This is an unprecedented time for MakerDAO. Thursday was a tremendous learning opportunity for the entire Maker community, and MakerDAO can immediately apply some of the lessons learned towards making the Protocol stronger than it was before.
Dai is facing a severe liquidity crunch. The Dai peg has been trading as high as $1.10. Dai generation from Vaults is low. Many in the community are buying Dai in order to participate in this upcoming Thursday’s MKR auction. Some are accumulating in order to pay down Dai debt in preparation for another downturn in the Eth price. There is an extreme ecosystem-wide shortage in the Dai supply.
As a result, the Interim Risk team is putting forth a proposal for an immediate Executive Vote in order to help alleviate these issues. We hope that this proposal both resolves the credit crunch and is a meaningful step towards restoring Vault use. The executive vote will include the following changes:
- Monetary Policy
The drop in DSR and Stability Fee to 4% on Thursday has not had immediate results for managing the Dai peg. Clearly, Vault use remains low, and there is a surging demand for Dai. Nonetheless, MakerDAO should consider all options with respect to monetary policy. The Interim Risk Team is proposing a DSR of 0% and a Stability Fee of 0.5%. This change will result in a tiny DSR spread which may mitigate any potential incentive issues that might arise from a stability fee of 0%.
Additionally, the proposal also includes an SCD debt ceiling reduction to 20 million.
- Governance Security Module
The 24 hour GSM has constrained the MKR holders’ ability to react swiftly when it has been needed most. Moving forward, given the continuing significant volatility in the markets, the community should consider having the ability to react more quickly. The Interim Risk Team is proposing that the community reduce the GSM to 4 hours. This should give the community more time to deal with any governance attacks or handle network issues, but also significantly speeds up turnaround time for any new executive votes. MKR Holders can, of course, revert back to the 24 hour GSM, or another time period, in the future.
- Collateral Liquidation Freeze
The proposal includes a significant addition to MakerDAO’s issue-response tools. The engineering team at the Maker Foundation has created what — if introduced by the MKR Holders — will effectively be a decentralized circuit breaker, to be utilized only by the authority of MKR Holders.
To very briefly recap Thursday’s events, the $0 bidding was apparently affected by two marketwide issues: network latency issues and lack of Dai liquidity. While Thursday’s 6-hour auction bid duration extension, voted in by MKR Holders, should be effective in mitigating network issues, there are still some situations where insufficient keeper liquidity might lead to affected bidding. For instance, a sudden Eth-price drop(anything resembling Thursday) could trigger another series of parallel auctions. It is currently excessively difficult to source Dai to bid on auctions, as well as pay for gas, in times of such network congestion.
The proposed solution involves a form of rate-limiting in order to reduce auction triggering. Keepers seemingly have a sufficient amount of assets, and the exchanges can support the necessary volumes. If auctions were to be more sequential, as opposed to parallel, then keepers would likely have the ability to recycle their Dai from auctions and rebid again. The risk of excessive price volatility is outweighed by the alternative risk that collateral may be sold for an unreasonably low price.
As a result of this proposal, the MakerDAO governance community, by full executive vote, will have the ability to temporarily disable Vaults from being sent to the auction liquidation module. To re-enable liquidations, MKR Holders would have to pass a subsequent executive vote. Critically, this proposed module lives outside of the GSM and is not subject to any delay.
To be clear, today’s executive vote on this proposal will not trigger the circuit breaker. It merely enables MKR Holders to utilize it at a future date. Also, as a reminder, this vote is still subject to the 24 hour GSM delay.
A sample scenario in which the community might want to make use of the circuit breaker: Assume the Eth price spikes down to $90, liquidations occur and keepers bid on auctions, and then immediately after the price dives to $70. Given the OSM delay, the MakerDAO governance community, in conjunction with keepers, would have one hour to react to keepers requiring more time to recycle Dai from the first round of auctions in preparation to handle the incoming collateral queued up for liquidation. That reaction time includes the time necessary to make the decision to freeze auctions temporarily.
This situation would be an ideal time to use the circuit breaker. After allowing enough time for keepers to recycle their capital, MKR Holders could then unfreeze the circuit breaker and trigger the next round of auctions. MKR Holders would have one hour (before the OSM price applies) to trigger the liquidation freeze. While this is difficult and indicative that a long-term solution is required, the MakerDAO governance community needs to be cognizant of the fact it would have to rally an executive vote in under an hour to prevent severe underbidding.
The liquidation freeze/circuit breaker would be another tool in the governance community’s toolbelt. It is relatively simple to implement at the technical level, and decentralized at the social and governance layer. Without it, MakerDAO remains more vulnerable to certain price movements. This is not an issue of how much collateral the exchanges can absorb, but how much Dai liquidity keepers can generate and utilize. The circuit breaker would help by processing liquidations in a more orderly manner.
There are certain cases where an extreme price drop might necessitate additional aggressive actions by the community (such as intervening with the oracles or triggering Emergency Shutdown, which is better addressed in separate threads). The community should continue to explore additional potential actions, such as the addition of new collateral types, but the Interim Risk Team proposes the above changes for immediate discussion and consideration.
Thanks all, looking forward to hearing your feedback.