The liquidation ratio is the minimum amount of collateral required per unit of DAI debt borrowed (more info in the docs here). Currently, the UNI-V2-DAI-USDC vault type has a liquidation ratio of 110%, meaning a borrower would need to supply at least $110 worth of LP tokens for each 100 DAI borrowed.
While the UNI-V2-DAI-USDC vault type has seen some DAI minting, I believe it may be underutilized due to an unnecessarily stringent liquidation ratio. In many ways, Uniswap stablecoin LPs are better collateral assets than holding stablecoins directly. They have reduced potential losses from stablecoins losing their peg, earn native interest from swap fees, improve DAI liquidity, and are naturally resistant to censorship.
The USDC-A vault type, which has been deprecated but still has over 200 million DAI outstanding, has a 101% liquidation ratio, implying a 1% buffer. The current 110% liquidation ratio for the LP vault type implies a roughly 20% buffer, and could potentially be reduced without adverse impacts on system risk.
One issue to be aware of is abandoned vaults, which impacted other stablecoin vault types and has forced Maker to reduce interest rates to 0%. Uniswap LPs benefit from native interest from swap fees, helping reduce the risk of vaults becoming undercollateralized through interest accrual. But this is still an important reason to avoid setting too low of a liquidation ratio.
Benefits of reducing liquidation ratio:
- More capital efficiency for vault users
- Increased DAI generation through this vault type
- Potential to reduce exposure to USDC-A and PSM-USDC-A
- Potentially better risk adjusted return on Maker’s stablecoin exposure
- Improved DAI liquidity for DEX traders
Drawbacks of reducing liquidation ratio:
- Greater potential for losses on this vault type if USDC losses it’s peg
- Potential for abandoned vaults (similar to current USDC vaults) if liquidation ratio is set too low
Please select all options you would support in an on chain vote (multiple choice)
What should be the liquidation ratio for the UNI-V2-DAI-USDC-A vault type?
- 110% (Current value)
This poll will run until Monday April 26. If a majority of forum voters (excluding abstain voters) support changing the UNI-V2-DAI-USDC liquidation ratio, I’ll follow up with an on chain governance poll for the selected parameter update.