Parameter Changes Proposal - PPG-OMC-001 - 7 April 2021

[ultraschuppi]

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

Source: Risk Premiums & Competitive Rates April 2021

Table Notes:

• Risk premiums and Maximum debt ceilings are based on Liquidations 2.0 which should be implemented in next few weeks for all assets

• 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

Competition in the AMM backed lending space is beginning to heat up, with Aave’s v2 AMM market going live over the past month. This joins the Cream money market as a MakerDAO competitor.

General competition for stablecoins is also increasing, with Liquity protocol (focused on ETH based lending) and Fei protocol both launching recently. Inverse Finance’s DOLA stablecoin is another notable upstart competitor. Greater competition in the stablecoin space could reduce DAI demand and increase Maker’s cost of capital, although this does not appear to be an issue presently.

Rates have remained high throughout the month of March, with Aave in particular seeing very high stablecoin borrowing rates. This was partly caused by poorly tuned stable rate parameters, which allowed certain users to borrow all of Aave’s liquidity for below market rates. This in turn caused borrow rates for opening new positions to reach extremely high levels. Aave is addressing this by deactivating stable rates in Aave v1 via a governance proposal.

Compound DAI Borrow Rates

Aave DAI Borrow Rates (yellow)

Proposed Changes

ETH-A and WBTC-A

We aren’t proposing any rate changes for our largest vault types this month since we have recently seen a notable amount of USDC-A and PSMUSDC-A unwinding and we may want to keep momentum going. The newly calculated risk premiums that are based on Liquidations 2.0 are also showing lower figures for higher debt exposures, which makes us less worried about the pace of debt increase on ETH-A.

LINK-A

• Increase SF from 3.5% to 5%

Higher debt utilization has increased LINK-A risk premium and we therefore recommend 5% SF, which is still lower than average competitive rate of 7.9%.

ETH-B

• Increase SF from 9.0% to 10.0%

Despite increasing SFs in the last months, the utilization of ETH-B has not changed. We believe we can increase SF by additional 1% as ETH-B borrowers might be less rate sensitive than believed.

YFI-A

• Increase line from 75 MM to 90 MM

The current executive is raising the line of YFI-A from 45m to 75m. However, risk metrics for YFI-A currently look very good because of high collateralization of largest vaults and therefore an even higher debt ceiling can be implemented. We may though recommend higher SF for this vault type next month if the newly set debt ceiling becomes heavily utilized again or vault collateralization metrics worsen.

ZRX-A

• Increase SF from 2.0% to 4.0%

ZRX has one of the worst on-chain liquidity metrics that is an important factor under Liquidations 2.0 implementation. Risk premium therefore increased and we recommend higher SF, especially if debt exposure continues to grow with recently increased debt ceiling to 10m.

AAVE-A

• Decrease SF from 4.0% to 3.0%
• Increase line from 25 MM to 50 MM
• Increase gap from 2 MM to 5 MM

The on-chain liquidity of AAVE and vault collateralization metrics are very good and we can safely decrease SF. Similarly we recommend a higher debt ceiling despite the low utilization.

BAT-A

• Decrease SF from 6.0% to 5.0%
• Increase line from 3 MM to 7 MM

BAT also has improved metrics which lead to risk premium to decrease. It is still higher compared to other similar collateral assets because of a lower 150% liquidation ratio. Yet, we recommend the decrease of SF and increase of Debt Ceiling.

RENBTC-A

• Increase line from 2 MM to 10 MM
• Increase gap from 0.5 MM to 1 MM

Utilization on RENBTC-A has increased in the last month and recent joint undertakings from Alameda and Ren team decreased some of the risks associated with the RenVM protocol. We therefore recommend a higher debt ceiling.

LRC-A

• Increase SF from 3.0% to 4.0%
• Decrease line from 10 MM to 5 MM
• Decrease gap from 2 MM to 1 MM

LRC on-chain liquidity is mostly on the L2 which creates some risks for Liquidations 2.0. We therefore recommend higher SF and lower debt ceilings until vault and liquidity metrics improve.

MANA-A

• Decrease SF from 4.0% to 3.0%
• Increase line from 2 MM to 5 MM
• Increase gap from 0.5 MM to 1 MM

NFT hype has improved MANA metrics and we recommend slightly favourable changes to both debt ceiling and stability fee.

BAL-A

• Decrease SF from 3.5% to 2.0%
• Increase line from 5 MM to 30 MM
• Increase gap from 1 MM to 3 MM

BAL metrics improved - although the volumes are lower, the on-chain market depth metrics are very good. Despite the SF being already low, we can afford to lower it additionally and boost demand.

Stablecoin Vaults

• Decrease USDT-A Debt Ceiling from 2.5 MM to 0 MM

We believe the USDT-A vault doesn’t carry any business significance for Maker and we are recommending to “disable” this vault type by setting the debt ceiling to 0.

Once we have PSM implemented for other stablecoins, we will also suggest setting debt ceiling for other stablecoins vaults to 0 (PAXUSD-A, GUSD-A).

UNI LPs

UNIV2DAIETH-A

• Increase SF from 3% to 3.5%
• Increase line from 30 MM to 50 MM

Because of 125% LR, this vault’s risk profile is similar to ETH-A and higher SF should be implemented from a risk perspective. We though recommend a smaller increase compared to ETHUSDC pair since we prefer users favour DAI pair. Because of recent high demand after increased debt ceiling we are also recommending another increase to equal USDCETH LP pair debt ceiling.

UNIV2USDCETH-A

• Increase SF from 3.5% to 4.5%

Similarly as mentioned above, this UNI LP pair should have higher SF from a risk perspective as ETH exposure in Maker is increasing. Because of a) higher APY for eth-stablecoin pairs and b) 5x max leverage and c) much higher competitive rates at Aave we believe such SF is still very tempting for users.

UNIV2DAIUSDC-A

• Decrease SF from 3.0% to 1.0%

We may want to stimulate this pair as it has a similar risk profile for Maker as PSM but can be more yielding. APY for users at max 11x leverage and at 1% rate can reach over 50%.

UNIV2WBTCETH-A

• Replace Debt Ceiling of 3 MM with line of 20 MM
• Enable DC-IAM and set ttl to 12h and gap to 3 MM

With the upcoming implementation of Liquidations 2.0 we believe we can safely increase debt ceilings of other riskier UNI LPs. The recommended debt ceiling increase is still lower than what models suggest due to caution and expected delay of Liq 2.0 implementations for UNI LPs.

UNIV2UNIETH-A

• Replace Debt Ceiling of 3 MM with line of 20 MM
• Enable DC-IAM and set ttl to 12h and gap to 3 MM

Model suggests a higher available debt ceiling but we are increasing it with caution for reasons mentioned above.

UNIV2LINKETH-A

• Decrease SF from 5.0% to 4.0%
• Replace Debt Ceiling of 3 MM with line of 20 MM
• Enable DC-IAM and set ttl to 12h and gap to 2 MM

A smaller increase in debt ceiling is due to higher LINK debt utilization on LINK-A vaults and lower demand.

UNIV2AAVEETH-A

• Decrease SF from 5% to 4%
• Replace Debt Ceiling of 3 MM with line of 20 MM
• Enable DC-IAM and set ttl to 12h and gap to 2 MM

A smaller increase in debt ceiling is due to smaller UNIV2AAVEETH current pool size and lower demand. We are also recommending lower SF due to lower exposure and low pool APY.

UNIV2ETHUSDT-A

• Replace Debt Ceiling of 3 MM with line of 10 MM
• Enable DC-IAM and set ttl to 12h and gap to 2 MM

We are suggesting smaller increases for USDT related exposures due to various Tether related concerns that still haven’t completely settled.

UNIV2DAIUSDT-A

• Decrease SF from 4% to 3%
• Replace Debt Ceiling of 3 MM with line of 10 MM
• Enable DC-IAM and set ttl to 12h and gap to 2 MM

We are suggesting smaller increases for USDT related exposures due to various Tether related concerns that still haven’t completely settled. We are also recommending lower SF to stimulate demand as there is not usage, probably due to lower pool APY.

UNIV2WBTCDAI-A

• Decrease SF from 2% to 0%
• Replace Debt Ceiling of 3 MM with line of 20 MM
• Enable DC-IAM and set ttl to 12h and gap to 3 MM

This vault type is not seeing any demand even at 2% and we are suggesting 0% rate to boost demand. Increased liquidity in this pool would also help Maker with our overall WBTC exposure and WBTC liquidity risks.

Final Note

Proposed Parameter Changes will get included into next week’s on-chain poll on 2021-04-11T22:00:00Z, and if passed will be included in an executive vote on 2021-04-15T22:00:00Z.

[Aaron_Bartsch]

Have you guys discussed a timeline for when ETH-B DC can be increased? I’m assuming it depends on the successful rollout of Liquidations 2.0? Just wanted to confirm.

[ultraschuppi]

yepp, imho the whole topic of low-LR-vaults can be revisited with Liq2 in action. WBTC-B has been delayed for the exact reason as well. weeks not months ™

[Aaron_Bartsch]

Since DAI/USDT UNI LP has 0 traction, did you guys think about dropping the SF for that vault to 0%? If not, why?

[LongForWisdom]

Mostly just ‘Tether bad’ I think. It does have slightly more liquidity in the pool than WBTC-DAI. It’s also that WBTC-DAI directly improves liquidity for WBTC, so if we can incentivise that pool into existence it provides us other benefits.

USDT-DAI does have some benefits as well, but I think everyone in the group still feels Tether is a bit sketchy.

I agree it’s not super consistent though heh.

[Aaron_Bartsch]

With their recent attestations it might make sense to lighten up slightly on the Tether hate. I have been guilty just as much as others to distrust them but perhaps we’re needlessly shooting ourselves in the foot at this point.

[LongForWisdom]

@Aaron_Bartsch

With their recent attestations it might make sense to lighten up slightly on the Tether hate.

Those came up as part of the conversation actually. @Akiva was not very impressed with them, perhaps he can comment?

[Akiva]

1. From the attestation:
   “Activity prior to and after this time and date was not considered when testing the
   balances and information described above.”
2. The other thing was that I could not find anything in the attestation which specified which kind of assets the entity holds.

Considering 1&2 together makes me concerned. I suppose if either one of those two were cleared up Id feel better about loosening parameters.

[ejbarraza]

If the debt ceiling on USDT is 0 then why not do the same to the LP token? I mean if Tether bad just kill it off the outset.

[Replenish2030]

I think raising rates further on ETH is very user hostile. Is our goal really to squeeze our users so much that they quit using the protocol? Its especially strange when the new liquidation upgrade is coming soon which should supposedly allow higher DC for high leverage collateral types

IMO it makes more sense to focus on long term growth

[Primoz]

@ejbarraza

If the debt ceiling on USDT is 0 then why not do the same to the LP token? I mean if Tether bad just kill it off the outset.

We limited USDT exposure in total to 20m (actually 10m in if you count 50% exposure in both UNI LP pairs) which equals or is below current Surplus buffer. Stablecoin vaults are not usable anyway and we see more downside than upside of having USDT-A enabled at this point. Even PAXUSD-A and GUSD-A are not really usable now considering PSM, but we don’t see that much downside having it enabled until we have PSM for more stablecoins.

@Replenish2030

I think raising rates further on ETH is very user hostile. Is our goal really to squeeze our users so much that they quit using the protocol? Its especially strange when the new liquidation upgrade is coming soon which should supposedly allow higher DC for high leverage collateral types

Well I wouldn’t say it would be hostile considering the market wide rates going higher again and the spread between competition and Maker only growing. But you are right that Liq 2.0 decreases risk premiums and we are more relaxed towards growing exposure on ETH. This was one of the reasons we didn’t propose to increase ETH and WBTC first this time after 4 months of continuous rate increases even though the exposure keeps growing with the similar pace.

It is debatable whether ETH-B needed a 1% increase at this point, but we jointly decided that ETH-B users are not very rate sensitive and we could afford another increase. ETH-B is also one of the best ETH leveraged products in DeFi (because of OSM and low LR) and for those bullish on ETH in current environment, 10% rate shouldn’t hopefully hurt considering competitive rates. Plus we wanted to have risk premium covered, calculated at 9.9%. I personally think a lot of users are very rate insensitive currently when we are talking about 2-3% spreads and the recent a bit slower than expected migration from ETH-A to ETH-C just confirmed this. In bullish environment, people care about LR mostly.

[Replenish2030]

@Primoz

we wanted to have risk premium covered, calculated at 9.9%.

This is very important information. So users can expect that it will not go above 10% unless the risk materially changes? Right now these changes feel very arbitrary and “whatcha gonna do”

IMO i would prefer to frame these things the opposite way. If the calculated risk premium is 9.9%, then anything below that is subsidized risk. So really eth-b right now has a risk subsidy of 1% which you are proposing to remove. That’s a much better way of framing it since this implies that this isn’t just yet another random rate hike that will just keep coming until we have crushed the users so much they start quitting.

[hexonaut]

This is more or less the formula we’ve been sticking with for all collateral types. Do our best to compensate the risk premium while not overshooting the competition and some special consideration to try and get supply up at a reasonable rate. It’s a little subjective sometimes, but that’s the general idea.

[alexis]

Just wanted to say all good.

It makes totally sense to increase eth-b as it max out and we can’t increase the DC.

Thanks for doing it.
And what an archivement if we compare at before when rates were moving up and down every other weeks without much consistency.

[ultraschuppi]

The onchain poll passed with a nice 100% approval (also by a16z). However, as the first step towards Liq2.0 are planned for tomorrows executive, the changes will get into the executive of 2021-04-22T22:00:00Z

I will update here once the spell is online so you can help on making it real as quick as possible.