[Gov Poll] Vote for 0% for the Stablecoin Stability Fee!

MKR holders: I need your vote! There’s a subtle but important vote going on right now that I believe influences the long-term health and incentives of the keeper ecosystem. https://vote.makerdao.com/polling/QmcALf82?network=mainnet

Backstory: typically, arbitrageurs / keepers mint and short Dai to provide liquidity to the peg, with the expectation of a small profit. They also assume that governance will act in the protocol’s long-term self-interest in helping keep the peg stable. If governance fails to coordinate properly, and keepers lose faith in governance, then the peg will start to drift upwards without anyone stepping in to sell it. This is why we saw the peg drift as high as $1.05 over the summer (after the surge of yield farming demand), and stay there. Keepers weren’t confident enough that governance could act swiftly enough and apply the correct incentives. Clearly, we can see how incentives are important in all this.

Eventually, governance pulled through and the USDC-A Liquidation Ratio (LR) was lowered to 103%, and the peg came down to $1.03. This was much needed relief. But the peg was then just merely stuck at $1.03. So, then, the LR was lowered to 101%, and the peg dropped down to $1.01. These actions were HUGELY beneficial to the peg, especially in light of the fact that governance does not or would not want to consider negative interest rates at this time. Myself, and several other keepers (and long-time community members) I have spoken to, continued to stay short due to our expectation that governance would remain vigilant in its duty to restore the peg, and continue to take actions that would eventually bring the peg down to $1. Remember, these shorts were put on 2 - 3 months ago.

Instead, what we saw was no further action with respect to the LR, and, worse, an increase in the Stability Fee to 4%. An increase in the stability typically is counter-intuitive when the peg is strong but in this case made sense since governance assumed that a lot of the newly minted Dai was being used for yield farming. While this is partially correct, it ignores the fact that a significant portion of the Dai generated from USDC was actually being used purely to arbitrage the peg downwards using recursive leverage on Compound. These keepers (myself being one of them) are vitally important actors in this ecosystem. And they were now losing money, while governance sat on its hands a bit. Our principal bled dry while the peg remained broken.

Recently, it came to light that Dai was losing integrations from key partners. This is simply unacceptable when governance has the ability and power to fix the peg. We’ve reached a point where it makes sense for the protocol to take urgent action to immediately fix the peg (as closely as possible). While I advocated for dropping the LR to 100.1% (due to its simplicity), the community has decided to implement the Peg Stability Module (PSM), which was originally proposed in July (and then stalled). While this is a valid option, it could take several months to implement, according to the current senior smart contract dev
at the Maker Foundation (audits, testing, governance, etc).

In the meantime, the keepers, who are the primary stabilizers of the peg, are at risk of losing all of their principal on a trade they should, reasonably speaking, be making money on. For MakerDAO to delay fixing the peg by going the PSM route (remember: if they wanted, they could fix the peg this week by dropping the LR to 100.1%), and still keep the stability fee punitively high at 4%, eroding all of the profits of the keepers, is a very, very poor incentive. This short term greedy move by the MKR holders will end up driving away a significant portion of the keepers in the ecosystem. The next time the peg breaks to $0.94 (like in Q1 of 2019) or $1.05 (summer 2020), the keepers will not have the confidence to step in and take the other side of the trade.

This post is already pretty beefy so I’m going to stop here but happy to answer questions. Plenty of stuff to expand on from the above. Also, this is obviously a nuanced, subtle topic. I am not arguing there is a definite right answer here. I can totally understand this both ways, but genuinely believe that my framing is better for the long-term health of the ecosystem. That’s how I positioned my trade. Ethically, I wouldn’t put on a trade and then expect MakerDAO to act against it’s own self-interest and try to convince it as such.

Full disclosure: I’m short Dai and I am talking up my book. I post this message not from the perspective of a risk manager, but from that of a profit-motivated keeper.

tl;dr: please vote for 0% in this week’s stablecoin stability fee governance poll in order to preserve and protect the keeper ecosystem until the PSM can properly be put in place.


Hello Cyrus–thank you for posting your thoughts and opinion on why the Stablecoin SF should be lowered to 0%.

As you probably know, the community has a lot of love :heart: for you. So, with that in mind–you’re Not talking up your book, right? :grinning: I know you said you are position to profit–but not sure if you’re kidding, or not/maybe putting out as a full-disclosure–which is totally appreciated.

I have feeling this was not implemented back in July because it raised regulatory issues/questions–however, this time–it is a Community project lead by SamM, and from what I heard it will be audited by Community members–you can imagine who–the best of the best.

Assuming we do get an Audit by talented community folks–I want to believe that the recent drop to $1.004 has something to do with the word that the PSM will be implemented soon. Or, maybe the ending of the UNI liquidity mining has helped the peg–not sure, we would need the Risk Team to provide the data. Hope they will on Thursday.

All in all–I got a feeling your post is coming from the heart and I will think-it-over before submitting my vote. Hope the rest of the Community does the same. This is a big decision, so I hope we all do our duty.


Disclosure added to parent post.

I have feeling this was not implemented back in July because it raised regulatory issues/questions–however, this time–it is a Community project lead by SamM, and from what I heard it will be audited by Community members–you can imagine who–the best of the best.


This is correct. But do you agree that it’s silly to say “you’re right guys, we should fix the peg, but we are going to milk every last penny we can out of you before we do so.” Keepers have already bled plenty of principal the last few months when, honestly, they maybe should not have been. It’s a toss-up to say we should have charged yield farmers or not when standard Dai arbitrageurs are losing money.

It is. But that doesn’t matter because I believe our incentives are aligned anyways. If they’re not, then I myself sorely misunderstood the system. I had two keepers --independent long-time community members who lurk the chat every day-- message me thanking me for making this push. Also, I have better things to do with my time now than to swindle the Maker community out of a few pennies. Now, I understand that this issue is not black and white. I myself could make the argument the other way, and might have had I still been on the risk side. But the argument is wholly genuine.

I mentioned this in chat, but I’m all for this if it’s paired with the USDC-A CR going to 100.1%. I don’t see any sense in doing one without the other.


Cool. Good looking out on posting Full Disclosure.

Am with ya man–I’m a long-term player, in a long-term game. :beers:

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I agree 100%. The positive stability fee is really hurting here. Your suggestions seem rational given the situation, especially given the uncertainty with the timing of the PSM implementation. It’s easy to overlook arbitrageurs when just thinking about yield farmers.

DAI is currently declining. I prefer to set SF to 2%. After observing for a period of time, decide whether to reduce SF = 0%.

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As a fellow DAI shorter, I fully agree (obviously). We who levered to 99% back when LR was lowered to 101%, are currently sitting at 99.56% in our vaults. Stability at 0% would be huge for us, as we are seeing our shorts go under water.

It’s not that I am against your proposal, but I don’t like the way this is proposed.

Well that’s for sure. But the ‘faith’ in governance is related to its ability to restore the peg. Not to ‘help’ keepers/speculators.

The governance (many thanks to Sam and its PSM code) is actively doing something, and indeed the PEG has improved the last few days organically.

No. The peg went up because demand was great (DeFI farming). The peg went down when countermeasures were deployed.

if we had to rely on keepers only, the peg would be 1.5:1 by now.

The peg is kept at 1:1 by a system of game-theoretic incentives and penalties. The keepers simply follow these incentives.

Some incentives goes towards Keepers.
Some incentives goes towards MKR holders (like the SF) and can be viewed as ‘penalties’ for keepers.

If these are not good, just close your position with a small loss.

@cyrus are you also a MKR holder or just a keeper?

Your goal should just be to make money. Game-theoretical incentives. No need for sacrifices.

Many actors involved in the MakerDAO dynamics, from DAI holders, to MKR holders, to keepers, to CDP holders, etc. sometimes lose and sometimes make money. E.g.:

  1. MKR holders lost money on Black to preserve the peg.
  2. some cdp holders lost money on Black Thursday due to the auctions.
  3. etc

It’s not a safe game.

You said in the Maker chat:

btw, this is the reason i argued heavily, heavily against the PSM internally back when it was proposed in june

for the record you also said:

the foundation was set to proceed with it despite my objections, and then pulled back due to entirely different reasons.

In any case, it seems that the Governance now finds the idea of the PSM to be preferable vs 100.1% LR.

This is just to say that your (Keeper) point of view is/was against what the majority of the Governance (at least in the forum) currently thinks.

This is the sentence I dislike the most from your post.

  1. Who are the ‘senior smart contract dev’ who spoke with?
  2. And when did you speak with them?

The code of SAM is available in the github, we are set for an accelerated implementation of the PSM.

So, can you please expand?

Some people think that launching the PSM by the end of November is possible.

Keepers are speculators. They will come back when there is money to be made.

Furthermore the PEG is already at 1.005:1 right now.

Governance did a reasonable job over the course of the last few months I think.


Thanks for your feedback and valid questions.

I think the way I view it is that keepers are designed to frontrun those incentives (otherwise Vault owners and Dai holders would have to transact directly with one another, and that would be a massive coordination failure). If they work harmoniously with governance, they they can preempt policy and provide more consistent stability and liquidity to the peg. As a market maker, you can make deeper, more liquid markets if you believe you are in sync with the governance mandate.They take a risk in doing so, and should they be wrong, they wlll book a loss.

For that specific reason, I have not spoken up for the prior 2 months. Remember, I am 2 months into this short, and I never spoke a word because I assumed that I had misread governance. Charging 4% against yield farmers vaguely made sense, and the peg wasn’t horrendous. I was almost resigned to being wrong and taking the loss (even though I felt it was a bit punitive. You’d expect someone short Dai to be able to cover within ~3 months, or at the very least break even). It wasn’t until last week when Greg brought up losing Dai integrations that I said to myself (“exploited,” if you want to be cynical), that maybe governance isn’t really doing its best job acting in its own self-interest. As a result of the overall situation, they decided to accelerate the PSM.

So, I’m okay taking the loss if that’s the direction governance deliberately wants to go in. But I do think it’s silly for governance to essentially say “well you were right all along, we do agree we should get more active in fixing the peg urgently, and we have a plan that we’re actively working on, but we’re going to make sure we milk every last penny we can from the keepers in the process.” To me hat doesn’t sound like the right incentive you want to apply to keepers. Poor keeper incentives were a part of the reason no one showed up on Black Thursday.

Totally agree. I view this post as governance in action. More like politics actually. Which isn’t limited just to MKR holders, but all actors in the ecosystem. I am fully open to the idea that this isn’t a black and white situation. I am not “definitely right.” In fact, I could be way off on all this, and part of my goal was to strike up a public discussion. If I’m wrong, then I’d love to hear some well reasoned arguments, and for governance to vote against me. However, because this is inherently political, I can’t help but campaign for my own position.

Coincidentally, this is also the sentence I dislike most from your post. It sounds like you think I am being deceptive about my intentions when I couldn’t be more blatantly transparent. I’m even burning a fair amount of my own social capital to convince governance to do something it probably should have done so on its own already. Might I remind you the peg has been broken for 8 months now.

And for the record, this was from the GnR chat yesterday by Chris. “We may be time constrained this year anyway. I am having difficulty seeing the PSM making the 2020 executives unless there are audits ASAP.” A second smart contract dev I spoke to echoed the same sentiment.

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Just for the record, this was before we had this DssChief 1.2 upgrade taking up 2 executives. I think from a technical perspective we can launch very soon, but executives are limited and there is a lot of stuff to add before now and the end of the year. It’s because of this uncertainty I started the lower the fees signal in the first place, and why I support lowering the fees to give us breathing room.

I will still be pushing to get the PSM in asap, but I am at the mercy of the executive queue which is very jam packed.


Maybe it sounded like that, but I am not implying anything.

Simply, the sentence

While this is a valid option, it could take several months to implement, according to the current senior smart contract dev at the Maker Foundation (audits, testing, governance, etc).

appears to be a novel news. I think you are the first to state clearly that (in your opinion) it will take months. So an opinion like this, coming from the blue, and having strong consequences should have been better backed by facts.

No I don’t think it’s necessary :slight_smile:

I’m even burning a fair amount of my own social capital to convince governance to do something it probably should have done so on its own already.

Governance has done what it could do.

Unfortunately the community has not found simple solutions to difficult problems.

Nobody is happy with a broken peg. But it’s not like setting the 100.1% LR solves all the problems. This has been discussed at lenght.


For what it’s worth @cyrus said early in chat that he foresaw the PSM being delayed beyond 2020. Apart from him I saw 0 worry about the PSM being done in a timely manner and I remember thinking “maybe I’m missing something and it’s easier than it seems to pass the PSM through the security&governance thresholds”. @hexonaut’s reply above makes me think it’s not so easy. So I’m pretty happy with cyrus urging to vote for 0% – ideally I would love a 100.1% LR as well just to be safe. Being at / as close as possible to the peg really is paramount, and we have many eggs and many baskets.

I just want to verify that I did say this and that it’s a really serious issue. We are losing integrations and it’s only going to get worse if we don’t fix the peg. Once again I don’t see how cutting the SF on USDC is going to fix the peg without a commensurate reduction in the CR, but I support any solution short of printing unbacked Dai that actually fixes the peg.

The community runs MakerDAO, not the arbitrary set of rules it put in place. If we need more executives, let’s get a signal request about adding one to the cycle? I don’t think we should let our own processes hamstring us from doing what’s right for the DAO.


I also had this instinctive reaction.

I understand it’s hard. But if we are losing money (in terms of integrations, market-share, etc), it is probably necessary to act faster.


Cutting the SF to 0% along with the knowledge that the PSM will be deployed soon looks to be enough to push the peg down.

Good point. We can probably bump something if need be.

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If the SF goes to 0 this week, and the community has approved the PSM (to go live some time in the next few months), then keepers will just arb the peg today down to $1.001 + opportunity cost of 2 months capital. That’s already a big reason why it’s moved from 1.007 to 1.0035.


To play devil’s advocate - won’t all of these USDC arbs (including you) just start unwinding the trade once we get to $1, which will then push the peg back to $1.01 until a new set of arbs comes in? It feels like the current arbs just want to rinse and repeat. I could be wrong, but would love to hear the counterpoint to this.

My broader point is that the interest of the DAO and the USDC arbs is only aligned if you can get out without pushing the peg back to $1.01.


These arbitrage positions are also aware if they wait until the PSM they get a larger profit which is why we haven’t seen unwinding.

We will probably not reach 1.001 before the PSM, but we will get pretty close.

No why would we push it back to $1.01? With the PSM we can get out at $1.001.