Wintermute DeFi Governance Digest: February 2024 | Week 1

6 FEB 2024 | RESEARCH | AUTHORED BY CALLEN

This week’s proposals include Aave exploring the integration of Oval and joining the points meta, Abracadabra establishing a Depeg Contingency Fund, and Arbitrum upgrading to Atlas to support Ethereum’s Dencun Upgrade; along with votes from dYdX to list JUP-USD, Uniswap deploying V3 on Zora, and Radiant Protocol deprecating their Arbitrum DAI market.

Proposals

Aave (AAVE)

Proposal: [TEMP CHECK] Integrate Oval for the BAL & SNX Ethereum V3 Markets

Author: UMA

Summary:  UMA is proposing for Aave to implement Oval for BAL and SNX Ethereum V3 markets. Oval will allow the DAO to capture MEV associated with price oracle updates from liquidations that occur on Aave.

Key Points:

• Currently, Aave incentivizes third parties to liquidate distressed positions through a liquidation bonus.


• These liquidations generate enough profit that searches compete to send their liquidation transactions immediately after the Chainlink price feed update.

• It’s estimated that such MEV activities could have generated up to $62.2M from Jan 2021 to Jan 2024 via Oval for the Aave DAO.


• Oval is a MEV capture tool for Oracle Extractable Value (OEV) built on Chainlink’s price feeds and Flashbot’s MEV-Share infrastructure.


• Oval wraps Chainlink price updates as they’re pushed on-chain to force liquidators to bid for the right to liquidate a user.


• The winning bid will get the right to liquidate a user immediately after the Chainlink price update is pushed on-chain and the majority of the liquidator’s bid will go to the protocol in exchange for such access.


• If no bid is received during the liquidation auction window, the Chainlink price update is automatically pushed on-chain as normal.


• Oval ultimately allows the Aave DAO to begin earning revenue from liquidations on the platform.


• UMA’s is proposing for Aave to trial Oval for BAL and SNX markets and estimates that Oval could’ve earned the DAO ~$121k from liquidations across BAL and SNX from Jan 2021 to the current date.

Our Take: We are supportive of trailing Oval for BAL and SNX, it’s pretty clear there is use for such a product. However, we are concerned about the centralization it introduces and the potential for liquidations to be delayed.

Aave (AAVE)

Proposal: [TEMP CHECK] Merit – A New Aave-Alignment User Reward System

Author: Marc Zeller

Summary: This proposal requests to introduce “Merit” – an Aave-alignment user reward system. Merit is a Merkle-tree-based periodic airdrop system that incentivizes Aave-aligned behaviors.

Key Points:

• As the DeFi landscape becomes increasingly competitive, Aave seeks to innovate its protocol efficiency and appeal.


• “Merit” aims to distinguish Aave with a reward system that encourages actions that are beneficial for the protocol and DAO.


• The calculations of rewards will be kept private to avoid gaming and rewards will be used to determine the weekly distribution of stkAAVE and GHO rewards.


• The actions that will be rewarded:

–> Deposit LST, borrow wETH

–> Deposit LSTs, borrow wETH using emode

–> Deposit sDAI, borrow GHO

–> Deposit USDC/USDT, borrow GHO

–> Deposit AAVE, borrow GHO

• These actions can then receive boosts as a result of specific behaviors:

• Users will also face penalties for certain behaviors such as:

–> Being a user of a non-aligned protocol (up to -100% penalty) i.e., Morpho

–> Dumping a certain amount of the previous week’s rewards

–> Has not voted or delegated to a recognized Aave DAO delegate platform

• Users can also receive a bonus multiplier if they migrate from Morpho V2, Morpho V3, Morpho Blue, and Spark.


• Merit will run for a 90-day trial period and only be applied to Aave V3 Ethereum.

Our Take: The proposed points system incentivizes many good behaviors that focus on Aave’s near, medium, and long term growth.

Abracadabra Money (SPELL)

Proposal: AIP #44: Constitute a Depeg Contingency Fund

Author: Romy

Summary: This proposal requests to establish a Depeg Contingency Fund (DCF) which will use DAO funds to step in and improve the MIM peg and collateralization in situations of extreme stress.

Key Points:

• This proposal comes after the recent depegging of MIM (low of $0.8825) due to a recent exploit in their smart contracts that caused a $6.5M loss.


• The Depeg Contingency Fund (DCF) aims to act as a strategic reserve within the DAO to elevate MIM’s collateralization mechanisms and help solidify its $1 peg.

• The first initiative to fund the DCF will come from the DAO’s main asset and native governance token $SPELL. The DAO has plenty of SPELL in its liquidity mining treasury which can be used to help bolster MIM’s peg.


• This proposal requests to seed the DCF by minting 6b SPELL (~$2.9M) which will be held in a multisig.


• In the future, the DCF will be comprised of various strategic assets that will help boost MIM’s on-chain liquidity and collateralization.


• For the funds in the DCF to be used it will require a DAO vote.

Our Take: This is a great initiative that should help improve MIM’s peg recovery, however, without a PSM it’s very difficult to maintain a stabelcoin’s peg within a tight range.

Arbitrum (ARB)

Proposal: AIP: ArbOS Version 20 “Atlas”

Author: Arbitrum

Summary: This proposal implements a number of improvements to Arbitrum chains, including the capability to leverage EIP 4844 and support for Ethereum’s Dencun upgrade.

Key Points:

• Arbitrum is proposing ArbOS Version 20 “Atlas”, a hard fork that will include various improvements to ArbOS.


• The upgrade will bring 2 main changes 1) EIP-4844 support and 2) Partial support for Ethereum’s Dencun Execution Layer.


• EIP-4844 support will allow any Arbitrum chain that settles on Ethereum mainnet to be able to post transactions as either call-data or “blob-data”.


• This will allow for a reduction in gas costs for users on Arbitrum L2s.


• ArbOs Atlas will also provide support for 3 specific EIPs from Ethereum’s Dencun upgrade:

–> EIP-1153: new transient storage ECM opcodes – TSTORE and TLOAD for cheaper temporary memory storage

–> EIP-5656: new MCOPY EVM opcode for cheaper memory copying

–> EIP-6780: changes in functionality for the SELFDESTRUCT EVM opcode

Our Take: It’s great to see Arbitrum preparing for Ethereum’s Dencun Upgrade which is expected to bring a bunch of new cost improvements.

Votes

dYdX (DYDX)

Proposal: Add JUP-USD perpetual market

Status: Live.

Created: Feb 3, 2024.

Ends: Feb 7, 2024.

Leading Consensus: Yes – 84.97M DYDX (98.3% of total votes).

Summary: Wintermute has proposed to list the JUP-USD perpetual market on the dYdX Chain. JUP will be listed as a long-tail asset under liquidity tier 2. Trading will go live ~1hr after the proposal passes.

Uniswap (UNI)

Proposal: [Temp Check] Deploy Uniswap v3 on Zora

Status: Live.

Created: Feb 3, 2024.

Ends: Feb 8, 2024.

Leading Consensus: Yes – 25M UNI (100% of total votes).

Summary: This proposal requests to deploy Uniswap V3 on Zora – an emergent ETH L2 built with the OP stack. Zora has 90k weekly active users who drive 600k transactions every week. It’s expected that Uniswap will facilitate the transfer from ETH to multiple stablecoins so that content creators, builders, and collectors can have an easier time off/on ramping to Zora.

Radiant Protocol (RDNT)

Proposal: RFP-32: Delisting DAI from Radiant’s Arbitrum Money Market

Status: Ended.

Created: Feb 2, 2024.

Ends: Feb 5, 2024.

Leading Consensus: In Favor – 7.4M RDNT (75.24% of total votes).

Summary: Radiant is proposing to deprecate the DAI market on their Arbitrum deployment. This comes off the back of a notable decline in utilization and DAI market share. By delisting DAI, Radiant can redirect its resources and focus on higher-demand markets.