B.Protocol is a decentralized backstop protocol. We are live for one month, backstopping around $10m of ETH-A collateral and $3.5m debt. A first successful demonstration was done during the sharp market crash last Thursday.
B.Protocol introduces the concept of relying on committed liquidators, who get priority in the liquidation process, in return to their commitment.
In ETH-A collateral we are an opt-in system, where users can decide to manage their Vault with us, and give priority to the liquidators. B.Protocol liquidators in return share some of their proceeds with the users who give them the priority.
In this write-up we propose to experiment a native integration between B.Protocol and the MakerDAO system, by on-boarding a new collateral type, namely WBTC-B, which will be natively backed by a strong commitment from B.Protocol backstop.
EDIT: following @OneBiteLawnOrder question, we want to emphsize that the proposal is for it to be a native collateral in dss (Maker) smart contract, available to all users (e.g., via Oasis and other platforms), and not limited only to B.Protocol front end.
A success of such an experiment could benefit Maker to give a better value proposition to the users, namely x10 long position on WBTC, and could pave the way for more collaterals to be backed by B.Protocol with high leverage opportunities.
In the next Section we present a proposed set of parameters, then we propose a way to commit on liquidations, and finally we raise topics for further discussion.
- Stability Fee: 4% (like WBTC-A)
- Liquidation Ratio: 110% (support x10 leverage)
- Debt Ceiling: 5 million (start with low ceiling in the experimental stage)
- Auction Lot Size: 50,000 DAI (*)
- Minimum Bid Increment: 3% (*)
- Bid Duration: 6 hours (*)
- Max Auction Duration: 6 hours (*)
- Liquidation Penalty: 0-10% (*)
- Dust: 500 Dai
It is also proposed to use the medianizer price feed directly, instead of the OSM, as otherwise the 10% buffer might not be sufficient until liquidation occurs.
(*) The auction parameters are applicable only when one of the backstop members is being liquidated.
Committed Backstop design
For simplicity we describe a system with a single liquidator. Scaling the system for multiple liquidators, in a permissionless way, will be handled by B.Protocol, and it is not in the scope of this writeup (we presented some ideas on how to achieve fairness here).
Initialization: the liquidator opens a Vault with $0.5M WBTC deposit, and 0 debt. We denote this liquidator’s Vault with
lv. Liquidator can withdraw collateral or increase his debt, only if his net position (collateral minus debt) is over $0.5M (according to MakerDAO price feed).
Liquidation: when calling
bite to an unsafe Vault
v, then if
lv does not have a net position of $0.5M, then
v is subject to a standard liquidation process (by the
cat or the
Otherwise, the entire position of
v is forked and added to
lv. The user of
v is losing all his collateral (which is effectively a maximum of 10% penalty).
lv get all the user collateral and all of the user debt.
bite function is callable by anyone.
The expected course of events is that after a liquidation, the liquidator will take action to rebalance his new position, by repaying the new debt. In the long run, if he fails to do it, he risks being liquidated himself.
Given each user position is 110% over collateralized, an initial deposit of $X would in ideal situations be sufficient to backstop $10X of debt. Indeed, at a worst case an unsafe Vault has a position of $5.5M of WBTC collateral and $5m of dai debt. This position could be thrown at
lv making a safe vault with $6m collateral, and $5m debt…
The proposed mechanism does not give mathematical certainty for the solvency of the system, however, insolvency would result in the liquidator losing his initial $0.5M deposit.
Over time the liquidator initial deposit might depreciate in value, and in this case his incentive to retop it is that in the meantime he will not be able to handle new liquidations. This mechanism design give rise to a more committed liquidator, which allows reducing the current WBTC-A 150% collateral ratio (where liquidators are not committed) to 110% collateral ratio in WBTC-B.
All the parameters presented here are very preliminary and subject to discussion. The development of bootstrapping of such protocol could be subsidised by B.Protocol, however it is important to generate a long term framework that will allow liquidators to profit. Hence, over time it might be needed to relax the capital requirements, or offer additional incentives to the backstop.
Operating within the framework of B.Protocol, who will integrate with additional lending platforms, will give rise to better capital efficiency for the liquidators, which could result in stronger commitment (i.e., capital) from their side.
Summary and open questions
The proposed collateral would benefit MakerDAO users, as it will allow better leverage (which is currently not available at any existing DeFi platform). It is our belief that this will be obtained without additional risk to the MakerDAO system, and moreover, it will actually increase its stability during sharp market movements.
The success of this experiment could lead the way to more higher leveraged assets, which could increase the total dai in circulation, and help prevent future Black Thursday events.
This post is a call for discussion on:
- what is needed to get the community consent for such a new collateral.
- missing technical details. E.g., behavior in the event of an emergency shutdown, potential adjustment to the OSM to support tighter collateral levels, changes that might be required when the liquidation 2.0 is live.
- Starting with a different collateral, e.g., ETH-C, is also something that is up for discussion.