Create a PAX PSM

Summary

I am a Senior Product Manager at Paxos and lead our DeFi efforts. We propose extending Paxos Standard’s [PAX] involvement in Maker through creating a PAX PSM to diversify DAI collateral and increase DAI trustworthiness. We discussed this proposal with the Maker Growth team and welcome feedback from the community.

DAI is 30% collateralized by USDC which creates a single point of failure in the Maker protocol. More than 60% of DAI is generated by USDC deposits. USDC has been coming under increasing regulatory and community pressure due to its treasury decisions; over 25% is non-government, third-party debt, which introduces liquidity, credit, and interest risk.

Given it’s beneficial for Maker to reduce USDC exposure, we believe PAX is the safest and most practical stablecoin to collateralize DAI due to its liquidity, scale, transparency and regulation. PAX is 100% backed either by US dollars held in fully segregated, bankruptcy remote accounts at insured depository institutions or in short term government securities (i.e. US Treasury Bills). Monthly attestations which can be found on our website. Both Paxos and PAX are regulated by a prudential regulator, the NYDFS. This regulation makes PAX more secure in that we are better positioned in the event of potential US stablecoin regulations because PAX has a prudential regulator, unlike other leading stablecoins.

As part of our proposed partnership with Maker, we plan to add DAI support on our platform, which means that Paxos Crypto Brokerage institutional clients (eg PayPal, Venmo, Revolut, etc) will be able to offer DAI to their end users.

Motivation

Stablecoins play an important role in DeFi, and the community is growing concerned that the lack of trustworthiness of the largest stablecoins creates substantial risk for the future growth of crypto. PAX is the most trustworthy stablecoin and its use in the PSM will increase the trustworthiness of DAI while simultaneously diversifying risk to any one token.

Specification / Proposal Details

Below are the key components of the proposal. The tin, tout, and debt ceiling suggestions are based on a prior Maker Proposal. The proposal’s motivation is to have other stablecoin tin be lower than USDC to incentivize diversification. However, we are open to widening the tin between USDC and other stablecoins, as 10bps may not be enough incentive for diversification.

#1 Add PAX Support to Maker PSM

  • Debt Ceiling: $500M
  • Fee in (tin): 10bps
  • Fee out (tout): 0bps
  • USDC tin: 20bps

#2 Add DAI Support to Paxos Platform

By the end of Q1 2022 (if not sooner), Paxos will add DAI to the Paxos Platform, which unlocks the below user flows. We will focus first on DAI minting via PSM. We cannot contractually require any/all institutional clients (eg Revolut) to support DAI for their end users, but we can ensure DAI is an available stablecoin option.

  • User can swap supported fiat currencies for DAI using the PSM (if best market rate)
  • User can custody DAI
  • User can buy/sell crypto using DAI
  • User can deposit/withdraw DAI
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I will reserve detailed comments for after reading through a few times and thinking on the specifics, but I want to say that I am very excited about this potential partnership.

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Hey @carlkvogel

Welcome to the forum, excited that finally the pax PSM gets some traction.

Regarding tin/tout: this will be up to MKR holders to decide but so far the community and PPGs like MOMC have been in favour for having a very favourable settings for it to support diversification

Looking forward
Tim

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This will undoubtedly enable DAI to position itself on the direct ramps to FIAT.

DAI will certainly be better positioned, so I’m super excited about this proposal and activation of it!

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@Growth-Core-Unit Congratulations and Great work negotiating this deal! You totally rock.

Excited to see what else the Growth CU will bring to MakerDAO :clinking_glasses:

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Thanks @ultraschuppi! Appreciate the welcome.

Re/ favorable settings, would you propose expanding beyond 10bps?

This proposed spread is already quite aggressive considering what the PSMs are for. Once we confirm there will be uptake with Paxos, then I could see us adopting a more aggressive spread (temporarily) in order to balance out our “foreign reserves.”

But if we make the spread between the two PSMs quite large, that risks affecting our peg if both PSMs aren’t treated as interchangeable by the market for some reason.

We definitely want to turn on the PAX PSM spigot, but can’t risk deviations in the peg by turning off the USDC spigot until we know arbitrageurs are ready to use them both agnostically.

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Very excited for a second PSM to allow arbitrage between stablecoins.

One thing I’d like to explore would be potential causes of PAX to break its peg? From what I gauge it looks very similar to USDC (so we’re depending on a single entity to hold the correct amount of physical currency/assets), but I would prefer to be up front about the risks.

How incredible, I would have never thought this day would come, good for maker and DAI, success to the team involved. :raised_hands:

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Some thoughts on how PEG could be broken.

  • Reserves insufficient for Withdraws: In the event that a user could not withdraw USD because of insufficient reserves (eg tied up in illiquid or risky investments) then this would cause the token to break its peg. Note PAX is 100% backed by US Dollars or short term government securities so this will not happen.

  • Prolonged Operational Outage: In event that Paxos had an outage where users or market makers could not mint/burn PAX then the value of PAX could deviate. We have had to meet the reliability requirements of the largest financial institutions (eg PayPal, Bank of America) and also have manual processes in place to facilitate transactions if automated solutions fail.

  • Security Breach: If an entity breaches Paxos and illicitly minted PAX. However, in that event we have procedures to determine PAX token holders prior to attack and would take appropriate measures to ensure redemptions of the reserves could be enabled and/or seize the illegitimately minted PAX. Note Paxos has SOC I and SOC II certifications and has robust security protections / procedures.

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We are literally armored in several respects for this PAX PSM. It would be interesting now to take it to a clear operation where these types of errors occur, although with USDC they did not occur I don’t think with PAX they did.

To be clear, this PSM (which I am 100% in favor of) reduces credit risk to Circle and also provides a powerful combination of the “next two” stablecoin issuers, but does zero to reduce risk of blacklisting. If our USDC is ordered to be frozen because of a subpoena, you can know that our PAX will be as well.

This PSM should be thought of as a really powerful tool for growth and branding. Our main risk with USDC (blacklisting) is not actually reduced here.

One last time, though, this is a really, really powerful proposal that I think Maker and Paxos should both get a lot of use out of.

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It would be interesting to have a PSM with stable decentralized currencies, FEI or RAI… Of course, we know that they are very small and niche, and they need a long way to go.

If PAX was maliciously minted and then sent into the PSM to mint DAI, what would be the recourse? I’m assuming the PAX that was exchanged to DAI would be revoked and Maker would lose money equal to the amount the exploiter deposited to the PSM. We’d have no way to get the DAI back from the exploiter in this case.

(note this is probably the same as how it would work with USDC so doesn’t necessarily mean PAX has excess risk)

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@Growth-Core-Unit wants to put this proposal up for a vote on Monday 16th as part of the weekly polls. We think this should be included in the weekly cycle asap to continue the process @ultraschuppi started weeks ago and give @carlkvogel and Paxos a quick response.

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Just confirming that we’re fine with this as we feel it falls under MIP41c2 - Facilitator Governance Powers:

Facilitators have the power to propose weekly non-standard Governance Polls (defined in MIP16) related to their Core Units.

Given that we already had a signal request, and that this proposal is more or less in line with the output, feels like there is no reason to run another 2 week signal on this specifically.

Poll will go up August 16th. Feel free to discuss any concerns about this process with me and @prose11.

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Hey everyone, just wanted to give a few small updates here:

  • Governance Poll has passed - thanks everyone for the support!
  • Today Paxos announced we are updating the Paxos Standard (PAX) name to Pax Dollar (USDP), with the primary motivation creating extra transparency to users that PAX is a digital dollar pegged to USD. The only fields we are updating in the contract are NAME and SYMBOL - rest of contract is unchanged.
  • In preparation for the PAX PSM launch, the Protocol Core Engineering Unit is implementing an initial $50M initial debt ceiling, which is within the surplus buffer limit. It is expected debt ceiling will be ramped to $500M after initial launch. CC @brianmcmichael

Thanks, and feel free to ping with any questions!

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