Are Polls Going Out Today
- Lev Livnev: I would say that the most important thing would be to discuss what actual steps should be taken. I expect that a lot of assets in Compound will get shuffled around after the patch, which makes some of the possible calculations incorrect.
Unknownname: If the SF for Dai is increased, but the demand for Dai for people to put into Compound stays the same, basically it transfers the pressure from people who are minting Dai to people buying Dai in the open market and probably pushes up the Dai price maybe significantly if people cannot make more Dai and relieve that pressure.
- Cyrus: that’s a good point. When you increase
SF, that’s typically what’s used to push the Dai price back up. What we want to focus on is do whatever we can to increase supply, so definitely a good point.
LongForWisdom: We have had emergency polls and votes before, so that’s fine. In order to be comfortable doing that outside of the weekly cycle, as a Governance Facilitator, I would want either a clear forum poll asking, “does the community think that we should take emergency action to fix this, outside of the regular cycle?” Ideally, with a clear idea of what we want to do as an emergency action. Either that or, if Cyrus, as the risk domain team, thinks that we should take emergency action. Then it would make sense to do that. If we think we should act now, we could potentially do that. Alternatively, we can wait and put some polls up on Monday. Or wait, and if things get worse in the next few days, then we can do emergency actions then.
Chris_p: So does anyone know when the new patch is going to be applied? Is it tonight?
Cyrus Younessi: I believe so.
LongForWisdom: I think it’s 2h15 from now. I could have the timezone wrong.
Chris_p: are people going to be paying attention on July 4th? Could we have another governance meeting potentially if things look bad? We should have somewhat of a plan to at least work over the weekend where the market could be moving really fast, and a lot of people might be away?
LongForWisdom: We can definitely do emergency governance meetings; we have had those in the past. Either Cyrus says that we need to do something as an emergency or the community votes, and there’s a consensus to do something immediately.
Cyrus Younessi: For what it’s worth, I’ll be monitoring this.
USDC Stability Fee Signal Request
Andy Tudhope: Since the USDC debt ceiling is maxed out and in line with Lev’s points, it might be potentially a good idea to get ahead of that. Cyrus, while I agree with you in principle, if we decide that the centralization risk is sitting between 30 to 50 million, and there’s, in principle, no difference between 100 million and 1 billion debt ceiling, I think that in practice there is a difference, and it has to do with the fact that governance is largely about optics. The community is doing everything it can to defend the peg. A preemptive small raise on the USDC-A debt ceiling might not be a bad thing to poll in the forums now after the call, just to prove that this is something that we’re carefully watching and considering for the wider community, people outside this call.
Cyrus: That’s a very valid point. I would suggest after the call we put out a signal request. At this point, I’m not even clear on what sort of options we want to put on the table. I would love to get some clarity on that, either on this call or afterward on the forums, and we can start working on a governance poll.
LFW: It would be good to have a better idea of what our options are in various situations, which might be good to try to figure out in advance.
Chris_p: Immediately, we all agree that there’s an issue with USDC-A vaults. Maybe we just try to kick a poll with some parameters around, raising the debt ceiling, increasing the stability fees, and taking it from there. That’s the type of action that we’re very comfortable doing. We have a lot of history raising stability fees, and lowering and raising debt ceilings. It seems very natural; I guess that’s what I’m saying.
Cyrus: anyone else? Lev?
- Lev: I would probably lean against raising
DC without raising the
SF because that would be potentially eaten by the same trader since we didn’t figure out at what stability fee it actually breaks even. On the other hand, if we are increasing the stability fee, it could be appropriate to increase the debt ceiling. But just feeding this trade, assuming that this behavior isn’t irrational, doesn’t help.
Stability Fee Raise Tradeoff
Cyrus Younessi: Don’t we risk raising the
SF high enough so that it’s no longer profitable to do the intended function, which is arbing the peg down? Don’t you almost need to keep it low enough until all the excess demand from Compound is diluted away, and then they start arbing the peg?
- Lev: I agree we’re trading off, that setting it too high would be counterproductive. But you have to keep in mind that most of the debt ceiling is currently being used on this COMP trade. This means that by clearing that up, you could potentially get more room than from scaring the so-called legitimate part of that Dai generated from USDC. Secondly, I think it’s acceptable to raise the
DC if we come to the conclusion that a good number would be somewhere in the 3% - 13% range. You could still imagine people using that for peg arbitrage at Dai price of 1.01 and higher. I think that heuristically that seems reasonable. And basically, we’re in a much worse situation if we have no USDC rope at all. Imagine if another exogenous situation were to happen right now, like ETH getting bearish. We have no rope at all in the USDC-A debt ceiling. It’s not a good situation.
Signal Request Threads
Cyrus: What about a signal request thread for the debt ceiling and a signal request for the stability fee? Maybe we can put those out today, and we put out a governance poll maybe tomorrow so that people have a chance to see what happens during the course of today and take it from there?
[Signal Request] ETH-A Stability Fee and Debt Ceiling adjustments
State of the Peg
Dai peg has come up in the last 48 hours. COMP activity and ETH prices looking good. The combination of both things creates a liquidity crunch on Dai. Prior to the shift in secondary-lending-interest-rate-models for Dai, there was a fair amount of buffer in the amount of available supply for borrowing. From that perspective, the impact on the liquidity crunch was mitigated. But I do think it will continue to have a potential price impact.
It shouldn’t be a surprise to see Dai prices at $1.01 or $1.02. There is often an impact on price from secondary markets since, very often, it’s a circular relationship. In this particular case, there is a rapid use case for Dai on secondary lending markets, a fact that Cyrus touched on. The impact COMP farming has on a particular underlying asset is elevating supply rate and depressing borrow rate; because both sides are compensated by the underlying yield token (which in this case is COMP.)
We’ve seen this in a different context. When you have a low borrow rate and a high supply rate, it incentivizes rapid refinancing and secondary market re-wrapping and basically pursuing a large degree of leverage very quickly. In the past, we have seen that the yield for those rates doesn’t necessarily last very long.
That’s the scenario you want to try to consider and manage against. For the peg, that price could potentially continue to go up. That’s something to be wary of.
ETH-A supply, you see short term ups and downs, while the last 48 hours has been flat.
There are other more interesting things to be doing with your capital at the moment, rather than putting it into Maker and generating Dai.
- WBTC continues to stay level since it’s maxed out.
- USDC-B not in use right now.
- KNC is a new thing, so small amounts.
- BAT, we saw on a large impact in March, and then it continued to rise through May. Basically, in the last couple of weeks, the remaining amount of BAT borrowed has shrunk, probably as a result of yield farming on Maker assets.
- Zooming in a little on just the last three months; Once there was a more attractive yield for BAT, it was refinanced away. The amount of Dai minted from BAT went down.
- Looking at USDC, which has been sporadic since May. And now, in the last 24 hours, it maxes out utilization very quickly. This isn’t a surprise.
Just looking at Compound markets, BAT became the asset for yield farming. With better opportunities, the supply in Maker shrank. The amount of Dai minted from ETH has slowed, and the collateral amounts are smaller.
On USDC, we saw a large amount supplied and a great amount borrowed. Pretty comparable numbers, in nominal value, to Compound.
More on USDC; We saw a large amount supplied and borrowed on Compound, and correspondingly, a large amount of Dai minted from USDC on Maker. We can expect this pattern to continue, given the attractiveness of the rates on Maker. There is a lot of risk math. Given a low collateral requirement and that it’s relatively safe and stable trade, that makes it a potentially very attractive option. That’s an important conversation for what kind of debt ceiling you want to manage on USDC.
A decent amount of Dai has been both supplied and borrowed on Compound too. It’s important to keep an eye on it. We’re talking about behavior, peg, supply, demand, etc. What is the underlying risk that’s being created from this behavior? You have 61 million Dai out of 140 million as supply on Compound. That’s a large chunk. And the larger that chunk, the larger part of the conversation of what is the total risk of the system, for Maker. That share could potentially grow larger, so it’s undeniably an important part of the conversation.
- For ETH, we didn’t see a large movement in the amount of Dai minting, but there has been a movement in the amount of collateral. Since it’s attractive to supply ETH to Compound, that changes the mental calculus for certain users around how much ETH to leave sitting on Maker. Though they aren’t making large changes on the amount of Dai that they have minted from that ETH, I think there have been some shifts in individual users in the amount of ETH sitting as excess collateral. We’ve seen the 200-250% and 250-300% collateralization buckets grow. 300-350% has shrunk as well as 500+%. I think this has gone from being a trimodal graph to being a bimodal or primarily dominated by this 200-350% collateral range. I think it’s very clear why.
- If we look at some of the largest USDC positions on Maker, the biggest one is at roughly 16 million at around 120% collateralization ratio. This has been the conversation with USDC since it was added, there was never a discussion around price volatility risk. But there are risks when the collateral type becomes more and more prominent month by month. It’s important to note that it’s a non-negligible share of the total amount of Dai that exists. What are the risks you assume as it grows?
- In the last seven days, BAT was predominant in the loans originated on Compound.
- In the last 24 hours, there’s a creeping share of that Dai and USDC interest. WBTC is a different conversation.
Cyrus Younessi: I wanted to highlight that it is definitely not a foregone conclusion that Dai will be the highest utilized asset for COMP farming. We want to focus on the oversupply of ETH and USDC. So right now, ETH is 242 million versus three million. And USDC is 227 million versus 34 million. So the gross borrow for ETH is up 500%, and USDC is up 21%. If those numbers continue to increase, all that ETH supply that’s sitting there starts to become borrowed by its owners, reducing the spread. That would be beneficial for us. It’s also the rational course of events over the long run. This goes back to Lev’s forum post from yesterday. If those large ETH suppliers don’t borrow their own ETH, the impact might come back to Dai.
- Vishesh: Two important stats there. You can see the excess supply for ETH. It’s huge. The attractiveness of the rates is the name of the game. Wherever is the most attractive yield is where the capital moves. In this case, how the attractiveness of the yield is determined, I think it depends on the share that the borrowing markets have on the market and the share of the total interest in Compound. There could be a whole conversation around the attractiveness of the different assets on Compound. If those rates aren’t as attractive as borrowing your own ETH on Compound, you could see the scenario where that interest shifts to a different asset. That was exemplified with BAT as the attractiveness shifts, so does the interest. So it could potentially be a moving target.
- We are passed the hour now, so the Q&A session is officially on if anyone has questions about anything.
Dai Interest Model on Compound
Akash: It seems from the comments that Dai is right now the most attractive because of the differences between the borrow rate and the deposit rate. There is currently a Dai interest model vote going on on Compound that is pretty contentious. It’s the first time I’ve seen not 100% go one way. Does anybody have any opinions on: first, the vote going on on Compound and how it would affect Dai? Second, if the interest rate difference on Compound was larger than USDC, between the borrow rate and the deposit rate, wouldn’t that solve our problem of why Dai is going to Compound? Because of the recycling effect? I’m hoping everyone understands my questions.
- Lev: I am not actually convinced that post-patch the spreads between the displayed supply and borrow interest rates are actually the dominant factor, and it is because post-patch the interest rate per se doesn’t go into the COMP yield calculation anymore as it does now. So the interest rate is an additional cost you have to pay on your COMP farm, but the COMP yields themselves are huge. Unless you are really paying a lot of interest, and generally, when you are recycling, you’re making back most of what you’re paying on the borrow on your supply. So keep in mind that, just for numbers that I’ve looked at, you end up getting something like 80% APY COMP yield, obviously at current prices, etc., while paying 5% APY on the actual spread between the supply and borrow. Essentially, the supply and borrow ends up being less important, and what dominates the COMP yield is the relative share of lending and borrowing on that market, which can be a much bigger difference between different assets. I just wanted to point that out for you to keep in mind.
Are Large Yield Farmers selling their COMP
Akash: Right. Another question that might be unrelated; I don’t know if anybody has done any research. All of the guys that are recycling on Compound, are they completing the arbitrage by selling the COMP token, or is this a way for them to accumulate COMP tokens? Because that would help some of the understanding of what is driving this. Does anybody know that?
- Cyrus: I don’t think that a lot of people are speculating too much on the price of COMP, to be honest. I think that it just adds an additional variable to the overall business model. Sure some are because they have opinions, but I don’t think it’s a core part of the entire operation. Of course, the entire concept of COMP farming has blown up because of the sustained high prices, that’s definitely true.
The Source of the COMP Subsidy
The COMP Arbitrage
Nuclear Option QE for Dai
Lev: I just thought I’d mention an idea for a nuclear option if the situation gets really out of control. In principle, MakerDAO can do a type of open market operation where it mints a large amount of Dai, puts it into Compound as supply, and then takes the cDAI essentially as collateral onto its balance sheet. By doing this, you could essentially flood Compound with an arbitrarily large amount of Dai; it could be like one trillion Dai or something. [laughs] Essentially, have all this cDAI on your balance sheet instead. That would essentially wash out everyone’s COMP yield.
- So firstly, it would make the supply side of the Dai market so big that no one is going to be making any money on the supply side. At that point, I think that could really tip the scales in favor of literally any other asset; and it will also mean that Maker would be collecting the COMP for the Dai part so there would be no way of making money involving Dai on Compound anymore. It would all just become collected by MakerDAO. It’s just worth thinking about that possibility, and it’s relatively safe because we are taking the cDAI onto our balance sheet as collateral, so we are collateralized by the other Compound assets.
Lowering the Collateralization Ratio
Cyrus Younessi: You can achieve something similar without the social implications. I mean, if the liquidation ratio goes low enough to 101%. I think that at 100X leverage, that would be incentivizing the market makers to do pretty much the same thing, right?
- Lev: Yes. I just like the component where we can take the cDAI on our balance sheet to avoid taking additional risk. Obviously, if you flood the Dai supply too much and it actually leaves Compound, then you have too much supply. But I think the difference between what I suggested and what you suggested is that we can actually take the cDAI as collateral, like 1 to 1 basically. It is literally QE for Dai, right?
Interest Rate of QE
Ideal Proposal for COMP Governance
Interest Rate Curve Calculation
Sam MacPherson: Right, I don’t know how feasible this is but we could set up an ETH-B, move people over to that one, and the time frame is probably not reasonable but just as another sort of crazy option, and then up the ETH-A stability fee to whatever we want to, to make it unattractive.
- Lev Livnev: Yes, I’ve also thought about that. I think that is also one of these backdoor hacks that might work, especially in the extreme. It’s not even inherently obvious that if you just manage to jack up Compound supply borrow versus using the stability fee as a backdoor, then you would actually make the situation better because you might also just incentivize a bunch of supply into it; Because imagine that we have this ETH-B which is very cheap and we trick Compound into making their supply and borrow rate for Dai really high then we might just end up incentivizing more of it getting sucked in. I mean, they also have the right to upgrade their interest rate model again so that they don’t have this backdoor as well. So it’s a little bit adversarial obviously.
Signal Request for USDC Debt Ceiling and Conditional Stability Fee
Cyrus: Just to confirm, after the call today, I’m going to put a signal request for the USDC debt ceiling and a conditional stability fee.
LongForWisdom: Yes, that was my understanding.
WBTC Stability Fee
MCD: The Multi-Collateral Dai system
CR: Collateralization Ratio
DC: Debt Ceiling
SF: Stability Fee
DSR: Dai Savings Rate
MIP: Maker Improvement Proposal
GSM: Governance Security Module
Tim Black produced this summary.
David Utrobin produced this summary.
Gala Guillen produced this summary.
Juan Guillen produced this summary.
Everyone who spoke and presented on the call (listed in the headers.)