[Discussion] Increasing Surplus Buffer

A middleground of 2% or lower stability fees on stablecoin vaults make sense. That’s my suggestion, less aggressive collection of stablecoin stability fees, more incentives for vaults to self liquidate.

Yes, there’s impairment if we liquidate but we don’t need to liquidate. If you use the 1 USD target settlement price at ES, going under 101% CR, does not result in unbacked DAI.

So I do agree that stablecoin stability fees could cause unbacked DAI, but it’s not as bad as calculating impairment to $1.01.

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Massive amounts of stablecoins were introduced as collateral to protect the peg (at 1:1.01). We can’t just get rid of them: from what I have read in the discussions in this forum, we can really ‘live’ without stablecoins at the moment.

I guess one hope is that we will have some RWA soon enough to further help with the peg.

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I am not suggesting we get rid of them overnight. We have spent 7 months building up stablecoin as collateral, we will probably spend 7 months building them down to something less.

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Yes I think everybody here would be happy to get rid of (high amounts of) centralised stablecoins.

My previous post was basically pointing to the fact that we still need to find how to do that. But I am optimistic that in the medium/long term, RWA will do good to the peg.

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Agree, but this implies ES as the final state. In case we would unwind them before ES (presumably we should be aiming this) there is uncertainty about actual collection of these fees. But I do agree that if we let stablecoins be part of portfolio until a point there is a high probability of collecting all the fees, everything is fine. But me being on more conservative side, I wouldn’t count on best outcomes in this particular case.

One (maybe a little bit crazy) idea:

Once some stablecoin vaults start to get near to 100% collateral ratio, reduce the debt ceiling and stability fee for that vault type to 0. At the same time, create a Stablecoin-B vault type with 101% collateral ratio, same 4% stability fee etc. This could allow Maker to continue earning money from new stablecoin vault users without pushing existing stablecoin vaults into under-collateralized positions.

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The system looks horribly broken and we always must choose between two bad options. We changed the definition and purpose of every system parameter (the surplus buffer is the current victim) and it still doesn’t work.

Now it seems that even the signal vote won’t be honored and that an unwanted change will be bundled in the executive with a bunch of “regular” changes.

The method of keeping the peg with 101% USDC LR is broken and we should abandon it. The surplus buffer was artificially filled anyway - no SF other than 0% makes sense for USDC (and ETH).

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Maybe @monet-supply idea was presented as “a bit crazy”, but sounds like a real solution if applied somehow directly to the Vaults (not needed Stablecoin-B in my opinion). If user A has a Vault 101 with 100k USDC and due to fees accrued it goes to 100%, then disable the fee collection for user A Vault 101. The DAI will be perfectly backed 1:1 with that USDC.

In a far far future :slight_smile:, if the PEG falls below 1, all those users will have a reason to buy the DAI in the open market and pay their DAI back (to get the 100k USDC which worth more in that moment than the 100k DAI).

That user will be happy because it actually earned something doing this! we will be happy since the DAI was all the time backed and we collected that 1% of fees there, plus that moment the users are buying the DAI is the right moment!!, when the PEG is below 1!!, ensuring that it goes back to $1.00 (we’re then building a big reserve to keep the PEG in 1 in the future!)

I think the current system is more stable and balanced than before, so I think the current measures are completely correct. Now, I think increasing the surplus buffer is the right choice, which will help the system become more stable and safe.

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Not crazy at all, this is definitely one of the best solutions. The only problem is that once majority of those Vaults reach 100% CR or some level, there might still be a large chunk of them inside this vault type with much higher CR that you may not vault to disable fees immediately…

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The @monet-supply solution is one of the best. As @Primoz note it may work less effectively when those subsequent vault take time to be filled. Therefore we need to balance the vault DC. Smaller vaults will capture more value but would add more management work.

While I hope work in this direction will continue, we need to address the short term. Either disable SF for stablecoins, increase the surplus buffer size or take the risk that DAI between 100% and 101% CR will become larger than the surplus buffer and trigger a MKR minting if something turn sour.

I think the risk is really small and I think increasing the surplus buffer is not great for many reasons. But overall, increasing the surplus buffer will allow us to sleep better and is a simple fix.

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If we are taking about creative ideas, another one would be to first increase Surplus Buffer, apply a SF of 50% for about a week on existing stablecoin Vaults, push average CR down to 100% and then disable fees right afterwards, limit DC to 0 and create new stable coin vault types with positive SF. But I think there is a lot of coordination needed and it also may not be the best strategy in case we aim for Vaults to self unwind in case DAI price drops faster than CR.

To echo my comments on the governance call…

I don’t see anything wrong with allowing “bad” fees to accumulate so long as we don’t use them to burn MKR. I would like to advocate that we just keep an eye on these and increase the surplus buffer as needed. When Dai inevitably goes back below $1, these vaults will be easy to unwind/liquidate if need be.

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Another option if the flapper proposal comes through would be to burn 25% (rule of thumb) and accumulate the remnant in the surplus buffer, we could update the % as we move along on a monthly basis.

Any need of funds from the community would be substracted from the surplus & if needed eventually mkr tokens would be minted if stablecoin revenue was non existent but at least we would keep burning & make use of the funds for development at the same time.

This of course needs more fine tunning as per flapper eta , what would be the process to determine & approve fund allocations & other technical complexites that I may not be taking into account

As long as we burn MKR with these fees, we will just need to mint an equivalent amount of MKR (in USD terms) once the vaults get liquidated. I don’t see a good reason to increase the surplus buffer- as long as we keep burning MKR with it to compensate for future MKR inflation, the system will remain in equilibrium assuming the peg is stable at 1.01.

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By doing that we would be exposed to mkr price volatility which could imply that the amount of mkr minted > mkr burned. Also the dai auctioned for mkr burning would probably be done at a higher price than market while the dai being minted at a lower one.

By keeping the revenue within the surplus buffer we can mitigate the price risk.

I have to admit I maybe haven’t followed everything around this topic, but since we are going to have a poll about raising the SB despite there is a reasonable and (at least from my limited PoV) unrisky solution (put DC and SF of the currently risky 101% ratio vaulttypes to 0, start a new vault type with the former parameters, repeat a couple of weeks later as long as this is needed) - why should I vote for raising the SB?

Because, right now: I will for sure vote against that. We need to burn more MKR

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I don’t think there was any conclusion so far to set SF on 101% LR stablecoins to zero? As discussed in Surplus poll thread, setting SF to zero right now doesn’t really maximize potential fee collection in the future for Maker.

I personally think there is better argument for “we would need to increase Surplus Buffer anyway”. MakerDAO debt exposure increased 10x in last 6 months.

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thanks @Primoz for clarifying - so the main reason to raise SB is the 10xed debt exposure and not the risk of 101% LR vaults going undercollateralized. will vote for yes given that :slight_smile:

is there any thread i haven’t found yet where the latter problem is dicusses, especially the crazy idea of @monet-supply (which i like a lot)?

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I have another potential solution to the stablecoin Vault issue.

Basic idea: Autoliquidation of Vaults after a certain time.

Let’s face it, the current setup we have going with stablecoin Vaults is a temporary measure enacted to keep the peg following Black Thursday events and the DeFi craze. It is far from optimal, possibly not even sustainable, so let us change how it works.

The proposed action sequence:

  1. For existing stablecoin Vault types (USDC A etc etc) we introduce upwards creeping liquidation ratios, the suggested pace is 0.25% increase per week until approximately 103% is reached. The increase is to ensure that if liquidations happen they do not eat into Maker buffers. Exact figures will of course be as per the Risk team’s recommendation. This slow pace of increase will allow Vault owners time to close maxed-out Vaults.
  2. We reduce the Debt Ceiling to 0 for the existing stablecoin Vault types, effectively ensuring no new Vaults of this type.
  3. At the same time we open a new Vault type especially for stablecoins. It works as before but with the added feature that the Vault will be auto-liquidated after a certain amount of time (blocks) has passed. How long? Some months to a year to start, but these are suggestions. This fully eliminates the potential issue of unbacked DAI in buffer/burner. As the new Vaults will be auto-liquidated anyway we could have a spectrum of Vault types, some with extremely low liquidation ratio or other experimentation to help with the peg.
  4. After the new Vault type is introduced we keep raising both the stability fee and the liquidation ratio for the older stablecoin Vaults, creating clear incentive to migrate to the new auto-liquidating Vault type.

Not everyone is going to like this proposal. It is tough love on the stablecoin Vault holders and it forces them to be more proactive with their Vaults. But for Maker it solves the potential issue of unbacked Dai in the buffers and it allows for more creativity with regards to Vault types as they will be closed after some time anyway.

Feedback appreciated. EDIT: grammar