I hadn’t followed the recent increases to the dust/debt floor parameters for the various vaults, and wanted to chime in with some thoughts.
Specifically, I think we should be allowing repayments to vaults where the repayment<existing debt<debt floor, instead of requiring that repayments = debt where debt<debt floor.
As a smallholder of an ETH-A vault with less than 5000 DAI with a recent windfall, I thought I’d put some of it toward paying off my DAI debt, and realized that this wasn’t possible unless I paid off the debt in its entirety.
I get the logic behind raising the debt floor: we want the minimum size of a vault position to be such that profits from liquidating it are equal to at least the cost of participating in the liquidation auction.
So, payments that take the vault debt from above the threshold to below the threshold are a no go. Mints are also a no go. That much is clear.
But a payment on a debt already below the floor only reduces the size of the pool of capital that’s at risk of undercollateralizing the peg, ie, positions that wouldn’t get liquidated during a flash crash.
In the meantime, smallholders like me who may or may not have the capital to pay off what can be several thousand dollars all at once are forced to allow interest to accrue continuously until they can save up the money to pay it off in one go. Gross.
Is there something I’m missing here?
If the debt floor were not reflective of the natural equilibrium point for liquidation participation, and that point was actually lower, bad actors could repay just enough to stay below that threshold, keep from being liquidated. However, this seems like a non-issue for 2 reasons:
- If the debt floor is higher than the natural participation threshold, then we’re already liquidating sufficient positions. Debt floor should be set based not just on auction participation costs, but also on the basis of where too much capital exists below the liquidation participation threshold in aggregate. Remember, you can’t open a vault under the debt floor, and you can’t repay when the repayment would take your debt below the floor.
- There are immensely diminishing returns for a bad actor in this situation, and they’re one-way. If I wanted to game the system in this scenario, I’d need a huge number of legacy vaults that happened to fall below the debt floor after a debt floor increase–something that you couldn’t initiate. Once I played keep-away from the liquidators, I can’t mint more DAI unless I put myself back above the debt floor. You could certainly capitalize on that opportunity if you happened into it, but it’s an edge case of an edge case.