Proposed Mechanism to Dampen MKR Mint/Burn

I’ve been thinking about this a while, and thought I’d just put out the idea now for feedback.

It concerns the idea that Maker tends to buy and burn MKR (flap) when it’s expensive, but mint and sell MKR (flop) when it’s relatively cheap. If effect, the protocol buys high and sells low.
While that is not guaranteed to be true, it makes intuitive sense and will be presumed true in the following discussion.

The idea is to dampen that tendency and therefore, on a net basis, buy low and sell high.

The proposed mechanism is gives governance 3 levers:

Funding Rate
Max Flop Rate
Max Flop Support Rate

Funding Rate defines an amount of protocol income flowing to this mechanism instead of the surplus buffer.
Max Flop Rate (e.g. 1 per day) defines how many flops are allowed before this mechanism activates.
Max Flop Support Rate (e.g. 2 per day) defines how many flops this mechanism can avert once it activates.

It works like this:
First, it slows the rate of flaps (buying MKR at a high price) by slowing the rate of surplus buffer accumulation when things are going well. Next, when things are not going well and the surplus buffer is wiped out and the protocol starts flopping (selling MKR at a low price), the mechanism averts some of the flops (prevents selling MKR at a low price).

That means less buying MKR high and less selling MKR low, which has the same net effect as buying low and selling high, which probably we can all agree is good for the protocol.

In the simplest form, this mechanism stores the Dai allocated to it until needed for flop abatement. However, a further iteration could employ a second storage strategy: Holding it’s assets in a custom DAI/MKR Automated Market Maker (see MIP31). Given the large scale, it could potentially earn significant fees. It also fits well with the “buy low, sell high” idea because it would hold less MKR when it is expensive, and have more MKR when it is relatively inexpensive.

2 Likes

Thanks for starting this discussion.

Maybe I have misunderstood some things but the flop mechanism to mint MKR is if and only if we have bad debt beyond what the surplus buffer can cover. Unfortunately, this will probably happen when the market crashes and MKR price will be low - so you are right that we’ll have to mint MKR at cheap prices. But given that this should be a rare event and that the surplus buffer is now being made larger, is this really a worry?

As for the flaps, again, it seems like the surplus buffer growth/contraction helps here. As prices go up, so does the buffer (assuming the buffer is going to be a certain percentage of outstanding DAI) and hence we burn less MKR than we would if the SB was not growing. Similarly, when prices crash, we don’t need such a large buffer anymore (because total DAI minted will drop). That reduction in the SB would burn a lot of MKR at low prices - which is great! I think we could even play with this further by having the SB be larger than the minimum requirement in a bull market and use that excess to burn more MKR in a bear market.

I guess I’m not sure if your premise that the protocol buys high and sells low is actually true.

1 Like

hi,

But if we have a SB that is not doing anything is it not also a wasted. Could we not put the SB into an saving account and earning tha 0.01% saving. At the current moment the SB is just sitting there.

1 Like

I fail to see the significant difference with the surplus buffer.

The Surplus Buffer is not idle, it’s used as a Liquidity Provider for the USDC PSM (the marginal effect of increasing/decreasing SB is on the USDC PSM). It is true that, currently, no one is taking USDC from the USDC PSM so the APY is not awesome.

2 Likes

MIP33 is a sort of PSM which buy at a defined price and sell at a defined price too. It is top it up with dai.
I am not sure if that is applied here but I believe it matches a bit more than MIP31.

All dais are lended. If we convert them we are not lending them anymore. So SB is actually already invested. As Seb said, the best way to increase the APR from the SB is to unload the usdc from the PSM. Or having a PSM with a better return than 0%.

1 Like

Yeah I mean, I feel this should be discussed more. For some reasons it is not.

With 640m of USDC bags we should really look to do something: aUSDC, Uniswap DAI-USDC, whatever that is better than 0%.

Unlike user vaults, which we might really want to keep uninvested at 0% because potentially they can be claimed back at any moment by users, with the USDC of the PSM we are free to do what we want. And we should.

Yes, there is some smart-contract and systemic risk associated with that. And we need to handle it as we handle all other risks.

2 Likes

I do think this a real worry. It happened once and could happen again.

The effect of this proposal would be allow flops to begin sooner (less in the Surplus Buffer to exhaust) but occur at slower rate.

If the assumption is that we are at immediate risk of a possible Black Thursday event, then yes, one can flop now, sell the MKR and add that to the surplus buffer. However, this might be overestimating the risk of such an event, no?

It seems more reasonable to simply vote for a larger surplus buffer and allow it to build through fees over the coming months. Or did I misunderstand your point?

This proposal doesn’t to that. It creates a segregated buffer (distinct from the surplus buffer) which is used to slow down the rate of flops if/when they do occur.

Building this segregated buffer also has a similar effect to raising the surplus buffer (reducing flaps) by diverting funds away from it.

In the simplest form, this mechanism stores the Dai allocated to it until needed for flop abatement.

I recognize that you’re adding some control levers and granting the possible ability to invest these funds by keeping it distinct from the surplus buffer - but it still feels very similar to just having a larger surplus buffer.

It is quite possible that I’m just not seeing the subtler advantages of this idea though - so perhaps someone else would be able to chime in with more constructive thoughts. Thanks for the discussion, nevertheless.

Also, on a rather tangential note, you may be interested in this MIP.

2 Likes

Thank you for asking why this proposed mechanism would be better than raising the surplus buffer. The original post didn’t address it well.

Currently the protocol doesn’t flop (raise funds) until all resources (surplus butter) are exhausted.
On the surface this seems like a fairly terrible strategy. It’s boom and bust. That doesn’t mean it was a bad design decision: It traded simplicity for optimization.

Creating this new buffer creates a minimum amount of system resources to have available, after which resources begin to get replenished (flops). It may still get drawn down, but the draw down will start sooner and will be shared with system income (flops).

This mechanism should also make the flop markets healthier. By flopping sooner and over longer periods of time, a more consistent market will emerge. A market that operates only rarely, during catastrophe, may have fewer committed participants.

I described the proposal mainly as “avoid buying high and selling low” in MKR flap/flop auctions, but I think this mechanism would be better even if it didn’t have that benefit.

Is there any good argument (other than simplicity) to fully deplete all forms of system surplus before beginning to gradually re-capitalize?

1 Like