Proposal for Collateral Onboarding of USDC

Hey all,

Due to the on-going liquidity situation and Dai price instability, we need to make a quick decision on risk parameters such that the executive can go on-chain as quickly as possible. We are targeting getting the executive vote on-chain as soon as the GSM delay is changed to 4 hours. The contents of said executive vote will be influenced by the outcome of these polls.

First, the Interim Risk Team presents a note on oracles and liquidation given the nature of USDC as collateral. Then we follow with a brief summary of the tradeoffs for each of the major risk parameters (Stability Fee, Debt Ceiling and Liquidation Ratio) with respect to the emergency onboarding of USDC collateral as part of the effort to increase Dai liquidity.

Following a description of the tradeoffs, the Interim Risk Team presents a number of polls that will be used to gather community sentiment and feed into the risk parameters included in the executive vote. Initially, the plan was to present combined risk parameter packages, however, after consideration, separate polls for each of the key risk parameters were determined to be more appropriate.

The main goals that MakerDAO should aim to achieve with the introduction of USDC as an emergency collateral type are as follows:

  • Increase Dai liquidity specifically for keepers taking part in both FLIP and FLOP auctions.
  • Increase Dai liquidity such that the Dai peg moves closer towards $1.

Oracles and Liquidation

Due to the nature of the collateral and the time constraints, it is proposed that the oracle price of USDC be set to $1 for the purposes of this Vault. The governance community can consider migrating to another oracle solution in the future.

Under normal circumstances setting the oracle price to $1 would still allow liquidations due to accrual of stability fees. However, the collateral type will launch with the new “collateral liquidation freeze” component switched on. Vault users will not be subject to any liquidations in the short term, even with the accrual of stability fees. Please note, however, that Vault users may be at risk when the liquidation freeze is removed in the future. As always in a non-custodial, permissionless and decentralized system, users alone are responsible for their Vaults.

Debt Ceiling

There are three main drivers to consider for the USDC debt ceiling. The primary use case is to provide keepers with access to Dai liquidity should they need it to participate in ETH flip auctions. Based on an analysis of the current structure of the Vault portfolio, if Eth were to fall into the $60-$80 range, the set of keepers would collectively need to raise ~20 million Dai amongst themselves.

The secondary use case is to provide liquidity for Dai markets, where the Dai price has been trading as high as $1.10. A high debt ceiling would allow market makers to absorb the excess Dai demand seen on centralized exchanges as well as on supply shortages seen on secondary lending platforms such as Compound and dYdX.

Thirdly, the community may want to allow additional debt ceiling room to facilitate DeFi users to refinance their outstanding positions from secondaries back to Maker Vaults. The benefit of this is that Maker governance would be able to more directly influence the liquidity situation for the broader ecosystem.

A final consideration for debt ceiling is the risk of “blacklisting” by the issuer of USDC or another entity in control of this function. If such a situation were to arise, MKR holders could conceivably need to mint additional MKR via the debt auction in order to cover any potential shortfall from a blacklisting event.

Depending on how aggressively the community wants to address these three issues, the debt ceiling could conceivably range anywhere from $10 million to $40 million. Please keep in mind that a more conservative or more aggressive debt ceiling can always be increased / decreased through governance (subject to the 4 hour GSM delay). This will allow the Interim Risk Team and MKR Holders to reevaluate a highly evolving situation, at a tradeoff of governance overhead.

Liquidation Ratio

Liquidation ratios are typically expected to be fairly low for fiat-backed stablecoins due to their low volatility. However, in this particular instance, governance is targeting highly specific use cases, and the community may be susceptible to a rationing risk. For example, a 102% LR allows for 50x recursive leverage. This means that a user with only 1 million USDC could deliberately soak up the entire debt ceiling through recursive leverage. Spreading the USDC over multiple users should mean that on average more of it will go towards the intended use-cases.

Similarly, too high of a liquidation ratio (such as the 150% LR for ETH) is a potentially inefficient use of collateral. As a comparison, secondary lending platforms typically target a 125%-135% range. As a result, a 125% LR is suggested.

Stability Fee

The stability fee should be set with the community’s specific use cases in mind (auction keeper liquidity and Dai peg management). The primary consideration is that the stability fee should be set high enough so that the limited debt ceiling is not utilized for any alternative use cases that don’t alleviate keeper liquidity or the Dai peg. Too low of a stability fee could cause just a few Vault owners to utilize the entire debt ceiling. Therefore, a high stability fee can price out these Vault owners.

Another consideration is secondary lending platforms, which currently carry a 17%-45% lending rate for Dai due to the high utilization rate. If the stability fee is below these amounts, then a significant amount of Dai will be generated to immediately lend to these other platforms. This is not necessarily undesirable, but it is not one of our primary goals, and the debt ceiling could be hit very quickly.

At the same time, too high of a stability fee may cause fewer Vault owners to take advantage of this collateral type, reducing the effectiveness of the collateral type.

Due to the competing dynamics, governance should be vigilant in adjusting the stability fee appropriately based on changing market environments. The community should be aware, however, that it will be easier to start high and lower the stability rather than the opposite.

Liquidations would be disabled at the launch of the collateral type. However, the following are proposed auction parameters subject to the removal of the liquidation freeze.

Liquidation Penalty

The liquidation penalty is suggested to remain at 13% for similar reasoning as other Vault types. The liquidation penalty cannot be too low due to the auction grinding attack vector.

Auction Lot Size

An auction lot size of 50,000 USDC is proposed for similar reasoning as other Vault types. Lot sizes that are too low cause significant friction with respect to network congestion and usage. Lot sizes that are too high price out many individual smaller keepers. To strike a balance between network congestion and participation, a 50,000 USDC lot size is suggested.

Auction Bid Duration

A bid duration of six hours is suggested for similar reasoning as other Vault types. Too low of a bid duration can be dangerous due to potential network congestion issues. Too long of a bid duration means the keeper will incur additional price volatility risk

Minimum Bid Increment

A bid increment of 3% is suggested for similar reasoning as other Vault types.

Maximum Auction Duration

A maximum auction duration of 3 days is suggested since liquidations might occur under uncertain circumstances. For example, if the market price of USDC is trading at $0.50 (yet the fixed oracle is still displaying $1), then Vault owners are incentivized to max out their Dai generation, which would lead to mass liquidations soon after. In such a scenario, the community might want to keep auctions running for several days in order to facilitate the liquidation process.

Dust Limit

A dust limit of 20 is suggested for similar reasoning as other Vault types. This decreases the risk of spam Vaults being created.

10 Likes

Hey guys, here are the polls that Cyrus suggested would be appropriate given the above post and risk considerations for USDC.

Based on the ongoing liquidity risk and variable market, these polls will be live for at least an hour before the executive goes on-chain. Anything past that is bonus time. I would urge everyone to signal as soon as possible.

Poll 1 - Initial USDC Debt Ceiling

  • $10 million
  • $20 million
  • $30 million
  • $40 million

0 voters

Poll 2 - Initial USDC Stability Fee

  • 15%
  • 20%
  • 25%
  • 30%

0 voters

For both of these polls, you can vote on multiple options. Please vote for anything you would vote for in an on-chain executive vote.


Edit: By request, here is a yes/no poll for USDC.

Poll 3 - Should we emergency onboard USDC as a collateral type to help mitigate Dai liquidity issues?

  • Yes
  • No

0 voters

Please note that I think there will be an executive regardless of the outcome of poll 3, it is mainly serving as a barometer for off-chain community sentiment at this time.

5 Likes

There is a significant amount of urgency related to this exec. A large number of ecosystem actors and liquidity providers need to coordinate in a timely manner in order to further secure the system.

The community may not have more than an hour to collect signals before this proposal needs to be moved into the portal. There is a possibility that if the OSM price remains constant over the course of the next hour we might be able to extend the debate.

8 Likes

Is there any legal opinions/analysis on the likelihood of this happening? Another 10 mil via debt auctions would be bad.

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In the early part of the Governance and Risk Call this was discussed. Check it out: https://www.youtube.com/watch?time_continue=1&v=YZFfGlp01q0&feature=emb_logo

I Like when Chris P. points out that Tornado Cash uses USDC haha

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Perfect, watching now

Rather simply encourage Dai holders to sell Dai for USDC and also impose negative SF than using USDC as a collateral.

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As I stated in governance and risk - using one option here and not doing a second or even third one at the same time centralizes blacklisting risk. It increases this as a hazard and basically kills the whole scenario as a valid option. Doing two more means one of them should work (TUSD since they applied and maybe PAX as possible options) same parameters but spread DC’s should suffice.

If we see they all go we can manage the DC’s appropriately.

Secondly with respect to starting up liquidations - please make sure to give enough warning time before turning those on - 48hrs minimum.

I have a problem with 15% SF but honestly want this to start low vs. high as suggested. You guys actually want people to use this don’t you?

I also want to urge to start the DC on the low side vs. going high immediately and to urge putting up a new executive with MCD DC going from 100M to say 80M to limit any sort of MCD minting attacks. Even $75M would not be unreasonable.

The other hazards is that PEG quickly reverses hard and the hope is the users of the facilities will mop up the excess DAI at profit… This will need to be watched carefully and is a real risk here. This is particularly true if markets fall and collateral is auctioned at some point when/if vault collateral is cleared in auction the need for DAI will dry up faster than it is being created the reversal move here is going to have to be swift as well - probably by using the USDC SF to mop it up and a looming turning on liquidations announcement which may whipsaw liquidity again.

I want to urge the community here. Start and try to move slower than you think because fast moves could just drive this system to an unmanageable state.

MKR market cap is $170M, TOTAL outstanding here is $83M If I have correct number - even if all collateral liquidates at 50% the hook here for MKR is at most $30M and falling. EDIT ADD: 83M*.63 = 52.3 which leaves about $30M potential gap. .63=.5(avg sale price) - .13 liquidation fee.

I also would urge a better control over auction mechanics and an absolute minimum floor on ETH price that Maker would rather choose to ride the collateral with vault owners than liquidate it.

I have this price around $30 ETH but have no clue where MKR cap will be then perhaps $50-60M frankly at that point most people are en effect pretty wiped out except everyone trying to participate in a growing USDC/DAI fund to stabilize these markets and MKR will have ~10M or so of USDC in coffers to cover as well.

I also want to note from what I’m seeing it looks like ES is completely off the table here - so basically no-one is talking about conditions for ES which is the alternate approach to consider here while the OSM and market prices are still rather ‘intact’ and not ‘dis-located’ - thinking one can do an ES with OSM live market price dislocation is probably the worst time to ES this.

Maybe rather than go through all these convolutions an ES is better. Honestly on the fence here and about all I have to say at this point. Seriously consider adding at least one more stable coin to this endeavor than USDC to spread the blacklist event risk.

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Hey, Ryan from TUSD here. We would love to re-open the conversation about TUSD being added as a form of collateral. We submitted an application in September of 2019 (Link). Let me know what we can do to support

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Edit: Now closed, thank you to all who signalled.
5 minute warning. These are closing on the hour.

If Circle can freeze the whole pool this basically will give Circle power to end Maker in this situation right? Atleast initiate another deep mkr minting event. I have no idea about the relationships with that group, but DAI is still a competitor right? Maker is different than compound, tornado, dy/dx ect.

Dammit wanted to get rid of my vote… oh well probably doesn’t make a difference

2 Likes

What are the current ceilings? ETH at 100m, BAT at 3mil, Dai at ?

Most of us know this but for the new viewers: the dust hasn’t settled on this process yet but we operate on a weekly voting cadence.

Let’s consider improvements and/or fixes the community may want to see for the regularly scheduled vote on Friday.

Hey Ryan, thanks for not kicking off about this. We recognise you guys were one of the first to apply. We may want to onboard more stablecoins in the coming days - things are moving pretty fast. Thanks for confirming you are still interested :slight_smile:

On a happier note, the first (as yet unratified) version of the collateral onboarding process was posted. Maybe take a look if you haven’t seen it. Collateral Onboarding Process (v1)

@MakerMan I’m not sure I understand what you mean. What is “total outstanding” in this context? How did you come to $30M

I think this is a really important point. Dai is trading above peg because of abnormally high demand. Could we lower price by decreasing demand instead of increasing supply? We could decrease demand by slowing the auctions down, and should probably base the auction rate on the average volume of Dai markets under “normal” conditions.

The executive is now live: https://vote.makerdao.com/executive-proposal/proposal-for-collateral-onboarding-of-usdc

I agree with dawson.

Let’s reduce liquidations of ETH for a while. The high Dai price is almost all people with large vaults dumping their ETH to push down their liquidation point.

Actual demand for Dai with a significant bid behind it begins around $1.02. The rest is arb driven with thin books.

We don’t need to panic about the Dai price right now given the macro environment, IMO.

I also recommend postponing the MKR auction until global markets stabilize.

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dawson

The $30M rough number is based on liquidating at 1/2 outstanding value. Basically what I leave the SCD alone here as this requires SAI not DAI and everyone was warned to get out of that long ago. SO if I just look at the MCD we are basically at 83M including the SCD. Liquidate at 1/2 value - apply 13% liquidation fee and one lands around $30M max Maker is on the hook for here. Sorry the 107M was just incorrect.

Also the only way to deal with a liquidity crunch is to supply liquidity - we want to decrease demand not increase it. When markets are falling people and there is a confidence crisis in the system everyone will be trying to find DAI to close their loans. It really is a real hazard with these systems is that one has to find liquidity in only a single thing to pay back a loan vs. having multiple options for how to pay down a loan - particularly when liquidity in what one needs to pay with is low.

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As an additional recommendation, we can let people know that if they sell their DAI for USD, USDC or other depository dollar token, they can make $1.05 (more than a half year’s interest) if they do it now.

This will free up lots of supply.

Lots of people bought Dai to get 8% interest. That’s dead until the bull market returns. In the meantime, some of them can get a really fat bonus payment right now by selling their Dai for 5% more than it cost them.

You should also be having conversations with Compound and the other secondaries and see what they can do to free up Dai.

All of this seems more apropos than rushing in a new collateral type with a kill switch.

1 Like