Following the Oracle team’s gas budget request, I would like to discuss a proposal to purchase additional ETH held by the protocol as strategic reserves to hedge any sustained spikes in ETH price and Gwei.
I performed a simple linear extrapolation of the prior six weeks of actual average Gwei per day through Q1 2023 (directly below) and put in some different ETH price points to estimate the $ impact on our oracle costs (bottom table). To be clear - this extrapolation is not my forecast, there are a number of factors which put downward pressure on Gwei. The data is simply to illustrate how quickly costs can increase even with somewhat modest increases in ETH price and Gwei.
As you can see from the above, if ETH hits $15K by the end of Q1 and Gwei increases by 80% from 149 to 268 per day, we could see gas costs balloon by nearly 10x. We have seen multiple occasions over ETH’s history and even this past year of it’s price doubling within six weeks. As we’re all aware, crypto markets can move quite quickly and without warning. Having an additional backstop of ETH in reserves will provide us with a larger safety net and could save tens of millions of dollars of funds.
If sustained increases in Gwei or ETH do not materialize, the DAO can decide whether to sell a portion of the ETH or continue to hold in reserves.
To be clear, this proposal is supplementary to the funds the Oracles Core Unit requested for Q1 and for emergencies. If the Oracle gas budget is exhausted prior to the end of any quarter, the Oracle team can request ETH from the strategic reserve. This Strategic Reserve could also be accessed by the PE team for smart contract deployments and testing.
- Hedges and mitigates higher oracle expenses due to sustained Gwei and ETH price appreciation
- Provides price exposure to increases in ETH price (which as we’re aware has outperformed MKR)
- Increases bad debt risk by having non-stable assets in the Surplus Buffer
Note - analysis assumes the same number of Oracles are active as were in October which will likely overestimate Oracle gas expenses as multiple collaterals are in the process of being offboarded.
Regarding the amount to be purchased, our initial recommendation is for 2,000 ETH, currently valued at $9,000,000. This is a little over 7 months of gas supply at current ETH & Gwei, and 4 months of supply at $15K ETH and 268 Gwei. Would really like to get community input on this number and the proposal in general.
Longer term we will want to refine this number but today we are limited by the Surplus Buffer, which currently sits at $60M and will decrease by $8.8M once the Oracle gas budget is passed.
I have already brought up the idea with @Derek and he has started discussing with the PE team. If the DAO decides we should pursue this path, I believe the team will be able to write up a requirement doc and technical implementation.