We talked about a lower liquidation ratio ETH-B vault on governance call about two weeks ago and I want to start a discussion here before we proceed to implementing it.
Our proposal to governance was to implement a lower liquidation ratio ETH-B Vault with initially low debt ceiling due to risks related to OSM attacks (minting unbacked DAI due to old ETH price system uses because of OSM configuration). OSM attacks can become severe if low LR Vaults would have a high amount of unutilized debt ceiling.
Fortunately or hopefully we should be able to expect quite some demand for usage of such vault types due to farm related DAI minting from current ETH Vaults. This means debt ceilings might get utilized quickly if we set them lower. It also means such vaults might be less risky from a liquidation risks standpoint, as most of the users might be farmers who are long DAI rather than ETH leverage traders that need to perform trades when unwinding their debt position. Note that the ultimate goal of ETH-B is to attract new capital and generate additional DAI.
Our indicative results for 130% LR for ETH-B Vault shows that risk premium would be twice as high or around 8%, compared to 4% calculated for ETH-A base case scenario. This calculation is based on higher ETH Vault debt exposures, which means that risk premium is likely much lower if we start with only 10m debt of debt ceiling for ETH-B. We also think 130% LR might be conservative enough that hedges from OSM attacks.
Assuming 8% risk premium, currently this represents SF of 8% if Base Rate stays at 0%. This rate would be though higher than the one on Aave (+6%) or Compound (+4% or even negative including COMP rewards).
Proposal from our side would be to have a sandbox approach, initially start with lower DC in the range of 10m-30m for a 130% LR ETH-B Vault type, test demand with higher SF in range between 4% to 8% and see what kind of Vault users we attract. As said, having long DAI Vaults is less risky for portfolio exposure. I also think this will be important test, to finally give us some feedback how sensitive ETH Vault users are on rates.
If the general strategy is sound we should soon proceed to Signal request and have a on-chain vote after next week.