Adjustment of stUSDS-USDS Curve Pool Fee to 100 Basis Points

[bout3fiddy]

Summary:

This proposal seeks to increase the transaction fee for the stUSDS-USDS Curve pool from its current setting of 1 basis point (0.01%) to 100 basis points (1.00%). This adjustment addresses the mispricing of liquidity risk within the pool and aligns the fee structure with the asset’s current distressed profile.

Motivation:

The current 1 basis point fee structure incorrectly categorizes stUSDS as a low-volatility, hard-pegged stablecoin similar to USDC or USDS. However, the underlying solvency mechanics and current utilization rates indicate stUSDS carries significant tail risk and liquidity constraints. With Sky’s Surplus Buffer effectively in a deficit (negative ~$13m) and stUSDS utilization hovering near 100%, the asset lacks the immediate convertibility required to justify a stable-swap fee tier. The market currently treats stUSDS as distressed debt rather than a cash equivalent. Maintaining a 1 basis point fee in this environment actively harms liquidity providers (LPs) by subjecting them to toxic flow without adequate compensation.

LPs in the stUSDS-USDS pool currently face asymmetric risk. If stUSDS depegs or remains illiquid due to manual liquidation processes and governance-controlled parameters, LPs are left holding the depreciating asset while arbitragers and exiting depositors extract value for a negligible 0.01% cost. A fee increase to 100 basis points introduces a necessary spread. This wider spread allows the market to price the liquidity premium accurately. Depositors seeking immediate exit via the pool effectively pay a market-driven haircut, which is transferred to the LPs as yield. This mechanism creates an incentive for capital to remain in or enter the pool to absorb the sell pressure, whereas the current model encourages capital flight.

By raising the fee to 100 basis points, the protocol takes into account that stUSDS liquidity is premium and scarce. This discourages casual churn while ensuring that those who must exit pay a rate that reflects the solvency risks inherent to the SKY-only backing.

This proposal requires an immediate executive vote to update the fee parameter on the specified Curve pool contract. Governance participants should evaluate this change not as a revenue mechanism, but as a necessary defense to prevent the complete evaporation of secondary market liquidity for stUSDS.

For:

Increase Fees of the Curve Pool https://etherscan.io/address/0xb0cefac820228827a3f40deedbca88d5de44bca9 from 1 bps to 100 bps

Against:

Do not increase fees of the Curve pool https://etherscan.io/address/0xb0cefac820228827a3f40deedbca88d5de44bca9 from 1 bps to 100 bps

[bout3fiddy]

Due to errors in the pool configuration

a new pool was created, again with 1 bps.

After some discussions with other DAO members, I think a fee of 10 bps with an offpeg fee multiplier of 5 makes more sense. I would have personally preferred the fees to be 100 bps, but I do understand 10 makes sense with a sufficiently high offpeg fee multiplier of 5.

Note that the number 5 for the offpeg fee multipler is relative to the number 10bps of the base fee: if we reduce the base fee to 1 bps then the max value of offpeg fee multipler is 50.

Also note that while I’m using bps here, the ‘actual precision’ in the smart contract will be different.

The new pool is: Curve.finance , or https://etherscan.io/address/0x2c7c98a3b1582d83c43987202aeff638312478ae

[saintrat]

EDIT: I misread this proposal and didn’t realize it was for the new pool, I thought this was regarding the old stUSDS / sUSDS pool, this is my fault. This pool does not need a change in A, it is parameterized correctly w.r.t. liquidity.

I’ll leave my previous comment up in case anyone wants to read my thoughts on the misconfigured pool. However, I’m not sure this is the best approach now for the misconfigured pool. Reducing A will cause stUSDS to depeg further, and the misconfigured pool is currently working fine as a supply sink, need to see what Sky would like to do.

Original Comment:
Can we pair this with a decrease in A please?

Currently with A=500 the pool will stay super imbalanced: ~94% $stUSDS and ~6% $sUSDS, and liquidity is super thin at this point:

If we zoom in the liquidity is currently about 2x that of x*y=k:

I had a quick look into some different A values, A=15 was the best liquidity curve of the values I looked at:
A = 10 →6x liquidity of x*y=k at current price
A = 15 → 6.5x liquidity of x*y=k at current price
A = 20 → 6.5x liquidity of x*y=k at current price, but slightly steeper curve, e.g. less liquidity if stUSDS depegs
A = 50 → 5.5x liquidity of x*y=k at current price
A = 100 →4x liquidity of x*y=k at current price

With A=15 the liquidity will increase around 3x at the current price to approx. 6.5x the liquidity of x*y=k (note the following image is a simulation based on pool parameters but with A=15 at the same block as above):

This would also balance out the pool significantly, rough calcs suggest the pool should balance to around 70% stUSDS and 30% sUSDS, which is much better than the current 94% stUSDS and 6% sUSDS.

I’m not sure how a significant reduction in A would affect the profitability of LPs over the ramping period though, would appreciate any insights into this.