PSM based on cDai - different than the actual PSM logic

To get the peg back,
We can have a PSM - Peg Stabilisator Module - based on cDai.

we directly convert Dai to cDai and we add the cDai into a vault. Dai will be backed by cDai.

The risk in mainly on the compound contract.
The conversion risk is 1:1 so no conversion risk.
The wrapper will free the Dai so the supply should increase, and we can get some fees on it.
Implementation seems easy

Ideally, we can set a APR return minimal with a parameter like 2%.

I believe this will carry less risk than a usdc PSM or cUsdc PSM as we remove the usdc risk.

Cons :

  • The cost of the Dai in compound will drop.
  • Compound will probably profit from it.
  • No natural unwinding

Any thought?

Maybe you need to elaborate a bit more.

If you mean a PSM allowing anyone to deposit cDAI to get DAI, I don’t see why that would help. Indeed, there is no liquidity risk currently on cDAI, you can get DAI already at no cost.

If you mean issuing some DAI and put them on Compound (DAI as liability and cDAI as asset), that would only decrease the interest rate on Compound. That should decrease the price of DAI because some people will sell DAI to lend USDC (if the yield is higher) and some people will borrow it instead of swaping it from ETH. That how it works in theory, but it’s a bit untested in the crypto world.

He might have meant cUSDC – is this right @alexis ?

A simple model based on the existing PSM :
two modules :

  • Vault cDai 100% ; 0% SF ; private; limit 50M
  • PSM input Dai - output Dai 0% fee

in :
put 100 Dai -> convert into cDai ( 100Dai ) -> vault cDai -> issue 100 Dai

out :
put 100 Dai -> withdraw cDai(100) from vault -> convert to Dai -> return 100 Dai

In that case it is not “issuing”, it is “normal” maker functionality.
you get the fees cDai and you free the dai inside cDai wrapper.

of course, there is no incentive to put 100 Dai to get 100 Dai but for maker there is an incentive, you can expect 2% same as ETH.

More I am thinking about this PSM more I believe we need to split the risk.
PSM - usdc :- risk on uscd
PSM - cUSDC : - risk on usdc + compound
PSM - cDAI : risk on compound
PSM - PAX : risk on PAX
PSM - TUSD : risk on TUSD
PSM - cUSDC cropJoin : risk on usdc + compound + leverage + compound governance + cropJoin contract

I still don’t understand why a user would sell cDai to the protocol

Actually this kind of mirroring asset is an interesting way to expand Dai supply. But I don’t think it should be done via PSM.

If cDai was a collateral, then as long as reward from cDai is higher than stability fee, it would be a profitable position. And users would be able to cycle it several times to leverage their profits. With lower required collateral ratio, the more cycles it can run through of course.

But if it’s integrated to PSM, then users don’t actually get the benefit of having cDai as collateral to mint Dai that can funnel back into cDai (to leverage their profits). So the incentive doesn’t really work in this case.

the deployment contract will flash mint and fill up to the limit and then governance can again flash mint to unwind the vault.

But in my example using existent component, you can also create incentive with negative fees on the input let’s say -0.001% on 50M it is like 500dai. You can even use the progressive fees change from Sam.

And to empty the vault, you will need to reverse the fees. Aka - output fees -0.001% with input fees >1%.

It is not cDai it is dai. you convert dai into cDai.
cDai it is a sort of wrapper like wEth. you convert dai with a 1:1 + interest.

I think it is the opposite as I explain above cDai is a wrapper, so why do we want to pay a percentage to provide us Dai. That seems silly to me.
There is no collateral market fluctuation risk, the risk is on compound + our contracts and in both cases we as makerdao carry this risk.

PSM plus Vault

Thinking, both mechanism can cohabit, the PSM is better to maximise profit, where the vault is better for adjustment. It can be use to align compound interest to what we think it is the best for us.

For example :
PSM 100M can’t be easily adjust, need governance execution.
Vault 100M with 2% interest and let’s say 175% collateral.

The vault will increase or decrease depending to be above the 2% interest.
PSM will be at 2%+ automatically cause of the Vault.

if cDai interest goes under 2% interest the vault will adjust automatically with the incentive to match 2%+
if cDai interest goes up the vault will increase.

if Vault is full, we can increase PSM
if Vault is empty, we have to decrease PSM