Isn’t PSM designed to be a liquidity provider of last resort?
- Fee In : 1.5%, then 1%, then 0.5% (stop if the peg is restored)
- Fee Out : 0% (to reduce USDC custody risk at the minimum)
- Debt Ceiling : unlimited (more on that below)
- ERC20 : USDC, then the Paxos stablecoins
Those setting would enable the ability to buy DAI at 1.015 USDC then 1.005. We can discuss if a cap at 1.005 is close enough to 1 for DAI users (I would say close enough).
When peg return close to 1 (starting at 1.003 for Uniswap users), the PSM USDC will be drained by arbitrage (less expensive than any alternative).
On the unlimited cap, it means the willingness to increase the ceiling each week if needed. It will avoid any significant arbitrage risk if USDC fails. Still, this “whatever it takes” approach will send the right message to the public, anyone buying DAI at 1.015 or above will lose 1%. The ceiling will have to be reduced if not used.
The main risk is if the community think DAI deserve a premium to USD (or any other USD alternative). Let’s hope collateral onboarding will provide enough supply while keeping counterparty risks low (diversified). In any case, the peg will be hit, the more the USDC PSM is filled, the less valuable DAI is (at the limit USDC risk + MakerDAO risk can’t be more valuable as only USDC risk).
If we want to provide liquidity of first resort, we can provide liquidity to trading pairs on Uniswap and balancer. That would be great to bring value to DAI usage. Much more an ecosystem building strategy. I like it. But this isn’t the same problem.