If you are uncomfortable with a large PSM, this is a possible way to limit that. If you are comfortable with a large PSM, this is probably unnecessary
We’ve all noticed how the PSM is filling up, and today is now the single largest vault class in the Maker Protocol.
The PSM’s main function at the moment is to inflate DAI supply by the process of arbitrage with USDC. I propose we need to think about new ways to purposefully debase DAI so that price stability in terms of $1 = 1 DAI is maintained.
DAI are, ultimately, debt that is either issued by Maker (via RWA or PSM) or guaranteed by Maker on behalf of private individuals (who use the standard vault classes). This debt (DAI) is consistently trading above face value in the markets. Thus far, the rather simple and elegant answer to this was the USDC PSM. I do not find a large PSM troubling, but many do.
I propose that we consider when USDC is above a certain threshold – perhaps 3 billion or even higher – we have a new ilk for MKR that is authorized to flap. Instead of burning this MKR, it will be held in the vault. From an accounting standpoint, this is just changing our capital structure by retiring equity through the issuance of debt. It also leaves something that the DAI is minted against.
This does come with some uncomfortable optics, namely that the (probably not correctly named) SB could be negative if done in extremely large amounts. That is as designed. It does not mean Maker is bankrupt or cannot cover its expenses. It means that we hold more debt than cash reserves, which is not unusual.
Note that this is not primarily to finance expenditures or even buying back MKR. It is only done to maintain the peg, and in this case reduce exposure to a single counterparty (Circle).
The reason this would be done with MKR is to limit the distortions to prices of other assets that are not themselves expressly pegged to the dollar, or may be improperly propped up themselves by another PSM. Also, by doing it with MKR, and with what is effectively zero-coupon debt (DAI), we are mostly just moving things around internally, without in real time altering the value of Maker Protocol in aggregate. This is because the E in the core accounting equation is simply being reduced buy the exact same amount as L is growing:
Assets = Liabilities + Equity
If L grows by 1 DAI, but E shrinks by 1 DAI, then the net value of Maker Protocol’s assets has not changed.
Do note that regardless of how you feel about this particular proposal, debasing DAI is what is necessary to keep the peg maintained. We already do this every day through the PSM’s operation. This is merely a different way to do that so there is another tool in the box besides the PSM. It makes a lot of financial sense in general, and also reduces (or slows down growth of) exposure to USDC.
There is more thought that would need to go into the technical execution – perhaps a new ilk isn’t the best choice – and there are several aspects that may be uncomfortable to on a philosophical level (negative SB possibility without minting, accepting MKR as a kind of “collateral”). But we need to think about the most harmless ways to diminish the deflationary pressures on DAI.
- Yes. We need more than one way to increase inflation to maintain the peg
- No. USDC-PSM and any future stablecoin PSMs will provide enough inflation to maintain the peg