Hey guys, the analysis / logic behind picking the params for Liq 1.2 is fairly difficult. I think the best we’re going to be able to do on short notice is guess some ranges, and then suggest a conservative option. Please review the below analysis and give feedback, and help brainstorm ideas for a more formal research strategy. This is a very gut-feel analysis so far. Here’s some context for how we’re thinking about it.
Goal: What is a reasonable amount of Dai that can be liquidated without running into zero bids, without accruing significant bad debt to the protocol, giving Vault owners a fair shake recovering their collateral, etc. The mandate here could use some more specificity.
- The current Dai supply is roughly 450 million. Roughly 300 mil of that was generated from farming, which leaves 150 mil “organic.” This is roughly a 50% increase since 3-4 months ago, which is fairly consistent with intuition. The 300 mil is more or less levered up off of ETH, and generally speaking can’t be relied upon to bid on liquidations.
- Previously, we used to estimate ~20% of the Dai supply as being freely available for keepers to use in auctions. Of the remaining 150mil, this would imply ~30m keeper liquidity.
- USDC-A and USDC-B also now offer decent lines of credit. With sufficient time (is 6 hours enough?), keepers should hopefully be able to squeeze out another 20 million Dai liquidity. Additionally, keepers can probably source Dai from Curve or Compound these days, but let’s not depend on that.
- Analysis based on liquidation price points is ineffective because the distribution changes so frequently.
- Analyzing keeper liquidity (the optimal research strategy) is just really difficult. One idea would be to check all previous addresses that have bid on auctions in the past and check their on-chain stablecoin holdings. This could provide a rough estimate, but would take a little bit of time, and I want to get some feedback before we go down a research path (maybe there are easier solutions?)
- How many keepers currently have their capital locked up in farms?
- How much of the Dai supply that we think is available for auctions is actually going to unwind Vaults?
- What is the latest on keeper infrastructure / keeper presence?
- Parameter ranges: IMO, intuitively, there is no way we liquidate more than 75 million Dai at once. For me that is an extreme upper bound. Lower end is probably 25 million. Midpoint: 30 million from current circulating supply, plus 20 million from USDC Vaults = 50 million. Therefore, a conservative number IMO could be 25-35 million. 40-50m seems “normal.”
- What’s the downside of having it be too low?
- Price continues to tank and collateral is auctioned off at worse prices than otherwise would be, leading to minor MKR dilution.
- This could lead to several PR issues. Users complain that collateral wasn’t sold off fast enough. Or one person got liquidated, their friend got lucky and didn’t. Complaints start filling in to the forums
- In general, erring on the side of caution (worse liquidation prices) seems much preferable to zero bids. If this is a stopgap solution before Liq. 2.0, then hopefully should be fine.
- Network congestion concerns
- Assume a
boxof 30mil, and a
dunkof 50,000. That’s 600 auctions. Let’s ~double that since not every auction will be the full size of 50,000. And each auction takes 3 txs minimum (kick, tend, dent). If my math is right, we’re talking a tx every 5-6 seconds over a 6 hour time span. This seems a bit risky. Of course a keeper can bid on many auctions in the same block, but just want to say this is trickier than it seems at first glance.
- Given Ethereum is 15 tx/s, this equates to roughly 1-2% of Ethereum network capacity.
- Assume a
- Suggested parameters for launch:
box: 30 million,