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:
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.