[NIP-28] Onboard UNI as a Collateral Asset on Notional V3

[NIP] Notional Improvement Proposal
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Title: [NIP-28] Onboard UNI as a Collateral Asset on Notional V3
Author(s): Anthias.xyz Team
Submission Date: 30 October 2023

Summary

The following is a proposal to onboard UNI as a collateral currency option on Notional V3. The Anthias team thinks UNI would prove valuable for the Notional community as a collateral asset and thus would like the community to consider & discuss onboarding UNI as a collateral type.

Resources

Minimum requirements for consideration checklist

Application

1. Provide a brief overview of the proposed asset and its underlying project.

  • UNI is the governance token for the Uniswap decentralized exchange. UNI is used to govern the protocol.

2. How is the asset currently used (staking, collateral on other lending protocols, etc.)? Provide relevant activity KPIs.

  • The UNI token has no built-in staking mechanism, so in order to earn yield on UNI, holders lend it. UNI is currently a collateral asset on Compound V3 mainnet deployment.

3. Detail why you believe the project should be added to Notional either as a collateral asset or as a tradable asset and the potential benefits of doing so. Explain why you think the demand for this asset is sufficient to list it on Notional.

  • Uniswap is the largest and most popular DEX. Its governance token, UNI, meets the criteria to be onboarded as a collateral asset on Notional V3. UNI is still a nascent asset in the lending space, and with its high liquidity and low slippage, it could be a great asset to onboard to Notional V3 with a proper launch supply cap in place.

4. Provide information regarding the organization behind the project.

  • The Uniswap protocol was developed by Hayden Adams and is maintained by the Uniswap Labs team based in New York City. Uniswap is the most popular decentralized exchange as ranked by TVL (Uniswap currently has a TVL of over $3B). The founder, Hayden Adams, is a known public figure, and the team has been backed by firms including Fred Ehrsam’s Paradigm.

5. Provide information regarding past hacks or major bugs and how the team addressed them.

  • In July of 2022, Uniswap was subject to a phishing attack where a hacker tricked an LP into supplying liquidity into a false pool, but the Uniswap team has stated that this was not an exploit of the protocol. (Read more here.)
  • In April of 2023, Uniswap was the subject of a sandwich attack that cost the protocol around $25M. (Read more here.)

6. Provide an overview of the token’s market data.

  1. Market Cap: $3,238,348,875
  2. 24H Volume: $161,207,445
  3. UNI Volatility (UNI price compared to ETH over past 12 months)
  • UNI has a volatility of 4.16% over the past 90 days, according to CoinCodex.
  • Chart via CoinCodex
    1600Ă—944 135 KB

4. UNI DEX Liquidity (DEX Guru)

  • UNI has over $9M of DEX liquidity at the time of posting this proposal according to DEX Guru: DexGuru

5. UNI DEX Slippage

  • UNI slippage for a 1M USDC swap is currently about 1.98%.

6. Provide an overview of the token emission schedule and major holders.

  • According to Uniswap Tokenomics, the initial token launch date for UNI was 1 Sept 2020. The maximum supply of this token is capped at 1,000,000,000, with a linear emission rate since genesis. The supply of UNI is expected to be fully vested by Sept 2024. A perpetual inflation rate of 2% per year will start after 4 years once the initial capped supply is reached, ensuring continued participation and contribution to Uniswap at the expense of passive UNI holders.

Conclusion

The Anthias team would like to gauge sentiment and hear thoughts from the Notional community with regards to onboarding UNI as a collateral type to Notional V3. Please share thoughts/questions in the comments of this forum post, and feel free to reach out to 0xBroze (@0xBroze on Discord or @OxBroze on Telegram) with any questions.

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About Anthias

Anthias is a risk management organization that also builds tools for easily monitoring liquidation risk for DeFi borrowing/lending markets. The Anthias team has shipped multiple grants for Euler, Aave, Compound, and more. We also recently posted the collateral asset onboarding proposals for cbETH, GMX, ARB, and RDNT on Notional V3.

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Date of analysis: 2023-11-03

Summary

Following up on the @Anthias.xyz proposal, we assessed the risk implications of listing a Prime UNI market on Notional’s Arbitrum deployment. If the DAO is in favor of listing UNI then we suggest listing the asset with an initial supply cap of $500K (~120,000 UNI), a liquidation discount of 8%, and an implied minimum collateral ratio of 140% vs stablecoins. Our asset onboarding review highlighted no significant technical issues to list the asset. We welcome community feedback before this proposal is formalized into a Notional Improvement Proposal (NIP) and goes to a formal governance vote.

Asset Overview

  • Asset symbol: UNI
  • Underlying Protocol Name: Uniswap protocol
  • Historical daily volume (avg. last 30 days): $161M (CEX and DEX)
  • DEX liquidity (Arbitrum): $4M
  • Market cap: $4.8B
  • Total supply: 1,000,000,000 UNI Tokens

Economic Risk Assessment

Asset ownership & DeFi presence

UNI is currently held by 26,359 wallets on Arbitrum. The top 100 wallets own 88.96% of the supply. 61% of the token supply on Arbitrum is in GMX. 11% of the UNI supply is currently in the ETH/UNI uniswap pool.

Underlying protocol KPIs

The Uniswap protocol facilitates in excess of $500M in trading volume from more than 60K addresses daily across all its deployments. The protocol’s TVL currently is $3.32B. Uniswap is the most popular DEX on Ethereum and has been live since 2018.

Token

UNI is the utility and governance token of the Uniswap protocol. UNI token holders can vote on governance proposals and could eventually receive protocol fees if the fee switch is activated.

Historical volatility

UNI historical price vs ETH

Chart1226Ă—556 60 KB

Historical volatility analysis

UNI

Time period Volatility (last 90 days) Annualized vol (last 90 days) Volatility (last year) Annualized vol. (last year) Source
1h 0.64% 59.59% 0.68% 63.30% Chainlink
1d 2.99% 57.12% 3.75% 71.65% Chainlink

ETH

Time period Volatility (last 90 days) Annualized vol (last 90 days) Volatility (last year) Annualized vol. (last year) Source
1h 0.37% 34.53% 0.56% 52.18% Chainlink
1d 1.72% 32.87% 2.92% 55.80% Chainlink

Historical maximum drawdown analysis

UNI

Time period Max drawdown (last 90 days) Max drawdown (last year) Max drawup (last 90 days) Max drawup (last year)
1 hour -7.03% -7.03% 5.42% 5.42%
1 day -11.85% -20.05% 11.54% 17.97%

ETH

Time period Max drawdown (last 90 days) Max drawdown (last year) Max drawup (last 90 days) Max drawup (last year)
1 hour -5.38% -7.20% 4.96% 7.36%
1 day -10.44% -24.99% 7.07% 17.86%

UNI has historically been more volatile than ETH. It also had more pronounced drawdowns than ETH’s over the last 90 days making the asset more risky.

Therefore, we propose a 140% minimum UNI/USDC collateral ratio. This would protect the protocol against the worst historical maximum drawdown over a 1 day period. This implies that the protocol would have still been overcollateralized if risky accounts were not being liquidated for a period of 24 hours.

Asset liquidity

UNI to USDC slippage analysis:

Expected slippage Trade size
0.5% $750,000
1.0% $765,000
2.0% $770,000
3.0% $780,000
4.0% $785,000
5.0% $810,000

UNI (arb) is listed on Uniswap V3 and GMX and benefits from relatively good liquidity with approximately 2% slippage for a $770K trade.

On-chain liquidity breakdown (on Arbitrum):

DEX UNI liquidity (Arb) Non UNI liquidity (Arb)
Uniswap V3 $528,000 $16,000
GMX $2,485,000 $975,000
Total $3,013,000 $991,000

We propose setting the UNI supply cap at $500K in order to gauge demand from UNI suppliers. If there is high demand for UNI on Notional the DAO could increase the supply cap at a later date if UNI’s liquidity profile on Arbitrum supports such a decision. Given that most of the UNI liquidity is on GMX, monitoring how liquidity evolves on GMX is going to be important.

Other notable risks

UNI is also subject to smart contract risks. A potential vulnerability in the protocol’s contracts could lead to a rapid price decline in the value of UNI.

Security Assessment

As mentioned by @anthias in the initial post, the Uniswap protocol underwent multiple security audits from top auditors.

Implementation Review

No specific integration challenges have been identified.

Proposed Risk Parameters

Based on the different analyses presented above, we propose listing UNI with the parameters presented in this spreadsheet. Based on UNI’s historical volatility profile, we propose to list the asset with exchange rate haircut and buffer parameters that imply a minimum collateral ratio of 140% for USDC borrowers. Based on current on-chain liquidity we propose to list the asset with a 8% liquidation discount. We think a 8% discount is sufficient to allow liquidators to liquidate GMX profitably under historical market conditions. Finally, we propose to list the asset with an initial supply cap of $500K (120,000 UNI).

We propose the following listing Prime UNI interest rate curve. The proposed interest rate models imply a 2.26% borrow interest rate and 1.23% supply interest rate at the target utilization rate.

Risk Parameters Benchmarking

Parameter Aave V3 (Mainnet) Compound V3 (Mainnet) Notional V3 (Arbitrum)
Liquidation Discount 10% 7% 8%
Minimum Collateral Ratio (vs USDC) 130% 133% 140%
Supply Cap (USD) N/A N/A $500,000

The proposed liquidation discount is in line with the discount used by Compound and Aave on Mainnet. The proposed minimum collateral ratio is more conservative than what Compound and Aave offer on Mainnet.

Resources

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