[Informal Poll] Creating a Bite-Rebate Contract for Keepers Acting on Small Vaults

This post is in response to the recent Signal Request to Increase the Dust Minimum on Maker vaults. It is my belief that we need to explore other ways to ensure liquidations are profitable for keepers before Liquidations 2.0 is implemented. Otherwise if ETH continues to increase relative to DAI we could easily find ourselves forced to set the dust limit even higher, pricing out more individuals who would otherwise be keen to engage with the Maker Platform. It’s additionally worth noting that many of our competitors in the DeFi space (Aave and Compound for example) have been able to offer collateralized positions similar to our vaults without the high minimums we have at Maker.

One “easy” fix to the problem of smaller vaults not being profitable to liquidate is to offer a rebate on the cost of calling bite on such vaults. Such a rebate would cover the gas fees for keepers that call bite on small vaults, encouraging them to participate in what should be a profitable action. Below is a draft of the code written by @yaronvel that could be implemented to enable such rebates. With this code keepers would call biteWithRebate instead of bite -

It should also be noted that:

  1. Liquidators could still call the standard bite function (like today) if they want to.
  2. A potential bug/failure in this contract will only compromise the funds that were deposited in this contract. And will have no effect on the overall stability of the dss system.
  3. This is a temporary patch, until the liquidation 2.0 is deployed.
  4. If implemented, MakerDAO only needs to approve the initial fund deposit as there would be no changes in the existing dss or its parameters.

This poll is to gauge if there would be support for funding this rebate program with a small amount of DAI from the surplus buffer. @yaronvel has proposed an initial funding of 10k DAI for gas rebates, with B.Protocol donating 1k DAI to show their support for maintaining smaller vaults while we wait for implementation of Liquidations 2.0.

Would you support 9,000 DAI being pulled from the buffer to create a keeper-rebate program that pays for gas fees on bite calls on small vaults?
  • Yes
  • No
  • Abstain
  • Could support with added features (comment below)

0 voters

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Excellent work P-Rose! And thank you to @yaronvel of the B.Protocol Team for helping out.

Such as awesome community! :love_you_gesture:t3:

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While I’m not savvy on the inner mechanics I fully support any endeavor that can help as avoid pricing out users. I understand however that it should be audited and looking forward to hear opinions from people with more knowledge on the matter.

Thank you for formalizing this into a poll. My opinion is that we should not encourage small investors to open vaults. There is a concept in traditional financial markets called https://en.wikipedia.org/wiki/Accredited_investor that defines a high-net worth individual. Although the income or net worth thresholds to meet the definition of an accredited investor are arguably too high, I still think the concept is sound. Leverage is risky. We shouldn’t encourage people to take risks that they cannot afford. MakerDAO suffered quite a bit of bad publicity from the Black Thursday drop; We should not forget that crypto folks tend to underestimate the risks and may feel burned as a result. Worse, MakerDAO is not properly compensated for small vaults. We don’t charge more to small vaults even though small vaults likely represent smaller investors who are more likely to complain loudly when the shit hits the fan. MakerDAO should not become a target of groups like, https://www.stoppredatorygambling.org/

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The fact that you don’t have the money does not mean that you don’t have the knowledge, perhaps you do have the money but you don’t see the need to compromise on a higher amount than secondary lending platforms when you try it out. Small vault owners today could be key players tomorrow, who knows? Defi is in it’s infancy and if we are already pricing them out we may be sacrificing usage, not to mention more negative PR.

I’m not against increasing the dust limit if it’s the best way to go for the protocol but if there is a possibility of not pricing them out I’m willing to consider it.

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How about not liquidating small ETH vaults but moving them to the Maker ETH reserve fund? We can do that until ETH reaches a pre-defined price and in the meantime we decide how to use that funds. Maybe there are devs willing to take compensation in ETH in a way that they get fixed amount of ETH weekly instead of DAI.

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Thank you for creating this poll @prose11 , I agree that this is an issue worth fixing. A question I have before voting is the following: While I see how this could protect the protocol in the event of organic liquidations of small vaults, will it also protect us from an attack where a malicious actor opens thousands of small vaults? It would seem that in that scenario, this protection would be far too small to compensate the keepers.

Also, assuming that the above issue is addressed, how much gas does it cost to claim this rebate and can it be claimed for all of the keeper’s bids, or do they need to call the claim function for each bid they made on a small vault?

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IMO this is a good idea, but requires a change in the core protocol, as oppose to the proposed solution here, which is more of a workaround that does not put in risk the core protocol, even in the presence of a bug.

The bottom line is that it will give a full (mathematical) protection only if the rebate piggy bank will have enough funds to rebate thousands of liquidations.
With 10k DAI budget this is not likely to happen, and then it becomes an incentive question. In particular, the cost of a rebate, vs the potential loss/profit for an attacker.
In general, the liquidation penalty is bigger than the cost of a bite tx (at least looking at the recent txs). Hence, the DAO can win in such game, but it will have to re-top the rebate piggy bank during such an attack. And the proposed smart contract does not offer an automation for such process.
We can consider adjusting it so it will take the rebate directly from the surplus.

In the proposed contract, the first guy who calls bid get the rebate during the tx. All the others will not get anything. Once bite is called, an attack is no longer be profitable.

As a side note, with current ETH value and gas prices, it is hard to see how liquidation 2.0 could offer an incentive for calling bite without enforcing a big dust parameter.
I will raise this concern in the liquidation 2.0 thread.

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Totally Agree with you on opening Vaults as Risky and not recommended for inexperience risk takers/investors. However, hard disagree on the Accredited Investor rule. It is an old worn out rule from the1930’s, that should not tell the common human being that if you have $1 million dollars your brilliant, but if you Don’t have more than a million dollars, you’re too stupid to take on Risk. You and I probably know a lot of wealthy people that are pretty dumb, agree? Luckily there has been a nice push by many to get this turned via Reg D and Reg A+.

And if you and I believed that the Accredited Investor rule does work, shouldn’t the entire Ethereum community be accredited? Should we also make sure that a new Vault that draw more than 10,000 DAI be accredited? Maybe fill out a KYC/AML form?

You exaggerate my position and then disagree with it. To bring the argument back to reality, we’re talking about raising to dust parameter up to around 2500 DAI. Is that really such a high bar? Are we really pricing out lots of small investors for whom leveraged trading is not an excessive risk?

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Not exaggerated–perhaps you misconstrue–but the Accredited Investor Rule for many Americans is a subject that many have spent time and resources to change via lobbying in Wash. D.C., in order to make it possible for the average Jane and Joe to have a chance at investing in the next Airbnb, Roku, etc. Unfortunately, we have a different opinion of such. No worries, all good.

With regards to raising the Dust-- and your questions about “is it a high bar”?

It makes no difference to you and I if it’s 2,500, 10,00 or perhaps even 100,000 DAI. For me, fortunately I have no need to open a Vault. But as an MKR holder, I do expect product-market fit. And I also agree with many here that the security of the protocol is currently, priority number one (1). Hence, we can do 2,500 – The majority of Average Jane’s and Joe’s could careless about Maker/DAI–I highly doubt that 1% of London’s population has ever heard of DAI. So, it won’t make a difference to the success of the protocol, or take it from a hand-full of users to millions in the next 12 months (hopefully I am dead wrong), whether the Dust is 500 or 10,000 DAI. So, you’re right – we are not pricing out anybody.

As I told Schuppi, we can agree to disagree :slightly_smiling_face:

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Hey @Joshua_Pritikin I want to thank you for bringing up some points that I honestly hadn’t thought about with regards to risk for the platform. While we still fall on different sides of opinion, being more aware of how regulators could see our product offerings is something I need to do. While I’d like to express it a little differently than @ElProgreso, I also agree that not bending to unnecessary (and unhelpful) practices of CeFi is one of the things that make the DeFi space in general, and Maker in particular, so exciting.

I wanted to focus some push back on this sentiment in particular. I agree fully that our current set up we are not getting compensated for the risk these smaller vaults pose to the protocol. But I think proposals like this poll (which could potentially fund the gas prices for hundreds of liquidations) can offset the risk to make the smaller vaults a benefit to MKR holders.

I don’t think the perception that smaller account holders cause more work for the protocol is entirely fair. Larger vault owners have much recourse within the legal system if they feel wronged by Maker and thus pose a different set of dangers. While it’s easy to dismiss complaints people have with being liquidated, having users more willing to engage with us and tell us where are blind spots are is a net positive. After all, this is a DAO and our strength comes from having many different people with many different skill sets contributing to the organization as a whole. If we start pricing out people from the platform we start losing a lot of valuable thoughts and opinions that otherwise would have been happy to stick around and help improve Maker even more.

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I would like to offer my full support to ideas like this, which ensures that we don’t price out users.

I hope to get support from MKR holders to solutions like this Bite-Rebate contract for keepers acting on small vaults. I’m not sure how much would be enough for our risk team to feel that we have with it offset those important risks we have with small Vaults. Maybe there are still some others solutions out there which could be easily implemented as well, but if this is our best shot it has my full support.

If a solution well prepared and analyzed and easy to implement like this goes on-chain and MKR holders oppose to assign a small percent of the Surplus Buffer in order to keep small Vault owners in our system, I hope that some of us like B.Protocol team be happy to support this cause. I’m happy to donate 1k DAI as well to support this initiative if that’s what is needed.

I’m also supporting here all those who are in this moment learning about DEFI, and those who will learn about it later. I have too many good friends in Latam who have in last months ask me to share “my knowledge of DEFI”, I’m not that knowledgeable; but for many out there, creating a wallet in Metamask, understanding the current dapps, understanding what is getting loans to keep your exposure to ETH, leverage positions and many other things that DEFI offers now is “a very complicated matter”. I’m talking here of people well instructed, even many of them with deep understanding of programming… even though “DEFI is a complicated matter”, “to participate in DEFI you need to study a lot”, and for many of them “DEFI is simply a space that only reach people can use” (biggest issue being here GAS prices of course).

I’ve done some “webinars” and the first thing I’ve always shown is how to open a Vault in MakerDAO (typically using defisaver.com or Instadapps). Last month I had similar talk, and the 500DAI dust was something that I didn’t mention in that presentation… later when some of them tried out by themselves, they gave up completely when they knew they had to give their first steps with thousands of dollars instead that with the 100 they wanted to experiment with.

Most of the people who give their first steps in DEFI, do it with a few bucks, this is not about how rich or not they are, it is that they don’t want to risk their monthly salary in something they don’t understand very well. Sadly, we’re debating a topic here which will not even give them that possibility to learn.

I completely respect your point of view on the matter @Joshua_Pritikin, but for me this has deeper implications, IMHO this translates to: “we should not encourage them to interact with MakerDAO”. I’ve loved MakerDAO since I learned about it, and I really want to talk about it to others, to mention what it could be for the future of the financial system, for the future of the world in fact. We’re not simply not encouraging small investors, we’re not encouraging the new wave of “DEFI users” to learn about us, to come to this forum and propose ideas, we’re in fact with what is being discussed in Signal Request to Increase the Dust Minimum closing ourselves to a fluent wave of new members, skilled and valuable people that will add immense potential to our community.

In fact, I entered this forum because I opened a Vault!, and I opened a Vault cause Maker was the first saving/lending platform in every list. I really would like to keep that door open, and would like to continue talking about MakerDAO to the commoner in 2021, this could be a very important year for DEFI, if the first thing users see is Compound and Aave for earning interest and borrowing stablecoins, I really think that we’ll loose our current position, our inflow of good and skilled people, and maybe even our complete DAO…

As @ElProgreso recommended to all of us: Stay Grounded Maker Community. Stay Grounded, which translates to an important phrase in my natal country: “No dejemos que la fama se nos suba a la cabeza”.

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ooooffff! I wish I could like this :point_up: 100X

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nice that you are bringing this forward @prose11 - even if I am not convinced we should go that way in the first place :wink:

to convince me:

  • what are the projected operational costs for that over time / per vault
  • how is this going to be funded? just by occasional sucks from the vat by governance?
  • do we need to keep this with liq2 or is liq2 fixing the issue itself?
  • can’t this be used to game the system (creating small vaults on purpose, if the long does not work out i can self-liquidate me knowing I get a refund of the bite-costs?)
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OK, but then the Foundation should pay for that feature. They paid for the current design that is requiring constant patches. Without patches - this system is dead/unusable for most of us in a few months. It’s OK that they don’t want to fund the next major DAI release, but they should at least help patch this release and keep it afloat for at least one year.

Hey @ultraschuppi thanks for the encouragement, even if you’re not sold on the idea it means a lot to me that you’re willing to engage with it. Your spirit of moving quickly to improve the protocol was what inspired this to get done so quickly, so I really appreciate hearing you’re happy that this is being brought forward.

I’ll try to respond to each of these points as I understand them, though I fully defer to @yaronvel for explaining the technicalities behind it.

Little hard to answer this one as the main factor for determining costs is future gas prices. The nice part is once this that if this is implemented the only operational cost is keeping the contract funded. At current peaks in gas prices, we’re looking at the initial 10k DAI seeding funding between 100 and 200 small vault liquidations.

Yes. In the future if this proves to be a viable solution we could set it up to function as a percentage of SFs generated, but the hope is that improvements to our liquidations process make the need for this contract obsolete in the near future.

A lot of people in the community (myself included) seem to be under the impression that Liquidations 2.0 will fix a large part of the issue at hand. However, @yaronvel posted here that currently it appears calling bite in liq2 is not much cheaper than in 1.2 currently. We’re waiting to hear back if the devs agree.

The short answer is no but one could try. Basically the rebate is only given to the first person that kicks off the liquidation (and it only covers the gas fee from doing so). In the event that someone could ensure they would be the first to call it on their own vault and win the bid at a discount (without having to submit further bids that would not have their gas fees refunded) they might be able to recover their own funds close to what they were worth before the auction, but the additional gas fees from separating the position into smaller vaults would make this an expensive endeavor just to break even (not to mention the cost of infrastructure to ensure they could submit the bite first and win the auction).

Let me know if that leaves any more questions or if something appears faulty in my explanation!

Also wanted to give a huge shout-out to @smaugho!! Your generosity and commitment to keeping Maker accessible literally brings tears to my eyes.

Just wow. We are so lucky to have people like you in the community and your potential financial support makes this idea even more suitable for testing.

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I am on your side, and agree that this feature is needed.
I am just emphasizing that my proposal to implement it myself is for something external to the protocol, which as a result entails very low risk, and therefore I can do it over a course of one weekend.

Anything more, is not something I am sure I have the time to do on my own,

So initially I was under the impression that liq2 will fix the issue, but now I am not so sure, and issued a query to the smart contract team here.
My intention was to have something with a fixed cost, that will serve as a temporary patch, until liq2 is live.
And I was offering to start with 10k DAI and see how it goes.

Now I am less sure that the current implementation of liq2 will solve it, but i think a small change in liq2 could solve it.

liquidation penalty is 13%, and the minimum vault is 500 DAI. so we just need to make sure the rebate is smaller. And then self-liquidating is not profitable.

In general the idea is to just take the bite incentive from liq2 and put it externally to the protocol, as a quick workaround until liq2 is live.

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