The Yearn wBTC Vault, DIGG Peg, and Alchemix Transmuter Mechanic

Hi all,

Been giving some thought to the DIGG peg since it’s struggled to maintain the peg since launch. One interesting avenue to discuss would be utilizing a mechanic similar to the Transmuter on Alchemix.

For those who aren’t familiar, the TLDR is that users can deposit their alUSD, which is supposed to be pegged to DAI, into the Transmuter to be converted linearly to DAI over time. The DAI for this process comes from the yield earned on the DAI collateral deposited in the yDAI Yearn vaults. You can also trade alUSD for DAI on Curve, but the Transmuter essentially acts as a backstop for the peg to help make sure that alUSD is always redeemable for DAI as long as you’re willing to wait.

alUSD is non-rebasing, however the question of how a rebasing token would respond if a similar mechanic complimented its rebasing functionality struck me as very interesting.

When Badger launched its Yearn wBTC Sett product, that potentially filled in the last piece of the puzzle. In theory, Badger could take set percentage of the wBTC Sett yield and deposit it into a contract that functioned like Alchemix’s Transmuter. Then users who wanted to convert their DIGG tokens to wBTC could deposit their tokens and the Transmuter would redeem them for the wBTC yield over time. This would create a very obvious arbitrage opportunity between the Transmuter and the DIGG AMM pools if DIGG was trading far below peg.

I think there’s the possibility that this structure could help stabilize the DIGG peg, but it’s not perfect, and there are some details that would need to be worked out.

  1. What would the DAO do with redeemed DIGG tokens in the Transumter?

Alchemix is able to seamlessly redeem alUSD for DIGG because alUSD is a synthetic stablecoin minted by deposited DAI as collateral. Once redeemed, the alUSD in question is no longer circulated. In contrast, as users utilized the Transmuter to convert DIGG for wBTC, the Transmuter would accumulate a position of DIGG tokens. So the DAO would have to decide what happens to those tokens. One solution would be to recirculate them as rewards through the Sett products. Another would be to stake them for yield once DIGG becomes more accepted as a lending asset on various lending platforms. However, the point is that these tokens are not truly removed from circulation, and the DAO would have to consider the impact of its actions when choosing to recirculate them.

  1. Does this mechanic align with the vision of DIGG as a rebasing token?

It should be considered, even for just a moment, if this proposed mechanic is philosophically aligned with the intention behind DIGG’s tokenomics. In other words, would the ability to redeem DIGG for wBTC at a 1-to-1 ratio, even if it took time to do so, defeat the purpose of DIGG being a rebasing token in the first place?

Would rebasing even still affect the supply at that point? I think it’s a possibility, especially since the rate of redemption in the Transmuter would be dependent on the rate of return from the wBTC Sett. So there’d be no guarantee of how long you’d have to wait for your deposited DIGG to fully convert to wBTC. Also, the redemption curve could also be dialed in by the DAO as necessary.

That said, would something like this be unfaithful to the rebase concept in the first place? Personally, I think it could be complimentary to it, but I could understand if others didn’t feel that way.

  1. Is there any guarantee that this kind of mechanic would actually stabilize the token and move it closer to its target?

I don’t think so. I’ve never seen a rebasing token utilize a mechanic like this within its ecosystem. So I have zero idea about how it would behave, just how I think it could behave. And I’m not an expert by any means. That said, I still think it’s worth a conversation, because it’s an interesting idea that could potentially address a challenge the community is facing with the product.

Thoughts? Pushback? Support? Iteration? All welcome. Just putting this out there to stimulate conversation about the idea.

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