInUsdc} {vaultSharesBalance}
vaultShareValue=1,000,0001.00+10,0001,000,000vaultShareValue =\frac{1,000,000 * 1.00+10,000} {1,000,000}
accountValue=1,010,000UsdcaccountValue = 1,010,000 Usdc
leverageRatio=1,010,000900,000900,000leverageRatio = \frac{1,010,000 - 900,000}{900,000}
leverageRatio=0.122(8.2Xleverage)leverageRatio = 0.122(8.2Xleverage)
Let's now recalculate the account leverage ratio assuming the value of USDT now sits at 0.95 USD. The change in the value of a BPT is non-linear and is a function of the pool's stable curve and the magnitude of the exchange rate change. A decrease from 1.00 to 0.95 in the USDT/USD exchange rate would imply a new BTP price of 0.96 USD.
accountValue=970,000UsdcaccountValue = 970,000 Usdc
leverageRatio=0.077(12.85Xleverage)leverageRatio = 0.077 (12.85Xleverage)
The ending leverage ratio has now breached the maximum leverage ratio. The account is therefore eligible for liquidation.

Liquidity risks

On-chain liquidity

The strategy is also subject to on-chain illiquidity risk. If the DAI to USDC or USDT to USDC on-chain liquidity was to decrease substantially, it could lead users to incur a large amount of slippage when redeeming their BPTs for the borrowed currency.
Aave liquidity
Part of the balancer pool is invested in aTokens on Aave in order to generate additional yield. If Aave ever defaulted or had major redemption issues the strategy would be impacted.

Smart contract risks

The strategy interacts or is subject to the following smart contract risks:
  • Notional for borrowing
  • Balancer for trading and entering the pool
  • Aave as part of the pool is held in aTokens
  • Maker, USDT, and USDC as the pool will hold underlying positions in all of these stablecoins
  • Aura finance to boost the BPTs and generate additional yield

Transaction costs

Entering the strategy

Upon entering the strategy, a user will have to cover for:
  • Notional trading fees, vault fees, and slippage on the borrowed currency
  • Balancer swap fees and slippage to enter the Balancer pool single-sided.

Exiting the strategy early

Upon an early exit, a user will have to pay for:
  • Balancer trading fees and slippage to redeem the strategy tokens BPTs back into the borrowed currency
  • Notional trading fees and slippage to close his borrowing position.

Settlement

Upon settlement, when the vault reaches maturity, the strategy will incur the following transaction cost:
  • Balancer trading fees and slippage to redeem the strategy tokens BPTs back into the borrowed currency
Settlements at maturity involve no trading on Notional as the debt will automatically close when it matures.

Vault governance parameters

Parameter
Value
Maximum leverage ratio
0.07 (14.3 X leverage)
Target leverage ratio
0.13 (7.7 X leverage)
Maximum vault capacity
1,000,000 USDC and 1,000,000 DAI
Minimum debt size
200,000 USDC and 200,000 DAI
Vault fee
0.00%
Reserve fee share
80%
Liquidation bonus
1.015 (1.5%)
Settlement period
2 days

Strategy governance parameters

Parameter
Value
Max Underlying Surplus
25,000
Oracle Window In Seconds
N/A
Settlement Slippage Limit Percent
N/A
Post Maturity Settlement Slippage Limit Percent
N/A
Emergency Settlement Slippage Limit Percent
N/A
Max Reward Trade Slippage Limit Percent
2.00%
Max Balancer Pool Share
15.00%
Balancer Oracle Weight
0%
Settlement Cool Down In Minutes
20
Post Maturity Settlement Cool Down In Minutes
2
Fee Percentage
0.00%
Oracle Price Deviation Limit Percent
0.25%
Balancer Pool Slippage Limit Percent
0.20%

Historical return data

The historical unlevered return data for this strategy is displayed on this Dune Dashboard.
Anyone can also use the following spreadsheet model to estimate the expected returns of the strategy while assessing its risks.

Emergency settlement

In case of an emergency, the protocol reserves the right to settle up to 100% of the vault if funds are compromised due to an active hack or a smart contract vulnerability.
An emergency settlement can also be triggered if the expected slippage to redeem the entire vault via a DEX aggregator such as 0x or 1Inch is larger than the vault liquidation discount. Under such a situation, it would be unprofitable for a liquidator to liquidate the vault. The emergency settlement acts as a way to ensure that the vault is always profitably liquidatable. This is key to making sure that the protocol is not subject to an excessive amount of risk.