On Monday I introduced MIP 29 - Peg Stability Module which is an implementation of the PSM defined here. While I originally wrote the PSM implementation and MIP with the intention of going through the regular monthly governance cycle, it has become apparent to me that accelerating this process may be in the best interest of the protocol.
Without mentioning anyone in particular, we are hearing again and again from credible sources in the rocket chat that we are losing market share to USDC with both integrators and users in Latin America. The reason being cited is almost always the issue of the peg not being at $1. I think with these past adjustments of USDC-A moving to a 101% CR has got us most of the way there, but we need to take that final step.
Currently we are a worst of both worlds situation where we have massive stablecoin exposure, but are still trading at $1.01 USD. From a risk perspective, there isn’t a big difference between having 500M of stablecoin exposure and 1000M. There has been hesitation in the past to go lower than 101% CR on stablecoins due to uncertainty about liquidations which has led us to have to consider some awkward options. At the time these options were the only thing available, but I now believe we have a better option with the PSM.
I am proposing we deploy the PSM with a 0.1% fee from USDC -> DAI and a 0.1% fee from DAI -> USDC. We can initially do this for USDC, and if all goes well deploy to the other stablecoins in the following weeks.
It is important that we do this soon not only to preserve the peg, but because stablecoin vaults will soon be approaching a CR of 100% where we will lose an opportunity for a natural unwind by vault holders.
By taking this course of action we get the following benefits:
- Restore the peg. Dai will be forced to trade between 0.999-1.001.
- Collect almost exactly as much fees as we can get from the Stability Fees anyways.
- No longer have to worry about liquidations as the PSM will self-unwind when Dai drops below $0.999.
- Additional profit on the unwinding stage which would previously have gone to vault holders.
- We enable very large holders to go between Dai and Stablecoins without slippage.
- Most active vaults in all stablecoins should migrate over immediately if we don’t wait too long as there is a profit taking opportunity.
- Any leftover (abandoned/forgotten) vaults can be manually swept over to the PSM as long as they are above 100% CR.
- As we get more tools to maintain peg stability we can back off with the PSM fees to find a more profitable/sustainable balance. This is in contrast to the stablecoin vaults where once you lower the CR you can’t re-raise it.
- Switching to a fee model gives us all the revenue up front, and exactly.
To keep this objective, I’ll list the cons I can see:
- We will increase stablecoin exposure even more. Estimates are another ~400M Dai to push us to $1.
- Removes profitable opportunities for people speculating on the price of Dai.
- Price controls are not really a long term solution. We will need to eventually replace the stablecoin exposure with other assets.
- We are even more so at the mercy of USDC than we already are.
While this is definitely not a long term solution, I think it is good enough to both solve our current issues with the stablecoin vaults and fix the peg at the same time.
The code for PSM is actually very straight forward. It is mostly using existing systems, so the smart contract risk is not high. That being said, if we are to proceed on this accelerated route, we still want as many eyes as possible looking at it before hand. Some other members of the smart contracts team are already giving it a look over. Security always comes first.
We are working against a ticking clock with the stability fees, and the sooner the peg is in-line the better. That being said, I still want to give ample time to discuss this, and if MKR holders don’t want to go this route so be it. I will run this poll until Friday, November 20th. If people want to proceed, I will craft a governance vote for Monday, November 23rd. Upon success of that we will turn off the stablecoin Stability Fees in the executive for Friday, November 27th and aim for PSM launch the following Friday, December 4th to give the smart contracts team time to set things up. A passing governance vote will override the Stablecoin Action Plan.
Note 1: I will continue with the formal process of MIP29 submission as well regardless of the outcome of this vote. If for some reason this passes and MIP29 gets rejected, we will work to close out the PSM.
Note 2: I will also continue to run the Stablecoin Action Plan governance polls in parallel with the assumption that is still the route MKR holders want to go.
There are a couple of options for the details of this proposal. I’ll split them out into separate polls:
- Yes, I want to proceed with the accelerated PSM
- No, I would like to stick with the normal MIPs process
- Greater than 1%
- Greater than 1%