MakerDAO, as a protocol, could benefit from transferring some of its risk off-balance sheet using a tailored policy with Nexus Mutual. This would have the following key benefits:
- Create a buffer that reduces the level of MKR minting should the system accrue debt.
- Allow more collateral types to be on-boarded, as downside risk of collateral failure is dampened.
- Provide buffer funds in an Emergency Shutdown situation giving greater confidence that DAI holders can be made whole.
An outline of the proposal is as follows:
- Who does the cover protect?
- The protocol itself, rather than individual vault owners
- MKR holders
- DAI users indirectly, by making the overall protocol more resilient.
- What are the main underlying risks?
- Collateral Failure
- Oracle Failure
- Liquidations being sold below market value
- Risk management processes failing
- How do the risks manifest themselves?
- DAI debt leading to minting and auctioning MKR
- Implementation of Emergency Shutdown
- DAI dropping below the peg
- Simple claim payout trigger
- Covers all the main risks
- keeps interests aligned with MKR holders
- pricing is reasonable
The following product assumes that nearly all material risks manifest themselves through either MakerDAO accruing debt or the Emergency Shutdown being implemented.
- Cover is only valid if purchased by MakerDAO (not regular crypto users)
- Cover is bought in lots (lot size TBA but might be 3,000,000 DAI)
- Cover is paid for in DAI and claim payments are made in DAI
- Nexus Mutual can currently offer a maximum of 32,485 ETH worth of cover in total, roughly $12m at an ETH price of $370. This will expand as Nexus Mutual grows and further cover can be bought in the future if desired.
A) If DAI debt goes above a threshold, eg 5,000,000 DAI, then a claim from one lot will be paid, eg 3,000,000. This continues for each 5m tranche, for example if DAI debt goes above 10,000,000 DAI then 2 lots will be paid, 6,000,000 DAI in total.
Note: Claims are only paid for each threshold being breached once within any monthly(?) period. This gives time so that MKR auctions get cleared and bring the debt position back to zero.
I believe the right metric to track is “Debt Available to Heal” here https://daistats.com/#/
B) If Emergency Shutdown is enacted claims on all lots will be paid. Any planned Emergency Shutdowns for the purposes of upgrading the Maker Protocol are specifically excluded.
Payments could be sent to the DAI debt pool (where auctions are conducted from), on the assumption that the DAI would directly reduces the need to hold some MKR auctions. Would need to be confirmed if this makes sense technically.
Pricing needs to be determined by Nexus Mutual stakers after the product has been finalised.
Disclosures: I’m the Founder of Nexus Mutual and hold NXM tokens.