[Signal Request] Adjust the Surplus Buffer (2021-2)

[ultraschuppi]

Overview

A week ago the executive spell to increase the Surplus Buffer from 4MM to 10MM got executed. Until now the System Surplus has grown to 5MM. At the time of the last Signal Request the SB/DAI-ratio was at ~0.33%, by the time we reach a System Surplus of 10MM the ratio will be at 0.63% (assuming we stick to a total DAI of 1.6B)

Aside from usual risk mitigation (where we might have probably at least 2%), we are seeing a lot of conversations around the increased ETH-exposure circling around that we should not (only) think about raising the Stability Fee for ETH-A, but also about increasing the Surplus Buffer.

We are still 5-7 weeks away until the Surplus Buffer is full again (depending on extra income through Liquidation Penalties, PSM fees, adjustments on the SF…), but I don’t think it is too early to make a decision about raising the Surplus Buffer again. If we want to raise it, it would be nice to do that before the MKR-burning starts again.

We have to decide on two things regarding this topic:

• How high do we want to set the Surplus Buffer
• Do we want to put all the fees into the Surplus Buffer or do we want to slowly lerp it so some of the fees get into the MKR-burning

To make it more tangible, I added some tables. Please bear in mind, that the fees might go up (and down) based on vault-utilization, Stability Fee changes - so I based the tables on the current state of the System (1.6B DAI, 2.38% average fees)

Let’s start with the Surplus Buffer itself. Assuming we stick to 1.6B we would end up with the following ratios:

Surplus Buffer in MM	Surplus Buffer/DAI
10	0.63%
15	0.94%
20	1.25%
25	1.56%
30	1.88%

Now looking at the effects on increasing the Surplus Buffer. The two dimensions are: how much do we want to increase it, how much of the fees accrued shall be used for MKR burning. This result is the amount of weeks it would need to get the Surplus Buffer getting filled. Please bear in mind that Weeks until SB filled up counts from the point in time where we reached the current (10 MM) Surplus Buffer. The guestimate about the weeks is probably pretty conservative and might be a bit lower (due to more DAI in circulation or higher Stability Fees).

Increase Surplus Buffer by MM	MKR Burn Fraction	Weeks until SB filled up
5	0%	3.7
5	25%	4.9
5	50%	7.3
5	75%	14.6
10	0%	7.3
10	25%	9.8
10	50%	14.6
10	75%	29.3
15	0%	11.0
15	25%	14.6
15	50%	22.0
15	75%	43.9
20	0%	14.6
20	25%	19.5
20	50%	29.3
20	75%	58.6

(spreadsheet to clone)

Increasing the Surplus Buffer

Pros:

• likelihood of flopping new MKR in a “too much bad-debt”-event gets decreased
• I hope we feel a bit better about keeping up with the DAI-demand without going crazy on SFs.

Cons:

• DAI in SB is DAI taken out of circulation (probably not a big issue anymore, the supply side is elastic due to the PSM)
• no / less MKR burning

Please vote on ALL options you would support in an onchain-poll.

• 10 MM (no change)
• 15 MM (+5 MM)
• 20 MM (+10 MM)
• 25 MM (+15 MM)
• 30 MM (+20 MM)
• Abstain

How much of the fees should go into the MKR burning?

Pros:

• We burn some MKR again

Cons:

• It takes longer for the Surplus Buffer to get filled (see tables above on the effect)

Please note that the actual % cannot get guaranteed, as we would basically just calculate the end-date before adding it to the exec - if we accrue a lot of more fees than expected the burn-ratio will go up, if we accrue less, the ratio will go down.

Please vote on ALL options you would support in an onchain-poll.

• 0%
• 25%
• 50%
• 75%
• Abstain

Next Steps

The Poll will run until February 11th; its outcome will result in a on-chain-poll assuming the outcome of the poll deems it necessary.

[MakerMan]

Just to contextualize my vote.

30+ M minimum. I would fill it at 100% revenue at this point but am ok with any option < 100% going to MKR burn, and my order preference is 0, 25, 50, 75 in the poll. (for some reason the poll wording got me). Use part of the treasury to set a price floor to buy MKR at (at least 500 now). Once this fills continue to burn MKR.

I have an alternate idea. Build treasury/reserve and start putting this extra cash into instruments that provide return and use that return to burn MKR since this preserves revenue as investments (cash or cash like stuff - stablecoins in DeFI vaults earning something) and will steady out MKR burn at a lower level (don’t care the price in this situation as we are then banking all revenue to earn additional return while retaining liquidity if possible).

This gives the system

1. reserves building via revenue which can also be used in a liquidity emergency.
2. more consistent return to burn MKR with to build long term consistent MKR burn even at significantly reduce levels.
3. provides more liquidity into DeFI markets reducing farming returns on DAI, also reducing demand.
4. a reserve fund that can be used to set a MKR price floor to buy when MKR price drops vs. buying when price is high, and potentially selling (if even possible) when price is low.
5. supports the ecosystem and multiple protocols
6. earns governance tokens from other systems that can either be used with Maker governance to affect what these other protocols are doing or just convert to MKR and burned.

We need to start thinking beyond strictly burning MKR and building multiple tiers of buffers and funding sources. Maker has many good problems once we get even 10% of our reserves earning 2-3-5-10% in DeFI and reducing returns for everyone else we can get demand under control and maybe many of our real problems under control. We can then build a real steady MKR burn that costs us only our profits on our treasury - not locking capital away from markets but exposing it to them (keeping liquidity out there). With such a model we protect MKR from being diluted with large and growing surplus/reserve/treasury tiers. We bank money not just to be able to commit to core groups, and people not just for 2-3 years but for 10-20. We can also pay salaries that won’t just attract good people, but the best the brightest, the cream of the defi crop.

It might take 1-2 years to get to the 10% mark of surplus/reserve capacity and we don’t have to eliminate burn entirely just reduce it (to say 50-25% even) but once we get there we will have people, cash, probably a much higher MKR price, and a much more robust Maker DAO that hopefully isn’t struggling with much other than thinking about how to expand markets…

BTW: with SF avg running 4-5% on 2B we are banking 80-100M/yr (6-8M/month) and I consider this to be a likely scenario within as little as 3 months at current rate of growth. Maker could be at 3B or higher by end of year with SFs on that 4-5% (120-150M or 10-12M/month). Lets try not to piss away all of this revenue just on MKR burn but expanding system security, and talent.

Get a salary closer to 150K/yr+ and a commitment even for 5 years and I might quit my day job and come and work for MKR full time. Others might need a bit more actually (our key smart contracts folks imo - my California and other high income area peers making 200-250K or higher).

Imagine if you will a MKR system with 200M (or 10%) reserves (mostly stablecoins in LP with 100% or good liquidity) earning even 5% we could then burn 10M/yr of MKR without losing any cash reserves. Do this at a even a 50% rate and we will have burned 200M worth of MKR and will use the other 200M to burn at 10M of MKR per year as long as 5% returns on the reserves hold. Reduce the chance of having to worry about minting and selling MKR to deal with a loss event to near 0 permanently.

[g_dip]

I’m voting for the highest number simply because I think it’s easier to decrease the suplus buffer rather than to continually increase it. I.e. I think these votes should be occurring in the opposite way that they are right now.

[alexis]

I think there is a misunderstanding on what is the surplus buffer.
The surplus buffer is a buffer for the money we take before we actually own it. If we use it for different reason it is a misused and there are some risks about it.

Now, how much this buffer needs to be is the correct question. And should be the only answer to this pool.

[MakerMan]

My understanding of the surplus is that it represents both paid and unpaid DAI interest on debt. It is owed and yes some of it is not yet collected. But we have collateral backing it so the ‘debt’ no matter how you technically want to account for and use it is ‘fully collateralized’.

It is also why I distinctly refer to a reserve vs. the surplus as the surplus is connected intimately with collateral and balancing the system. Once pulled from the surplus this DAI while part of the system (and can demand assets in an ES) would require a governance vote to be put back in to ‘cover’ anything. It is capital (or if you like debt notes) effectively pulled from the system (vat, vaults) but is completely collateralized.

Now if there is still something I am missing I am happy to be ‘educated’.

[Davidutro]

I voted for the highest option (30MM) because I think besides acting as a risk buffer, the protocol should be preparing for offloading some of that Dai into reserves that will be used to fund operating expenses as reflected in Core Unit budgets over the coming months.

Also, 30MM / 1.6B Dai is still not enough in my eyes from a risk perspective–of course, saying this as a layman and not a risk professional.

[MakerMan]

Hearing @cmooney on the CC expressing concern that if the surplus is too big we are pulling DAI from markets. If the markets can’t handle even 2% we have other liquidity problems.

Also this is precisely the reason to build reserves by exchanging this DAI (freeing it into markets) for USDC, TUSD, GUSD, god knows what else raising funds to build a treasury/reserve that should have decent DAI liquidity especially when markets are dropping. I think a DAI surplus of something at a minimum of 2% isn’t going to kill these markets. And if they want to drop USDC or other stablecoins to mint DAI into the PSM take the fee give them the DAI and move on.

@cmooney as you know I started here with Maker asking about how we deal with DAI liquidity generally. I harp on it constantly. We added USDC (starting as a emergency) now have tons of stablecoins (like or not like). Governance went to LR101 vaults to get PEG to 1.01 (500M worth). Now switching to PSM (that probably needs an IAM to manage DC liquidity with 500M). Governance probably needs to raise the DC on the emergency USDC-B to handle emergencies (the system needs at least 5-10% of the outstanding dai as available liquidity at all times under varying terms vaults/rates/whatever).

I think the markets can easily find 10% liquidity here - virtually in a single block if done right (I wondered what defines the most DAI liquidity that could be sourced in a single block tx via flash loans etc.).

This is another reason in our largest collateral vault classes to have a sequence of vaults with different SF, DC, LR. To provide emergency buffers for collateral in case DCs on the normal vaults get exhausted quickly and needs more DAI (so DC is there waiting for them in more profitable and/or less risky vaults). THis has the added benefit of spreading out Liquidation Risk into different LR/CR bands as well and I will continue to encourage adoption of this for ETH in particular, wBTC second.

[ultraschuppi]

This for sure is not the last increase. I was considering adding another even higher option but ditched the idea as I thought I will not get much support anyway.

Have to admit I am kind of surprised on the outcome of the poll so far. The last one looked for “don’t change the SB” up to ~3 days before it ended. Happy to see that the change of sentiment by the community

[Joshua_Pritikin]

I think it’s remarkable how insensitive the price of MKR is to buy-and-burn. Hm, maybe it’s not remarkable. Daily MKR trading volume is something like 100M/day; I guess 130k/day is just a drop in the bucket.

[Aaron_Bartsch]

I haven’t read all the comments to see if this has been said but is there a plan to put the SB to work so that 10-30 Million DAI isn’t just sitting there? I’d be a lot happier voting for a higher SB if it was actually going to be productive.

[SebVentures]

Indeed, increasing the Surplus Buffer will not provoke a liquidity squeeze by itself.

Since the PSM, the amount of circulating DAI is now higher than all the debt our vault owners have. So the situation never was better. The PSM is basically a vault that we own and that doesn’t cost us anything.

RWA will also help reduce DAI pressure.

[alexis]

Regarding the Dai backed, it depends how you looked at it.
If the 100% CF is here to cover the liquidation slippage so this debt is not cover.
If you consider the non-owned dai is cover by a part of the CF, then you decrease the coverage for the liquidation.

I believe a more correct metric for that is the stability fees owed but not recovered yet, I think that is what makerburn shows here :

I believe the buffer should be something between 0 and this number.
If we go pass this number, it should not be inside the buffer but more inside a reserve or wherever you want.

For reference I voted for 30M but the reason is different.

[alexis]

The keg won’t work like that, it will take a percentage of the income or we can eventually take a chuck of debt, while it is common to say it will be taken from the surplus buffer it is actually half-wrong/half-right.

As we take a chuck of debt the surplus buffer will decrease but it is a consequence of it. And I believe it is wrong to assimilate both of them.

[ultraschuppi]

One point i raised in the community call i haven’t mentioned before:

---

TL;DR: vote for +20MM and 0% burning please

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Right now the Surplus Buffer is the only tool we have to prevent further burning of MKR tokens. Keg is on the horizon, strategic reserve is in discussion - but none of this is in place right now

if Maker would be a traditional company nobody would expect a share-buyback or similar. We should invest as much money as possible on growth. If we start failing on spending money: start burning MKR. as long as this is not the case: don’t burn.

we constantly struggle with increasing the debt exposure, raising the fees is nice for the profit, but bad for the growth. I know the increased SB is not helping right now, but it surely is not helping if we start burning again - even if this is just a fraction of the fees.

we can easily reduce the SB again as soon as there is something better in place, but right now we should make sure to put everything in there. don’t even burn 25% of it.

[SebVentures]

I want to push again this signal because of two new developments.

1- $MKR is now valued $2,800 and the market cap is now $2.5B. The buy & burn is quite useless and I would note that we get the best price increase when we are not burning … If needed (market crash), we can always buy&burn later (but we need a surplus buffer for that)

2- The Yearn incident shows that you can lose $10M quite easily and suddenly. 90% of the value of Maker is the trust that DAI holders give us.

Not signaling 0% burning strongly is choosing farming behavior over growth. The risk exposure is growing faster than our surplus buffer. I don’t want us to artificially limit our growth. I feel bullish tonight. Let’s hit 10B DAI end of this year.

@Aaron_Bartsch, @alexis has almost 10 MIPs to put idle USDC at work, I also have crazy ideas and DAI bonds are coming. RWAs are coming as well. Really what we need is more DAI issuance, not MKR burn.

[alexis]

Stability fees owned is increasing too

[Aaron_Bartsch]

Alright I changed to 0%. Thanks for the nudge.

[hongbiao_li]

I changed the voting options to 30 million and 0%. The rapid increase in loan amount and the increase in MKR prices are the reasons for my change of choice.

[iammeeoh]

@Aaron_Bartsch

Alright I changed to 0%. Thanks for the nudge.

Same.
0% and 30M.

[ultraschuppi]

Closed the polls - Will craft the onchain poll PR now, will likely go into the portal next Monday

Thanks everybody for participating!