Parameter Changes Proposal - PPG-OMC-001 - 4 May 2021

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

Source: Risk Premiums & Competitive Rates May 2021

Table Notes:

  • Risk premiums and Maximum debt ceilings are based on Liquidations 2.0 which is in rollout right now
  • Negative competitive rates are mostly due to liquidity mining rewards at Compound & Cream and due to rates and rewards accrued on deposited collateral
  • Lending products between secondary lenders and MakerDAO are not standardized and therefore rates can not be strictly compared.

Lending Market Overview

During the past month, Aave began a liquidity incentive program covering primary stablecoins, WBTC, and ETH. This has lead to a substantial decrease in borrowing rates on Aave v2 and has pushed down the overall competitive rate landscape

Despite the bullishness surrounding ETH, rates on centralized lending or trading venues seem to be trending downward as share of leveraged long positions was overtaken by increasing net short positions in ETH at Bitmex. Similarly data from Binance show that funding for ETH perpetuals decreased recently, suggesting that leveraged long ETH positions have lost some steam.


Source: Bitmex ETH longs


Source: Binance ETHUSDT Perpetual Swap (annual funding rate)

Proposed Changes

ETH-C:

  • Decrease SF from 3.5% to 3%

Although risk metrics on ETH vaults improved in general with increased collateralization ratio metrics, lower on-chain slippage and Liq 2.0 implementation, we still want to promote higher usage of safer ETH-C vaults as overall exposure to ETH in Maker’s portfolio is growing.

KNC-A

  • Increase SF from 2% to 5%
  • Decrease line from 5 MM to 1 MM

KyberDAO is currently in a migration process from the current KNC-token to a new one. The liquidity for the KNC will very likely dry out at some point and we don’t see any reason to wait any longer, so we suggest pushing for the vault-owners to unwind their positions now. Note that there are only 11 vaults remaining having approximately 50.000 DAI debt in total.

Please note, that there is also a Signal Request about the future of KNC-A.

TUSD-A + PAX-A

  • Increase SFs from 0% to 1%
  • Decrease DC for PAX-A from 100 MM to 0

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Utilization of TUSD-A hasn’t changed a lot since the DC has been set to 0. For PAX-A - where liquidity is really low - we have seen a substantial increase in utilization in the last weeks as users tend to use PAX-A vault to farm with DAI since PAX on-chain farming is limited. We want to encourage vault-owners to close their position (which is essentially a free short position on DAI). Later on - with Liq 2.0 - we are able to liquidate these positions in a more controlled manner, so the threat of vault-owners abandoning their vaults is not existing anymore. In case vault owners don’t unwind their positions, we may however accrue some fees from vaults going below 100% CR, but the amount estimated is small (max 25.000 DAI per month).

USDC-B

  • Decrease DC from 30 MM to 0

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USDC-B was planned as a last resort when PSM is fully utilized and we see a liquidity crunch during liquidations. With Liq2.0 the risk of a lack of DAI-liquidity is a lot lower since a vault-liquidation can happen in a single TX thanks to flashloaning, so there is basically no need to keep this tool.

Others

ETH-A

We considered raising the ETH-A SF by a small margin, since we believe users are very insensitive to small rate changes in the current environment. Additionally this would also further incentivize migration to ETH-C. However the decision was made not to make any changes, since we still have a substantial inflow of USDC into the PSM and still want to encourage further increase in DAI supply to meet increased demand.

ETH-B

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We have seen a rather big liquidation on ETH-B last week which went pretty well and produced a nice income to the protocol. At a first glance this could be seen as an indicator that even with Liq 1.2 we are in a pretty safe spot. However, this liquidation did not happen during a big market drop and would probably have had a different outcome if this would have happened during a real market crash.

We suggest playing it conservatively, so we decided against raising the line for ETH-B until we have some proof that Liq2.0 works significantly better than the current system. The currently running executive will move ETH-B to Liq 2.0 - if this passes we will hopefully have some more data at the next regular MOMC-Meeting in the beginning of June to revisit this topic.

UniLP tokens

The APY for liquidity providers is still really high so we could easily increase the SFs - but since Uni V3 is about to launch tomorrow we decided to just wait how this evolved in the next weeks.

Final Note

Proposed Parameter Changes will get included into next week’s on-chain poll on 2021-05-09T22:00:00Z, and if passed will be included in an executive vote on 2021-05-13T22:00:00Z.

10 Likes

If this is the case why did you not consider decreasing ETH-A SF to compete?

ETH-A utilization is still growing and demand seems to still be really high (despite almost x3 the SF in the last 6 months).

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I don’t think we have a real issue in terms of competition for those who are mega bullish and want to leverage as much as possible. For those who want to leverage moderately ETH-C is the right spot - and we propose to lower the SF there.

No need to leave money on the table.

1 Like

But it could be even higher * taps head *. I guess we’ll never know.

Edit: There is a lot more competition in this landscape these days. My intuition says that while a large portion may not be rate sensitive, there is still a large section that follows the best rates (since migration is so easy). This is the supply we’re missing out on.

I think everyone knows we are a bit over the price at the moment but,
My understanding is that we should wait a bit until aave rate settled to see exactly where we are.

I haven’t been part of the meeting but for me it makes sense to wait a month or two before changing things.

Aave started one week ago and there are actually significant rate changes on they side. From 30% to 3%.

2 Likes

Yeah well - I initially had the same feeling and I was surprised about the lack of adoption of ETH-C. My read on that is: the majority of players are totally okay with paying higher SF for being able to have a lower LR.

For those that are happy with exposing a lot lower risk on us (by running with a higher CR): ETH-C is there - a lot cheaper than ETH-A :slight_smile:

Fair enough, I don’t see the risk side. So you’re saying that from a risk perspective, the rates we have at the CRs we have are as low as we should go right now given market conditions?

Yes–agree. Good call/decision by the RISK Team on keeping Rates for ETH-A steady. As you said, the majority of folks are okay with paying higher fees–the opportunities in DeFi to gain higher returns with DAI are endless.

2 Likes

We got 4.1% risk premium for ETH-A, mostly because ETH on-chain liquidity is really high and CR distribution improved. But there are few inputs of the model that we can’t really predict until we have Liquidations 2.0 running. For instance we aren’t yet sure what the average keeper’s profit will be in auctions. Higher profit means lower realized settlement prices in auctions and higher probability of loss for Maker, essentially higher risk premium.

I think it is fair to say that Maker has this enormous advantage when it comes to borrowing larger amounts. So even if rates are lower at Aave and Compound, Maker is still much more competitive on the loan availability side of things as there are no liquidity constraints for taking out a loan. Not to mention OSM feature, non-volatile rates, etc…This is why I am personally not too worried if Aave or Compound are cheaper for 3 to 5% after liquidity incentive rewards. Especially in this market environment.

6 Likes

Thank you for putting my concerns to rest!

Let’s not forget that if you’re really doing large scale stuff, with Maker you don’t move the market like with a LP. Also, our variable rates are a lot more fixed than many alternatives