Thank you for the great questions and contributions. I’ve tried to add further notes to answer where I can. Note, we still need to review all of this with the risk team for a more comprehensive analysis, please do not consider this in anyway definitive - let’s chat on tomorrow’s Governance call!
- Tax accrues based on the accumulated debt (Sai). You can think of this in the same way as the Stability Fee accumulating in MCD.
- Tax is paid to PETH holders, whereas the Stability Fee is paid to MKR holders.
- Tax is applied uniformly across all CDPs. It is not possible to individually target a specific CDP.
- Regarding Tax, each time
drip is called, it calculates the time that has passed between the previous
drip and increases the debt of a CDP reducing its ratio of collateralization.
- Note that in addition to paying the tax, users may also be hit with a liquidation penalty of 13% if their CDP falls below the collateralization ratio.
- Tax is part of the SaiMom Contract and has a maximum value of approximately 10% per day, which can be viewed in the above contract.
- Due to the above maximum value of Tax it would be necessary to have at least 2 days of the tax rate at/around <10% based on the largest current CDPs in order for the penalty to reflect stability fees accrued to-date.
- When calculating the above rate we need to consider that CDP debt will increase over the next e.g. 6months for those CDPs that do not close or go into liquidation.
- Preference is for a shorter tax activation time using a single tax value - this is for easier communication amongst Sai holders and for it to really be obvious as to which times are optimal/sub-optimal for debt payback (I’ve tried to demonstrate this in the diagram below).
- CDP owners should get a lot of warning before ‘ participating’ in the activated tax rate. Previous forum poll mentioned 6months lead-time to Global Settlement.
- Due to the fact that tax goes towards PETH holders (instead of MKR holders via the SF), PETH value may increase.
Consideration - how long should the timeframe for Tax be?
If we were to set the
Tax for only a few hours before global settlement, it is possible that users would not see the impact until the system is shutdown. We should be as transparent as possible, would it therefore be preferable for them to see the
tax over a period of a few days, possibly 2-4days?
Determining a fair value of Tax:
Is the MKR Community willing to forgive a percentage of accrued debt in good spirit or will the penalty be slightly more. As MakerMan says, this is the tricky carrot/stick dilemma, and from recent chats/posts is still an open conversation.
Thoughts…From the perspective of the protocol:
Optimal user behaviour: would be if the user closes out their CDP and pays the Stability Fee only. This is optimal because it is covering the cost incurred for generating Sai.
- User closes out their CDP a day or more into paying the tax. They will therefore need to pay the Stability Fee and a day of Tax at e.g. 10%. This is not optimal for the user because they are now incurring both the Stability Fee and the
Tax. Due to the
Tax they may also be exposing themselves to liquidation and a further 13% penalty.
- User refuses to close out their CDP and instead accrues Tax up until Global Settlement, which may or may not be more that their unpaid Stability Fee (and again, may liquidate them).
Alternatively, looking at this from the user’s perspective , we would not expect users to migrate once they reach the Stability Fee and Tax phase (sub-optimal phase) because it would be favourable to hold out until Global Settlement to avoid the Stability Fee - unless the user gets liquidated.
Similarly, those who hold out to Global Settlement will have incurred a significantly large Tax accrual - of which the precise tax value applied needs to be discussed, but again, may likely exceed their original Stability Fee as this is a value that needs to be uniformly applied to all CDPs.
Additional Solution with more detail:
Applying the above information and your comments, let me create an example. Let’s say that, as per the poll, we want to give CDP holders 6months to migrate, and let’s assume 4 days of elevated rates to cover the Stability Fee Cost incurred.
*Note; This is a very rough illustration of the concept, we will need to map this out with the risk team. I am adding it here as a means to share my understanding, not as anything that the foundation is formally proposing - that comes now with discussion, community polls and voting
That was a bit longer than intended, thanks for viewing.