Earlier this week I was thinking about a medium term solution while dealing with some insomnia. Since insomnia ideas are the opposite of shower thoughts, it might be terrible with some obvious failing. What’s more, this idea probably wouldn’t work all that well unless places like DEX.AG integrated it. I’m still wrestling with it, and the full version is probably its own post if not its own MIP, but here’s the short version.
We create a kind-of flywheel module to the Maker Protocol that is similar to the migration contract in that it has exclusive access to a set of collaterals with ideal parameters; a dark vault. Sane DC limits, 0% stability fees, 100% collateral ratio, and no liquidations. To the outside world this module would behave like a simple market trade. Show up with ETH, BAT, or USDC, and get ETH, BAT, or USDC amount of DAI out, where DAI is minted at $1. Same in reverse, show up with DAI and get back ETH, BAT, or USDC again where DAI is burned at $1. The former service would be used when above peg, the later service used when below peg. The one additional constraint is that the amount of liquidity is rate limited by seconds, risk, peg deviation, and some desired time-box where we return to the peg. I’m waving my hands at this formula for now.
At the time, this seemed like a great idea:
- For these time slices where DAI could be minted against collateral, we are no longer dependent on the fear/greed of market participants.
- The right formula could have us returning to peg within that timebox.
- More potent the further off-peg we get, and has very little liquidity when close to peg.
- Solves the peg problem efficiently when DAI is over peg and collateral markets are bullish, and when DAI is under peg and markets are bearish. Both rare cases.
- Felt cleaner than a TRFM solution or PID controller on rates, as we can side-step the rate and market incentivization problem.
| t1 | t2 | ... | tn |
| 12k DAI| 10k DAI| ... | 2k DAI|
Then, sweet sweet sleep came, and in the morning I started seeing all the failings:
I was trying to fit the solution too much to our existing problem. That is, it’s a reasonably elegant solution for a set of market conditions that are rare. Without going into detail on all the cases that could happen, it should be obvious that the underlying collateral is volatile and could leave those dark Vaults with either a surplus or debt.
The surplus case isn’t so hard to deal with as there are any number of things one could use the surplus for, burn MKR, buy DAI on the market, or just keep it around for a rainy day.
But the debt problem defeated me. The debt problem meant that the system would have unbacked DAI, and that we would probably need to accrue our losses to system debt, which could eventually result in flop auctions and dilute MKR holders. This might mean that the available liquidity should probably be proportional to system surplus, and since we burned that on Black Thursday, it doesn’t seem that helpful of a solution now.
Anyway, this is where I gave up on the idea, or at least pushed it to a more long-term consideration. I leave it here in case someone sees more failings or better yet, a way to make it work in the medium term. At very least, perhaps it will inspire other solutions. I don’t know, maybe there’s a way to integrate your idea for this failure case.