Making Gro protocol more resilient

Vault and PWRD were the first two products built by Gro Protocol and went live on Ethereum mainnet in June 2021. The products have continuously been refined by many DAO contributors with changes to both core mechanics and yield strategies. The depegging of UST demonstrated one of the protocols key mechanics that allowed PWRD protected yield, while Vault took on higher losses to provide that protection. But it also showed the need to further refine the protocol and risk procedures to make it more resilient.

TL;DR — Gro Protocol was impacted by the depegging of UST, the third largest stablecoin by market cap, in May. Since then Gro DAO has planned and implemented changes to make its yield strategy operations more decentralised and resilient, so to reduce impact if similar events would happen again.

That is why Gro DAO has invested a lot of time post-depeg in improving the protocol operations. Let’s take a look at these improvements one by one.

• Deeper DAO involvement in yield strategy selection
• Reflecting stablecoin price volatility more frequently
• Stop-loss on yield strategies
• Maximum 50% exposure for Vault to any single strategy
• Utilisation ratio cap at 80%

Deeper DAO involvement in yield strategy selection

When Vault and PWRD users stake their tokens, they can earn GRO rewards that translate into votes for whitelisting yield strategies. Instead of voting for the strategy risk profile (as in Vote 9) and tacitly agreeing to strategies by using the products, DAO members can now vote on which specific yield strategies they want to whitelist. Among the whitelisted strategies, a selection based on pool depth, yield and diversification is used for generating yield.

Vote 15 (split into A to H) wrapped up on 20th May to whitelist the first 6 strategies on Curve/Convex that led to the addition of alUSD-3CRV, LUSD-3CRV, and OUSD-3CRV into the active portfolio, while removing MIM-3CRV from it. More will come as the stablecoin yield landscape changes — watch out for new votes coming up at https://vote.gro.xyz and suggest new ideas at https://community.gro.xyz!

Reflecting stablecoin price volatility more frequently

Most harvests bring yield to users, but it’s not always the case. When the market has doubts on a stablecoin used in one of the yield strategies, traders swap that stablecoin for something they think is safer. This lowers the stablecoin’s exchange rate against other assets in the strategy and may in turn decrease the market value of that strategy. Trading fees and governance token rewards may not be enough to offset that value loss and a harvest at this point will reduce the value of Gro Vault.

Before the next harvest is run, Gro Vault tokens redemption value does not reflect the changes in underlying stablecoins’ value. This creates a window for Vault users to withdraw and front run those losses. The protocol will now more frequently trigger harvests when loss thresholds are met due to stablecoin volatility. On the flipside, when stablecoins recover their peg, those will result in a profit for the Gro Vault.

Stop-loss on yield strategies

DeFi is still a very new space — the fundamentals of yield strategies could change rapidly even if the DAO has vetted and whitelisted them. When a situation deteriorates quickly, the full DAO governance process may not be agile enough to act fast. This is why a stop-loss mechanism approved by the DAO can better guide the emergency response when a yield strategy is at risk of failing.

Gro DAO voted to establish a yield strategy stop-loss in June 2022. Funds would be pulled out of a strategy if the protocol would receive less than what the stop-loss indicates accounting for slippage. As the strategy can grow in size, this means it could be triggered before the “market price” of the exotic stablecoin reaches the stop-loss level as a larger transaction tends to incur a higher slippage. To avoid loss of funds due to a temporary dip, action will only be taken once the stop-loss level is breached for an extended period of time. The exact implementation will adjust to address potential malicious attempts to game the stop-loss mechanism.

It is worth pointing out that this would crystallise losses for all Vault users as funds will be withdrawn and converted back to one of the 3 major stablecoins. But how much loss would that be for Vault users? To understand that, we also need to look at the exposure to each yield strategy. Read on to find out more!

Maximum 50% exposure for Vault to any single strategy

While Gro’s Risk Balancer optimises for strategy exposure at a system level to ensure diversification, its objective has so far been optimising the overall system exposure which includes both PWRD and Vault funds.

Vote 15 has introduced a maximum Vault exposure cap of 50% to limit Vault users’ exposure to any “exotic” stablecoin paired with 3CRV (DAI, USDC, USDT) in the yield strategies. This means that Vault users will not have more than 50% of assets at risk to any one exotic stablecoin collapsing, once implemented with the upcoming G² protocol upgrade. This exposure is calculated by system exposure of an asset * (1+ utilisation ratio), where utilisation ratio could go as high as 100% at which point Vault exposure would effective be 2x system exposure. Now let’s turn our focus to this ratio.

Utilisation ratio cap at 80%

Utilisation ratio is the bedrock of how PWRD and Vault work together. Defined as PWRD TVL divided by Vault TVL, this ratio determines how Vault shares yield generated on PWRD funds and how much protection it offers in return if any assets are lost. As PWRD is protected against the total collapse of exotic stablecoins, Vault TVL needs to at least match PWRD TVL in the system. In other words there is a natural cap for utilisation ratio at 100%; once it is reached, PWRD cannot take more deposits and Vault funds cannot be withdrawn.

While setting this cap at 100% would be the most capital efficient, it also means any Vault write-down if a strategy fails could bring utilisation ratio above 100%. This would stop Vault withdrawal at the smart contract level. Setting the utilisation ratio cap for PWRD deposit at 80% of Vault helps create more breathing room for Vault withdrawals. Together with the profit-sharing curve kinked at 80% utilisation ratio, this cap should also help steer utilisation ratio away from 100% at any time so it would take a more impactful hit to Vault for withdrawal to become unavailable.

Conclusion

While we build to deliver more value to people, we also have to prepare for the worst scenarios. Gro DAO and its community have shared very valuable feedback on how protocol operations can be improved to weather the worst storms. This post has outlined some key steps Gro protocol has taken based on the feedback, which has made Vault more resilient than just a month ago. The design will continue to evolve as the DAO governance suggests and votes on new strategies and parameters — don’t hesitate to let us know your suggestions in our Discord at https://discord.gg/gro!

Making Gro protocol more resilient was originally published in Gro Protocol on Medium, where people are continuing the conversation by highlighting and responding to this story.