Based on assessment from @Smart-Contracts and our findings, we believe that implementing a “test run” DC IAM for ETH-B vault type makes sense at this stage. Below is our thought process when we were deciding on three key parameters (
ttl) and later proposing potential parameters to be implemented for ETH-B.
Definition: “The maximum debt ceiling limit can always be increased or decreased through a governance action. The maximum debt ceiling is a hard limit that prevents any further incremental debt ceiling increases through the module.”
Max Debt Ceiling (
line) defined by our models is based on three key inputs for each collateral asset: CEX+DEX liquidity, Collateralization Ratio distribution and Price volatility. It assumes a predetermined Liquidation Ratio and looks for highest DC value where Risk Premiums start reaching 10% or higher. These levels aren’t necessarily Debt Ceilings that governance would want to have fully utilized from a business standpoint since SF would start rising above 10% and grow exponentially, unless something structurally changes for collateral assets (lower volatility, better CR distribution, better liquidity).
It is up to the community to tolerate debt exposure equal to
line parameter proposed below and be aware that a much higher SF will be needed to compensate for risk taken. At that point the question becomes if it makes sense to have high debt exposure by charging high rates versus limiting debt exposure and still offering competitive rates. Still, for the purposes of MIP27 we thought this might offer good guidance.
|Vault Type||Debt Exposure||Maximum DC (
Definition: “Absolute number which is the distance between the current debt (Dai supply) and the debt ceiling”
Based on historical data, daily DAI supply increases for particular vault type were on average as such:
|Collateral type||Avg daily increase||2x st.dev||largest incr.|
Another breakdown on daily mints and repayments for ETH-A & WBTC-A only
|largest daily draw||50,441,832.7||29,829,285.2|
|largest daily wipe||43,988,180.7||18,410,833.6|
|average daily draw||4,467,456||668,921|
|average daily wipes||3,530,596||330,035|
|stdev daily draw||6,096,975.5||2,509,733.8|
|stdev daily wipe||6,183,382.2||1,487,887.6|
If governance wants to allow highest daily increases as were observed in the past, the proposed 24h
gap should equal the highest DAI supply increase observed in the past (30m for either ETH-A and WBTC-A) or even equal largest DAI daily draw observed in the past (50m for ETH-A and 30m for WBTC-B). If it wants much more protection (lower
gap), but still aims to cover average daily increases observed in the past, 24h
gap proposed in such case would be much lower or 4m for ETH-A or and only about 1m for WBTC-A.
Definition: “Amount of time required to pass before a new increase to the debt ceiling can be made”
In our view, the idea is to either use a combination of low
gap and short
ttl or high
gap and long
ttl. You don’t want to be making large increases too frequently and you don’t want to be making small increases with a low frequency. Whatever combination is used, the limit should be somehow set and compared to what amount of DAI can be minted until governance can react and stop additional minting due to GSM delay.
For instance, if we use combinations such as 25m
gap and 12hour
ttl, this means that 24 hour mints are limited to 50m, but at the same time, we need to be aware such vault type might have 100m+ DAI minted before governance can reach and disable minting.
As already @cmooney mentioned above, longer
ttl versus shorter
ttl is preferred, which means higher
gap would be preferably applied.
Pros for high
- More flexibility
- Better UX, less limiting to users and larger vaults
Cons for high
- Risk of governance reacting too late on rapidly increasing debt exposure
Conclusion and proposed parameters for ETH-B
We believe governance should use higher
gap and longer
ttl to protect against fast increasing debt exposure but still allow enough flexibility for users.
gap values can be benchmarked on past debt increases or draws observed, whereas
ttl needs to make sure that DC increases aren’t too frequent to hit
line in a short time or too infrequent to damage user experience. The
line parameter on the other hand could be in our view set more relaxed and higher if a) governance is aware that higher debt exposure will lead to higher SF and b) combination of
ttl is still conservative enough to prevent from
line being hit before governance can react.
Therefore the proposed parameters for test run on ETH-B would be the following:
gap = 5.000.000
ttl = 12 hours
line = 50.000.000
This implies that a maximum 20m increased debt exposure is allowed before governance can react and vote to reduce it due to 48h GSM delay. However we could still use OSM freeze module as an alternative line of defence, which would me much faster than waiting for GSM delay.
gap of 5m means that such vault type should allow larger whales to perform one time mint of 5m. Observed maximum daily debt increase for ETH-B in the past was 3.5m. The core protection DC IAM enables for ETH-B vaults specifically is OSM attack protection. Having a maximum 5m of unutilized debt on ETH-B means that if we have a very severe 25% hourly ETH price drop and OSM attack is performed, this could lead to a maximum of 125k losses for Maker (excluding auction slippage).