Parameter Changes Proposal - PPG-OMC-001 - 26 August 2021

Parameter Proposal Group: MakerDAO Open Market Committee
Authors: @Primoz @LongForWisdom, @Monet-supply, @SebVentures, @Akiva, @hexonaut, @ultraschuppi

Source: Risk Premiums & Competitive Rates September 2021

Table Notes:

  • Risk premiums and maximum debt ceilings assume liquidations 2.0 and are calculated based on recent market conditions
  • Negative competitive rates are mostly due to liquidity mining rewards and Compound and Aave, as well as interest and rewards earned on deposited collateral
  • Lending products are not standardized across defi and cefi lenders, and therefore rates can not be strictly compared on a like for like basis

Lending Market Overview

Source: Compound cUSDC

Borrowing rates have begun to trend upwards over the past month on defi lending platforms Compound and Aave. However, they are still well below levels seen during the bull market until May of this year. If the trend continues, there may be some scope to raise borrowing rates at the next OMC meeting while remaining competitive.

Aave has also recently broadened their liquidity incentive program to include deposit subsidies for several collateral assets (including UNI, YFI, and BAL). While this reduces incentives available for borrowing stablecoins (increasing Maker’s competitiveness in general), it also leads to lower effective borrowing costs for users of these collateral assets. This will increase competitive pressure on related Maker vault types.

Source: Coinalyze FTX ETH-Perp Chart

In centralized trading venues, funding rates have increased markedly from last month, showing consistently positive borrowing costs for taking leverage on ETH. This hasn’t yet carried over to significant increased demand for Maker’s ETH vault types.

Proposed Changes

We propose not to change any parameters at this time. In our view the covered parameters (stability fees, debt ceilings, and debt ceiling IAM metrics) are well positioned given current conditions.

Because no changes are proposed, there will not be a poll or executive vote following from this post.

7 Likes

I these are important notes.

Also with respect to competitiveness.

I keep coming back to Maker issuing a MKR-R reward token to reward borrowers of DAI with so Maker can actually compete using another value token which can be used for polling borrowers, in the future can be used to achieve negative rates, act as a delay valve so SF can be kept high while the protocol builds reserves before deciding to allocate some Buffer to buy and burn of MKR-R. There are ideas that MKR-R could be vested and with polling and maybe some voting options convert into MKR proper that only have to be ‘hinted’ at along with the idea that some small amount of revenue would be allocated to buying and burning MKR-R at the discretion of MKR governance.

I think this is a huge missed opportunity for Maker and agree this is not in the scope of OMC, risk but probably more in the growth CU domains… I mention it here because each time I see this ‘competitivenees comment’ being tossed out I am sure this one thing could bring in more deposits and increase DAI borrowed more dramatically than reduction of LRs proposed and passed by governance recently.

BTW: Wanted to say - nice report. I like these things. At some point I will have some ideas for new stuff to include but so far looks great @monet-supply

My opinion hasn’t changed since I voted against this idea, [Informal Poll] Offering DAI borrowers MKR to increase borrowing

Let’s not copy the unsustainable, short-sighted business model that our competitors are foolishly pursuing.

3 Likes

I completely agree with one part and disagree with the rest which will be obvious from my reply.

Let’s copy exactly what our competitors have done and make it sustainable, and long term. I am absolutely convinced we can do just that btw. The beauty of using a second token is that governance can connect MKR-R burn to revenues, basically keep the SF higher balancing this against the vault reward metrics to encourage deposit and more important DAI borrow growth. Rewards can also be connected to CR maintenance, used as a polling metric, as well as creating its own value to the Maker ecosystem. In the loosest sense a MKR-R is the perfect reward intermediary because it gives governance another tool over rates and a way to connect with borrowers that simply doesn’t exist today. To back a sustainable value governance only has to state an intention that some % (even 5% would be sufficient btw) of net positive revenue would be used to buy it back. We could even take some of the MKR slated to burn and offer it via reverse auction for MKR-R.

Using MKR as a reward has been a political hot potato. Governance making a new token slated to be a reward imo shouldn’t have as much political baggage - but ofc your idea nor mine has ever gotten any traction.

To help others who feel TLDR, some revenue is diverted from the DAO or MKR to pay for MKR-R.

I remain firmly against this idea. @MakerMan, please stop trying to obfuscate it.

1 Like

obfuscate. Really?! Well I guess your firmness against the above idea is similar to others firmness against using MKR for any sorts of rewards. So status quo…

Could you explain why you are against this idea? We are bleeding market share to competitors who are offering these incentives. We’ve lost 5% of the Eth market in the last four months (27.9% to 23%) meanwhile AAVE has increased share by 12% (7.1% to 19%) over the same time period.

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It’s a gimmick. If we really want to attract collateral, lower the stability fee. Lower it to zero if necessary. Make it negative, even.

Probably because the reason COMP and AAVE are gaining that market share is by massively increasing their customer acquisition costs. Whereas not paying a MKR reward for borrowing means a lower CAC for MKR shareholders. I don’t know if there is a middle ground here, but there are certainly merits to each way of doing things.

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I think there is value in having customers own tokens and become stakeholders in the ecosystem beyond being solely vault users, but I see your perspective.

Sure, but what good does a lower CAC do us if we cede all our market share to competitors?

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Market share isn’t everything. We have to be good stewards of DAI solvency, while Aave does not.

Maker should focus on the commanding heights of DeFi. Our product is DAI, not vaults. The former is the promise of being an actor on the world stage that can press for fulfillment of DeFi’s promises.

The latter is just who can provide leverage the cheapest to the riskiest customers. Fees that are not the absolute lowest also filter out those depending upon thinnest margins, and most likely to leave us rekt along with their poor financial plans.

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I agree that 100% of nothing is worse than 10% of something. However, the main point is whether diluting existing shareholders in order to incentivize borrowing is a sustainable business decision. If Wells Fargo gave $1 of equity for every $1 of debt customers borrowed, they would surely gain massive market share. The problem is that it would end very badly because it is unsustainable. Also, giving MKR rewards would undo all of the (supposed) good of buyback and burn.

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I’d disagree with the comparison, MakerDAO is more like a tech startup than an institution founded in the 19th century and the valuation metrics are completely different at this stage.

The equity market values tech stocks based on market share and not current profitability - once a company has complete market dominance they turn on the profitability spigot (multiple levers to do this). Look at Amazon, Google, Uber, Airbnb, SAAS companies or really anything listed on the Nasdaq.

Is the proposal to get into a race to the bottom with all of the other protocols and offer zero or negative interest rates in order to gain market share in a kind of war of attrition?

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