MIP39c2-SP23: Adding the Deco Fixed Rate Core Unit

They ask for MKR compensation => MIP40c3-SP36: Deco Fixed Rate Core Unit MKR Budget

So they get DAI compensation, MKR compensation, 15% of revenues + buyout clause (the last two being a call option).

It is my understanding that without MakerDAO they can’t do anything. By reading the whitepaper, I understand that they are pivoting. All interest rate swaps protocols are capital inefficient and MakerDAO is the main stablecoin that can mint capital for collateral without any cost. This is the secret power of DAI (which I called balance sheet manipulations).

I would suggest that MakerDAO submit an RFP for all interest rate swaps-related protocols and make a decision with all data. @niemerg submitted a MIP long ago where all the code is done. They would probably submit an offer as well. @Akiva proposed one as well (asking nothing from MakerDAO).

I think it would be fair to let those people know we are willing to pay some millions for such a product and let them present what they would offer for that.

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@SebVentures all of your suggestions above plus before deciding on anything we should also do some research and try to detect the size of the market for fixed rates. Aavewatch.com have something, but they say the numbers are V1 while stable borrowing on Aave is V2.

I do not want to through all the onboarding, paying through our noses, and then find there is no demand.

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@Planet_X we are tracking AAVE and we are using debank for it right now.
So based on debank data, here are borrow amounts with stable rates, which AAVE2 is using (for how stable rates are working you can read here Borrow Interest Rate - Risk, tldr; its base on utilisation and they will change it in some conditions)

LINK: $148,660
BAT: $15,320
MANA: $30,174
ZRX: $224,624
WETH: $2,433,689
TUSD: $1,635,173
WBTC: $445,207
USDT: $12,647,416
ENJ: $436,052
USDC: $45,871,882
MKR: $15,043
REN: $1,585,982
DAI: $8,949,015
KNC: $82,639

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Thank you for those numbers @miha.
All in all a grand total of USD 74.5 million of fixed-rate loans, or 0.8% of total outstanding of USD9,250 million at Aave.

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I did a little more digging and here you can see variable vs. stable for each asset

Asset Variable rate Stable rate Total share of stable rate %
LINK 5624189 148660 5772849 3.0%
BAT 350861 15321 366182 4.0%
MANA 1566814 30174 1596988 2.0%
ZRX 76607 224624 301231 75.0%
WETH 408591195 2433690 411024885 1.0%
TUSD 80821755 1635174 82456929 2.0%
WBTC 97385890 445207 97831097 0.0%
USDT 913359487 12647416 926006903 1.0%
ENJ 166104 436052 602156 72.0%
USDC 5207512335 45871882 5253384217 1.0%
MKR 1476935 15043 1491978 1.0%
REN 913983 1585982 2499965 63.0%
DAI 1709497607 8949015 1718446622 1.0%
KNC 418741 82639 501380 16.0%
Total 8427762503 74520879 8502283382 16.0%
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This is not an apples-to-apples comparison! Aave “fixed rate” is still subject to utilization curves, Borrow Interest Rate - Risk ; As I’ve said before, I think a better indication of the level of interest is the Nexo institutional vault. In Appendix A, Deco projects that 30% of borrowing will be fixed rate. I think this is plausible if we steer people toward a fixed rate in the UX, by making it the default. Fixed rate should be the default. It’s easier to understand and better for novice borrowers.

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Sure, but I think a requirement should be that MakerDAO is the counterparty. That is, MakerDAO itself should be the main seller of floating-to-fixed swaps. That’s what makes the market liquid. As far as I know, that’s the architectural advantage that Deco has over @Akiva’s Pairwyse and @niemerg’s Term Lending Module. Maybe @Akiva and @niemerg can comment on how much development it would take to make MakerDAO the main selling counterparty.

Where does the Deco team see themselves in three years? It seems to me like they could grow into a second protocol engineering CU. Maybe Deco can comment on their future plans. Even if Maker decides that it doesn’t want the Deco Protocol, what about the Deco team? These people seem like talented people that are intimately familiar with the details of Maker.

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In our codebase MakerDAO already is the counter-party.

We are going to post our production codebase very shortly.

In your terminology, the agreement is between a borrower and lender. I find this a bit confusing because borrower and lender are approximate synonyms. If I understand you correctly, the borrower is the vault owner and MakerDAO itself is the default lender? If this is correct then why is there a matching process between borrowers and lenders?

What does this mean?

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To the extends that Nexo gets a better rate than the variable one (at least this is my understanding). So we are giving them better SF and interest rate security. Yet they don’t have to commit much as they can exit anytime (and the origination fee is not that much). To get fixed rates you usually pay more and have to commit. Make Nexo pay a bit more for the privilege of getting fixed rates and I’m not sure they will be so happy to jump in.

The problem of fixed rates is that most of the borrowers are targeting a spread. People borrow at MakerDAO to yield farm (Compound, Aave, Curve, …) or to lend at higher rates (Nexo charging more). They all borrow short term and lend short term. It doesn’t make sense to borrow long term and lend short term.

The other problem is that the collateral is volatile (ETH). DeFi lacks a stable collateral (like t-bonds or any high quality bond in the real world). Betting long term is risky.

It is my point that they all need MakerDAO (or any other stablecoin issuer) to scale due to the need of liquidity. I can be wrong, but that’s not an unreasonable assessment. IRS (Interest Rate Swap) market notional value is bigger than the actual bond market. You need an insane amount of collateral to make it work trustless.

Making a fixed rate term market in DeFi is a very tough problem.

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These contracts are based on ideas from CeFi. Regardless there is no comparison which is 100% perfect.

In general we think of it as a 3-sided market.

  1. Fixed Rate Borrower - any RWA issuer
  2. Fixed Rate Lender - Corporate Treasury
  3. Credit Support Provider - Maker

This is one way to conceptualize the deal. Note that under this model it requires no code changes or MIPs to Maker.

If you dont understand - consider that we will post our codebase very shortly.

“It seems to me like they could grow into a second protocol engineering CU.”

They could but that possibility applies to any other CU teams with good engineering backgrounds. And if that’s their primary objective, then they should apply under that. Since this possibility applies to any others, I don’t see how the budget + extra incentive + profit share is justified in that case.

“Even if Maker decides that it doesn’t want the Deco Protocol, what about the Deco team? These people seem like talented people that are intimately familiar with the details of Maker.”

That depends on what the Deco team proposes and their budget and of course, depends on what the Maker governance votes. Accountability is needed to ensure the best use of resources.

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This is a laudable negotiation opening but yeah guaranteed paid expenses + profit share + MKR incentives is pretty far fetched. Options I see are either just profit share to the level proposed (Deco operates a bit like B.Protocol in that it is an independent venture with Maker synergies) or expenses + MKR to the level proposed (Deco operates like a CU).

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While I don’t want to distract from the discussion above, I do want to mention a few points about Deco that I think make it unique relative to other fixed-rate proposals we’ve seen in the past.

  1. Unlike many other fixed-rate protocols which seem to try to vampire attack Maker TVL into their own protocol, Deco is a bolt-on on top of the Maker Protocol which keeps all collateral under our control.

  2. There is no ‘governance token’ which would put the Maker Protocol at risk (subject to an external authority).

In light of there being no token, the team can’t get really get any upside out of this being successful, hence why they opted for the revenue share model. The buy-out clause serves as a way for the Maker Protocol to subsume the lion’s share of future profits, while giving the team a ‘liquidity event’. I think it’s fair for the community to discuss what the exact revenue share number should be, but I don’t think this model of core unit should be discriminated against just because of the existence of the revenue share component. I think it’s a unique method to align incentives, where the team is incentivized to grow this as quickly as they can before the 3 year mark.

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Thanks for providing a different perspective.

But isn’t alignment of incentives the point of MKR rewards for CUs? DECO are asking for 1500 MKR over 3 years which at the time of writing is around 4.3M DAI. Profit sharing would be an interesting alternative, but I think the combination is a bit much. What’s to stop other CUs asking for profit sharing? Should PE get a share of liquidation penalties? After all, they developed the system.

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If there was an RFP, Yield would definitely be looking very closely at making a proposal. We have already demonstrated an ability to create fixed-rate protocols that can interact with Maker.

Specifically, as noted, our existing MIP43 has all the code done. It has also been approved by Maker governance in at least one vote. Yield did not asked for MKR compensation, revenues, or buyout clauses. We look forward to the deployment and integration of MIP43, regardless of any other fixed-rate approaches Maker may choose to adopt.

I am not sure what @psychonaut means by the requirement that MakerDAO be the “main selling counterparty.” In our MIP, Maker is buying fyTokens, which are zero-coupon-like tokens that are redeemable from the Yield Protocol. MIP43 provides for Maker governance to set an interest rate it must receive when buying fyTokens. Yield Protocol users sell fyTokens to Maker at that rate up to a debt limit also set by Maker governance. In short, Maker is a buyer of fixed-interest paying tokens in our proposal.

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Agreed, the proposal from Deco eliminates all risk on their end.

It should be either profit share & buyout OR MKR incentive. I feel accepting both would set a horrible precedent for the DAO.

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Thank you for this Nik! I think perhaps the community does not comprehend that @vamsi is offering to fund operational expenditure from his own revenue share–and no money ever comes from the profit share greater than the OPEX. That to me is quite generous–Vamsi could have easily chosen a different route. After-all, many devs are now being courted by other protocols and competing layer 1s.

I believe Deco is innovative, it has aligned incentives, while retaining key talent that knows the Maker protocol inside & out. I believe the community should support Deco. We need to get back to supporting innovations that solve Real World Problems (RWP)–because collecting jpegs of penguins and apes–ya, its cool–but that can only last so long.

Lets get back to being a leader in DeFi innovation.

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My understanding is that under the current proposal Deco receives max(stated budget in DAI, 15% of CLAIM-FEE revenue).

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