@MakerMan got it. Thank you for the valuable feedback, and handling many questions from the community this afternoon on the Maker Community Call! Would love to meet you one day in person!
Once we plug the leaks by a) introducing improvements to the Collateral Auctions b) onboarding more Keepers, lets figure out how MakerDAO could emerge from the crisis stronger than we were just a week ago.
Moving forward, lessons we all learned today are highly important when it comes to considering new collateral applications to MCD.
Specifically, I would like to bring forward four recommendations:
1. Encourage low LTVs for new collaterals during early days of such collaterals in MCD - Even when collateral value is not as volatile.
Where does this recommendation come from? During the last 9 months I had an opportunity to prototype risk model, calculate stability fee, LTV, debt ceiling (as an independent risk team) in pilots of a new collateral candidate (accounts receivables aka invoices). We were successful at originating real-world loans to trucking companies using DAI using their invoices as collateral (privately sourced DAI deployed to trucking companies who pledged off-chain collateral and borrowed DAI from a legal entity, just without MCD). Based on this experience in finding a product/market fit for MCD in traditional capital markets, I believe we should encourage new collaterals not to attempt replacing most commong legacy financial lending products (which often have very high LTVs). Instead, we should encourage new collateral applications (most of which are in the originating business) - to focus on a “low LTV product-market fit” - a niche in the respective lending markets where borrowers are comfortable pledging said collateral and borrow DAI from MCD at MUCH lower LTV ( such as home lines of credit - i.e. 50% to 70%) and not lending products with high LTV (such as mortgage loans at 80% or 95% LTV).
Example #1: Accounts payable collaterals (invoices of businesses). These guys will argue that 90% LTV IS safe because invoice factoring companies offer 98% LTV (they buy invoices outright). We must argue and encourage such applications to find a niche in the market where borrowers are OK to borrow at 50% LTV.
Example #2: Real estate collateral - we must encourage collaterals to find borrowers who want a “line of credit” type of product (who are OK with low LTV product) instead of a “mortgage” type of borrowers (these folks expect 85% or even 95% LTV product).
2. Define what a “Minimum Viable Keepers” market should be before we allow them into MCD. For example, make sure new collaterals have at least 3-5 Keepers specializing in, and native to this collateral (for example Keepers who understand the collateral, or enough “off-chain auction” participants collection agencies specializing in buying invoices,
3. Conservative debt ceiling allocations. Start with small debt ceiling, and only increase debt ceiling with growth of # of Keepers and history of participation in auctions.
4. Custom Auction Parameters for each collateral. Adjust parameters through governance based on risk/size/liquidity. Think custom Collateral Auction parameters for each collateral (for example:
4.1 liquidation penalty of 10% for real estate, 15% for account receivables, 20% for BAT, 25% for RenBTC
4.2 Consider activation of collateral-specific lot size
4.3 Consider activation of collateral-specific delays
4.4 Consider activation of DYNAMIC liquidation penalty. Liquidation penalty does not have to be static. It could be adjusted according to the risk this LTV and this collateral brings to the MCD system. For example, we can tie liquidation penalty to a bonding curve LTV (for example 50% LTV for collateral X = 10% liquidation penalty, 70$ LTV for the same collateral X = 20% liquidation penalty).
I hope that community considers recommendations above with the goal to reduce probability of Collateral Auction collapses in the future.