In preparation for the launch of the Aave Direct Deposit Dai Module (D3M), I want to run a signal request to see how the community wants to set the rates relative to Maker’s own rates. Since Maker has variable SFs it makes sense for the community to provide general guidance to the Maker Open Market Committee rather than pick a particular number. I see three options and we will compare against ETH-A as it is our flagship offering:
- Match the ETH-A rate. This means we will target a variable borrow rate on Aave to be equal to the ETH-A stability fee.
- Aim for slightly above the ETH-A rate. This would be something like a 1-2% spread on the rates between Aave and Maker.
- Aim for a large spread. This would be something like 3-6% spread on the rates between Aave and Maker.
I will take a go at pros/cons of each choice:
- Maximize the amount of DAI generated by the module.
- DAI becomes a very attractive stablecoin to borrow against on Aave compared with USDC.
- People may choose to borrow from Aave instead of Maker which loses us revenue overall (part of their fees go to AAVE holders)
- Revenue earned will be lower per unit of DAI minted as we are giving them a lower rate.
- Middle-ground approach retains Maker as the primary market to borrow from while still giving fairly strong guarantees at Aave (which helps with borrowers choosing DAI to borrow against instead of USDC).
- Even a 1-2% spread may not be low enough to get any serious supply generated especially during a bear market.
- Maker retains status as the best place to borrow against by far.
- Module is only activated during excessive demand for borrowing which gives us a high return
- Having even a high upper bound may be enough to convince users to choose DAI instead of USDC for fear of excessive rates (15%+ surges).
- Periods of excessive borrowing may be few and far between - diminishing the value of this module.
The D3M targets the borrow rate on Aave ignoring the AAVE token farming rewards. There is an additional question of whether we should be factoring in the rewards to determining the spread. For example, borrowing DAI backed by ETH currently has a borrow rate of around 3.5% if you ignore rewards, but if you factor the rewards in the rate is more like 1.5%.
What this means in practise is if we were to factor in the rewards (approximately) then we would run the D3M at a target rate of 4% in the 0% spread scenario with current market conditions. This is calculated by taking the 2% SF for ETH-A and adding 2% which Aave produces in rewards.
I’ve been changing my thinking on how to view the D3M over the past few weeks. At first options 2 and 3 seemed like the obvious choice. Why would we want to give Aave a competitive advantage over Maker in terms of rates? But this space is not like traditional finance. Aave the brand doesn’t really own the smart contracts. You could make the argument that Aave governance owns the contracts, but over time Maker should become a larger voting share of that governance process because we will be earning rewards like everyone else. Smart contracts by their nature are just neutral pieces of code. Whether we mint DAI from Maker or Aave it shouldn’t really matter all that much all else being equal. There are trade offs in terms of revenue, but we also get a lot of benefit by giving them a cut of the SFs. We get access to a team that has shown that they are capable of moving quickly and promoting themselves effectively. We also are paying for insurance that stkAAVE holders provide.
This is not me advocating for running the spread at 0%, but I think it’s something to keep in mind.
- 0% Spread
- Small Spread (~1-2%)
- Large Spread (~3-6%)
- Yes, take the rewards into account
- No, only take the vanilla rates into account
This poll will run until Thursday July 15th, 2021 after which any options which garner >= 50% of the vote will move to an on-chain poll. If all three options for the spread are over 50% then a ranked choice poll will be used.