Apologies for length here I am just putting down my thoughts for others to digest and to get them out because the analysis and thinking here really needs to be clearly analyzed so everyone - particularly governance can sort out what they want to do.
@cyrus Lets try to clear something up.
arbitrage trades are ones that are typically made on two different exchanges ideally simultaneously for different price netting an immediate profit for the arbitrager.
Taking a position and holding it until a price changes on something IS NOT an arbitrage trade is it a position trade. In the case of a DAI price higher than 1 it would be a DAI USD short, if < 1 a DAI USD long.
What you want the markets to do to provide liquidity is to take on the DAI short position for whatever the SF is with the hope to unwind it later when the DAI price is lower. The market participants have to have a good understanding of their pricing risk, against the trade profit (or trade risk). The problem here is that capital would need to be locked and then the position taken. What happens if they need their capital back and can’t exit the trade? Or worse another event side swipes everyone and DAI prices continue to rise. Double down, up the limit. No matter how you look at this the above options A/B basically put the system at risk (A) because of the massive centralization risk having not just $100M of USDC against what $200-250M DAI and markets looking for more DAI (B) lower LR and people buying ETH in to borrow DAI. No matter how you turn this to solve the problem there still is one basic issue. What is going on here is increasing risk in ALL DeFI systems and markets and this risk is not being priced appropriately.
It is starting to remind me of prehousing crisis and a whole bunch of other financial crises where to ‘float’ or ‘protect’ the financial systems from collapse (or huge stresses leading to possible bankruptcies) that the FED, govts etc. basically heaped on liquidity to stave off systemic risk. At some point the markets can come calling on this and if one is not nimble or fast enough can sideswipe you very quickly wiping the whole thing out. It is a game where the house has to have the cards to do whatever is required no matter what. It is a dangerous game still being played with the world economy even now.
Whether to take this risk with governance in control via the direct injection methods I suggested or to decentralize this to market participants and just try to manage it via the weak and slow tools Maker has at its disposal. Well we can ‘hope’ it will work. I want to know when the first $100M USDC-A is soaked up where do we stop this? And what SF fee are you going to advocate here. Medium means ‘what’ relative to this 29%yr over year comp bait being tossed into the DeFI waters by compound? 10%, 5, 15, 2?
And are we going to sit here and not active liquidations on USDC and float everything on top of the USDC. Honestly folks this is kind of serious and the idea of just throwing everything risk wise out the window to satisfy an already crazy situation is like heaping more gasoline on the fire to put it out.
We know there is going to be a liquidity demand that might not be satisfiable with a rather unknown driver that can change everytime compound governance changes. Prudence says to head that off with somewhat of a counter move. Make it more expensive to borrow DAI now so that the overall cost to play the compound game is too high. Play into the upcoming move so we can get a solid gauge as to whethere there even is a price where people won’t play the compound game with DAI. Hell if I knew Robert I’d be asking them to exclude DAI from the comp totally so that DAI can’t be directly gamed - only via indirect methods until they can get this under control. Maker system and markets really are not ready for these stresses and could get so hammered if we get another overall market surprise risk off event that also sideswipes crypto.
Honestly I’d like to see a protocol that could handle this and I don’t consider this an emergency yet. But I can see it quickly becoming a serious problem and possibly an emergency if we drive liquidity the wrong way here making an ETH price pump and then dump when the next compound governance change happens and these farmers want to make another shift with some fraction of a billion in value of assets.
I think it is more prudent to proactively tighten slightly to compensate for risk as a rise in the PEG. Yes extend some liquidity via managed DC increases, new facilities with different rates but USDC-A LR at 101% that is so over the top reactionary. Short leverage at those levels requires literally 90x fees and tx’s because you have to roll over and over through tx fees to accomplish this type of leverage. I know because I have been doing it up to 3x on USDC-A myself.
I mean if you want to go whole hog here. Do the 101%LR up the debt ceiling to 1B set the SF to .25% just to send a message that DAI will be available for this little game but then realize what you are doing to your DAI holders. IF (and I don’t think governance will ever do this BTW) the system has to be ES’d you are going to be having everyone holding DAI bags looking to exchange for USDC and that might not be pretty to markets.
No matter what is done here if it is extreme it will lead to further market distortions that we will not be able to easily guess in advance and may end up finding ourselves trapped in a pretty bad road very quickly.
Do we up the cost by raising SF and making the PEG go up now to throttle this and control system risk or do we simply keep SF low, increase DC and lower LRs and drive up the risk component. THIS is the kind of discussion we need to be having with risk teams here. What are the additional risk components in each scenario to the entire class of people that make up the entire business community. DAI holders, vault owners, and MKR holders as well as the entire DeFI space.
What appears to be missing here is this kind of risk analysis of how the above suggestion is likely going to affect not just the players in the space but also the pricing risks (driving ETH DAI price up, massively increasing centralizing USDC risk in the Maker protocol, etc.)
It is easy to make a guess based on what seems right, but much harder to game out this risk in a rapidly changing risk and reward environment particularly in the face of what is driving this to understand the most prudent change for all parties when our chains are being yanked around by someone elses decisions.
I want to be clear I don’t see this as an emergency. I am concerned. But I want the response to be well composed and thought out from a gaming scenario point of view and I am not seeing this with off the cuff suggestions without some gaming being thought out here. My biggest problem with trying to scenario this is that I honestly don’t have a good idea of what compound governance is going to do next and this is driving everything. I am honestly not sure we can set up a catch all type of response system as the parameter space seems larger than I like and the potential driver messing things up here at 29% on $1B is god awful strong.