Confidence in the Peg

Confidence in the Peg is what makes this whole system work. The more confident MakerDao participants are in the Peg the more action they are willing to take in and around the system. A persistent $1.02 Dai price does not inspire confidence. In fact, the reason the Dai price has been $1.02 for so long is due to a lack of confidence in the Peg and governance around it. The market participants (myself included) are unwilling to take the risk to lock collateral up in vaults right now and issue Dai to sell because we are afraid that governance will not take the necessary steps to correct the Peg in the markets.

We are currently proving them right. The markets allow participants to partake in arbitrage at any price higher or lower than a range of about $.9975 - $1.025 and still have profits. however, this is only if the market believes that the MKR governance is going to steer the Dai price, through its actions, back to where it belongs in a reasonably short time. We need to take action to restore confidence by steering the Peg back to $1.00 immediately.

Picture MakerDao confidence like a sailboat and the market participants are the sails. If we do not provide the wind, MakerDao will struggle to get anywhere as an organization. If however, we show that we will provide lots of wind. The sails will open up and we will be off at great speeds with high Peg confidence the way the system was DESIGNED. We should have rates at 0% right now or perhaps even a cost to holding Dai until the Peg is where it needs to be. We should always be correcting the Peg that is how you build confidence and that is how you get the Peg to correct itself over time.

If Peg is over $1.00 make holding Dai hard and creating Dai easy (and safe for the arbitrageurs to do). If Peg is under $1.00 make holding Dai easy and creating Dai hard. If we do this we will have success. Peg confidence is the #1 goal of the Dao. Lets get it handled.

6 Likes

Every time the Dai price has a period under the peg market forces drive it to $.995 and the same is true above the peg towards at least $1.005. The more we oscillate above and below those ranges as tightly as we are able to without much wandering for long the faster our ship sails and the more confidence and liquidity we pick up along the way from all actors on every single side of the system. By letting it sit above or below $1.00 for too long we tired out that side and no longer gain anything significant. It is far more efficient to swing it back to the other side and gain the new momentum + let the over worked side rest so they can be ready to participate again the next time we go over $1.00. This is what gives market participants on all sides confidence and allows everyone to truly KNOW that the peg is $1.00 and that it will be maintained well.

2 Likes

The USDC SF will be lowered soon. https://vote.makerdao.com/executive-proposal/adjust-multiple-risk-parameters passed.

2 Likes

USDC is meant for emergency liquidity not to be something arbs are using regularly to balance the Peg. When the price of Dai is above the Peg Dai supply needs to expand. Decreasing demand for Dai would also work. Both is better. What has been done since last week to increase Dai supply and to reduce Dai demand?

Changing system rates to facilitate the proper expansion and contraction of the Dai supply is what keeps the Peg strong and builds confidence. These rates have not gotten the Peg to where it belongs. It is time to change rates again. It is up to MKR governance. Do you want Dai to work as a Stablecoin and MKR to have value? If you do, then you will correct the Peg swiftly even if it means over-correcting. Over-correcting is far better than taking two months to correct the Peg.

1 Like

Welcome to the forum @FourthStreet :slight_smile:

Having a cost to holding Dai is not possible given the current implementation. We could set the ETH SF to 0%, but I’m not sure that another half a percent is going to make a significant difference. There is some reluctance to do that too, I think it opens up some weird issues with incentives when you can mint Dai for free (but admittedly I don’t understand these fully.)

I think reducing the USDC SF or on-boarding more collateral types are probably the best solutions right now. Both of these are being worked on. Assuming MIPs pass this month we should have more collateral types at the end of May. We could potentially start discussions about emergency on-boarding something else, but I’m not sure how much appetite there is for that.

1 Like

I agree with your solutions (but not the timing), waiting to fix the peg until the end of May is a problem. It erodes confidence in the Peg as we sit here doing little to fix it as it remains vastly out of range. 2% is enormous. If we make it a habit of having the Peg in range at least for a few days each month (ideally much more than even that) I am certain we will see greater volumes and confidence in all aspects of the system.

A strong Peg allows everyone to do what they want to do better. Stability seekers have better stability, margin traders have more confidence that they will be able to exit their position when the time comes without having to pay $1.09 or be liquidated. Everyone is better off, especially the market for Dai itself. Arbitrageurs and liquidity providers can do a better job making everything tighter and quicker if we help them by making strong moves to protect the Peg. After a few corrections the market will have confidence and we will need to correct the Peg less and less through actions in the future. But that confidence takes time to build and we are wasting that time now by letting the Peg sit like it has been.

The winning vote for this week’s poll is back to 16%: https://vote.makerdao.com/polling-proposal/qmwtwpa8fxd7r4x2dhdauo2gpb1kfrc3gt7mhdtzmv4e2o

What can we do to get more Dai out there? Dai persistent at $1.02 means we need more Dai being sold. Lower collateral requirements?, that seems a tad risky. The old system had a Target Rate Feedback Mechanism or something that was supposed to solve for exactly this problem. We need a way to inflate the Dai supply when needed to get the price back in control. What do we have? Whatever it is, it seems we are not using it yet because Dai is over the Peg too long. I am passionate about the project. I am sad to see us doing what feels like not enough. We can do better.

Yes, that’s the only way. The current system design took us only this far. It’s time for v3.

Depending on how things go with the executive vote this week we might see the stability fee for ETH hit 0% and the USDC stability fee will also take another large drop as well, so that is going to be something to watch.

I’ve mentioned this in a separate post, but i think that adding the DAI-ETH uniswap token might give governance a new tool to create inflation. Locking up those tokens will by definition mean you are providing liquidity to the market and minting DAI for doing it.

If the new stability fee vote doesn’t pass or if it doesn’t have the desired effect on the DAI price that collateral type might be a good second option. Depending on the outcome of the votes maybe try adding some correspondence to that thread if you are supportive. It might help to get the ball rolling on that front.

2 Likes

I have to do a little more in depth research on the DAI-ETH uniswap token. So far from what I have read though, it does look like a good potential 2nd option. I will research it more this week and lend my support in that area if the results are positive.