Parameter Changes Proposal - PPG-OMC-001 - 2022-01-07

Parameter Proposal Group: MakerDAO Open Market Committee

Authors: @Primoz @LongForWisdom @monet-supply @SebVentures @hexonaut @ultraschuppi

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Source: Risk Premiums & Competitive Rates January 2022

Proposed Changes

ETH-A

  • decrease Stability Fee by 0.25% from 2.75% to 2.50%

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We have seen a disproportionate decrease in DAI-from-ETH-A compared to DAI from PSMs in the last weeks and believe we are going to see lower rates on ETH across all competitors in the near future. To stimulate DAI minting from ETH-A we propose to lower the rates a bit. This will allow us to lower the Target Borrow Rate on AAVE-D3M as well.

AAVE D3M

According to the onchain polls about Net Rates Spread and Debt Ceiling Targeting we propose to set

  • the Maximum Debt Ceiling (line) from 100 MM to 220 MM
  • Target Available Debt (gap) from 15 MM to 50 MM
  • the Target Borrow Rate (bar) by 0.15% from 3.9% to 3.75%

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To understand the proposed parameters it seems reasonable to explain how we get to them

Maximum Debt Ceiling

According to the onchain poll the community gave us guidance to target for 30% of the real DAI supply on AAVE. According to this dashboard the current real supply is at 728 MM DAI

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This results in 218.4 MM DAI - we decided to round this up.

Target Borrow Rate

According to the onchain poll the community gave us guidance to target for a spread of -0.5% between the Aave borrowing market and Stability Fee of ETH-A.

The Target Borrow Rate bar can be described as

Bar = ETH-A Rate (Maker) + Borrow Rewards (Aave on DAI) + 2x Supply Rewards (Aave On ETH) + Spread

which is

Bar = 2.5% + 1.1% + 2x 0.33% - 0.5% = 3.76%

We expect borrowing rewards to move down a bit in the next days, putting 3.7% to a reasonable value for the bar.

Effects of the proposed parameters

This change will push another ~75MM of DAI into the secondary market of AAVE lowering the borrow rate of DAI below the corresponding rate on USDC. In total, this will be ~100 MM DAI provided by the Maker Protocol to Aave. With a line of 220 MM we have some headroom left in case borrowing demand increases.

This change will allow us to see if it is possible to get market share from the Aave USDC facility. People that engage in recursive yield farming might deposit in USDC but borrow in DAI (instead of depositing and borrowing in USDC). Thanks to the PSM with 0 fees, this doesn’t introduce slippage.

WSTETH-A

  • decrease Stability Fee by 1.0% from 4.00% to 3.00%

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This follows the change we propose on ETH-A and to further grow usage on this vault-type.

LINK-A

  • decrease Maximum Debt Ceiling (line) by 40 MM from 140MM to 100 MM

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Liquidity for LINK has significantly decreased in the last weeks, putting the Modeled Debt Ceiling to 99 MM. As the current utilization is below 80 MM we think it is safe to lower the line to 100 MM.

YFI-A

  • decrease Maximum Debt Ceiling (line) by 80 MM from 130 MM to 50 MM

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Same situation as with LINK - the liquidity for YFI has decreased and with that lowering the Modeled Debt Ceiling to 32 MM. As the protocol might use this vault-type we propose to leave some headroom. With a utilization of ~25 MM there should be enough space left.

UNI-A

  • decrease Maximum Debt Ceiling (line) by 25 MM from 50 MM to 25 MM

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Liquidity for UNI has decreased as well, lowering the Modeled Debt Ceiling to 4.9 MM. We don’t expect too much further traction on this vault-type so halving the line seems reasonable for us.

UNIV2UNIETH-A

  • decrease Maximum Debt Ceiling (line) by 15 MM from 20 MM to 5 MM

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Utilization on this vault-type is almost dried out, similar to UNI-A we thing cutting the line makes sense here. The community might start thinking about offboarding this vault-type as it will probably not be profitable anymore.

GUNIV3DAIUSDC2-A

  • increase Maximum Debt Ceiling (line) by 490 MM from 10 MM to 500 MM
  • decrease Stability Fee by 0.5% from 1.0% to 0.5%

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The 0.01% pool on DAI-USDC on Uniswap v3 has taken most of the volume from its older sibling; the vault-type is maxed and we propose to anticipate this change in our parameter configuration putting it to the same configuration as the 0.05% type.

GUNIV3DAIUSDC1-A

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The 0.05% pool on DAI-USDC on Uniswap v3 has dried out, most of the volume is now on the corresponding 0.01% pool. We thought about lowering the line but decided not to propose this - there is no downside for the protocol of keeping it on the same level and we can also wait to let the market sort this out naturally.

GUSD-A

  • decrease Debt Ceiling by 5 MM from 5 MM to 0 MM

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The GUSD-PSM has been launched so there is no need to keep this vault-type anymore. We started offboarding GUSD-A in the November Proposal and propose to continue here.

Revenue Effects

We anticipate the effect on annualized revenue - assuming stable levels of utilization - to be

  • -6.9MM by the Stability Fee decrease on ETH-A
  • -0.5MM by the Stability Fee decrease on WSTETH-A
  • +2.0 MM by the parameter changes on AAVE-D3M

Final Note

The proposed changes, if confirmed, should decrease yearly revenue by about 5.4 MM DAI.

Proposed changes will get included into the on-chain poll on 2022-01-16T23:00:00Z, and if passed, will be included in an executive vote on 2022-01-20T23:00:00Z.

9 Likes

I actively support the decrease in YFI, basically the team is the only user of the vault.

And because of the robustness of the protocol, I don’t think they will actively seek to use it again.

1 Like

Hi, is it possible to get an explanation of where this formula comes from? And even get it, and the corresponding values, added to the dashboard (@Primoz)?

I understand where most of the values are coming from, but I’m a little confused about why we’re 2xing the supply rewards.

1 Like

Sure. The bar is the target borrow rate of D3M and the recent on-chain poll ended with a proposed -0.5% spread between Aave DAI borrow rate (incl. rewards) and ETH-A rate. Meaning community wanted borrowing DAI at Aave shouldn’t more than 0.5% cheaper than at Maker.

The Aave DAI borrow rate is a bit trickier to calculate. It’s the one you see on UI (3.9%) minus the 1.05% AAVE rewards on DAI borrowed. So DAI net rate is 2.85% right now. But in order to compare it with Maker, you need to assume a borrower at Aave is also depositing ETH - on which you get another 0.7% of AAVE rewards if you assume the collateralization is 200% which we set as default to make things easier (hence 2x on Supply Rewards). This means the net DAI rate at Aave is currently at about 2.15% (3.9% - 1.05% - 0.7%). The spread between current ETH-A rate of 2.75% and 2.15% is -0.6%. Because we proposed to reduce ETH-A by 0.25% and bar by 0.15% the spread becomes the targeted -0.5%.

To make this calculation for Aave DAI net rate easier we made a dashboard with competitive metrics you can access here

This is then: Bar = 2.5% + 1.05% + 2 x 0.7% -0.5% = 3.75%

There is an interesting dynamic that we talked about in the meeting - if we lower ETH-A and at the same time lower the bar, how much of lost revenues on ETH-A can be offset by additional exposure on D3M because of lower target rate. And how does this behave if we go potentially even lower in the future. Currently with proposed changes about 30% of lost revenues on ETH-A can be offset with lower bar on D3M and keeping competitiveness intact. Going even lower on ETH-A rate and bar this ratio can increase but the problem is that we’ll go beyond the currently tolerated Aave D3M debt ceiling.

4 Likes

Thanks for taking the time to provide such a comprehensive explanation!

I wasn’t factoring in the collateralisation ratio so that explains why I couldn’t work out where the 2x was coming from.

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