[Signal Request] Adjusting Dust Parameter (2021-3)

With the recent adoption of the liquidations 2.0 framework, as well as recent price volatility and gas price spikes, it is worth reevaluating our current dust parameters.

To review, dust is the minimum permitted debt for a vault - you can learn more in the documentation here. Users must borrow at least this amount to open a vault, and cannot repay their debt below this amount unless they pay off the entire remaining balance. Higher dust values make vaults less accessible for smaller users, but also protect Maker from risk of vaults being too small to liquidate profitably.

Market conditions

This table (updated for liquidations 2.0 changes) shows the transaction costs in DAI for liquidation based on ETH and gas price, and also shows the minimum debt (dust) tolerated for auctions to clear successfully without a loss to Maker.

Source: gasnow.org

In the market volatility of the past week, we’ve seen cases of gas prices rising to over 1,200 gwei for sustained periods, with spikes as high as 2,000 gwei. If we want to be hedged/protected in cases where gas prices spike to 1,500 gwei, and market price of assets is 15% below vaults’ liquidation price (through a combination of price falls or liquidator profit margin), we’d need to set a minimum dust value of around 10,000 DAI for vaults with 150% collateral ratio.

The ETH-C vault type has a higher collateral ratio, and therefore larger safety buffer for liquidations. So we could accommodate for a similar gas price spike and price discount with only 5,000 DAI dust limit.

Many of our small capitalization assets require a minimum 175% collateral ratio, but they are considerably more volatile than Ether. We may want to accommodate for larger potential drawdowns and lower liquidity in these assets by requiring a larger dust value vs the ETH-C vault. A dust value of 10,000 DAI would accommodate a 25% drawdown.

The ETH-B vault type uses a lower liquidation ratio, which gives Maker comparatively less margin of safety for liquidations versus other vaults. The same hypothetical 1,500 gwei gas spike and 15% price drawdown would require a 25-30,000 DAI dust value to maintain liquidator profitability without causing Maker losses.

Based on the liquidation ratios and price behaviour of our supported assets, we can roughly group them in 3 categories for dust parameter: ETH-B, ETH-C, and all other assets. Generally we’d want to set the highest dust value of ETH-B, an intermediate value for most vault types, and the lowest value for ETH-C. But the community can decide its preference of how large of a gas price spike or price drawdown we’d like to be protected against.

Impact on users:

Taking the ETH-A vault type as an example, out of a total 2,803 vaults with over 200 DAI debt, there are 462 ETH-A vault positions below the current 5,000 DAI dust limit. Increasing the dust limit to 10,000 DAI would impact an additional 403 vault positions. Other vault types have much fewer users, but in percent terms a similar proportion of small balance vaults would be impacted.

For borrowers using ETH collateral, they may be able to use the ETH-C vault type if Maker community decides to maintain a relatively lower dust limit. Maker could also implement other creative solutions to help reduce reliance on the dust parameter, such as an alternative vault type with higher liquidation ratio or requiring a security deposit from vault owners similar to Liquity, but these reduce accessibility similarly to high dust limits.

Signal request polls:

Please select all options you would support in an on chain poll (multiple choice)

What should be the dust value for the ETH-B vault type?

  • 15,000 DAI (no change)
  • 20,000 DAI
  • 25,000 DAI
  • 30,000 DAI
  • Abstain

0 voters

What should be the dust value for the ETH-C vault type?

  • 5,000 DAI (no change)
  • 7,500 DAI
  • 10,000 DAI
  • Abstain

0 voters

What should be the dust value for all other vault types (excluding ETH-B and ETH-C)?

  • 5,000 DAI (no change)
  • 7,500 DAI
  • 10,000 DAI
  • 15,000 DAI
  • Abstain

0 voters

Next steps:

This poll will close on Tuesday, June 8. I’ll submit for an on-chain poll if a majority of forum voters support changing the dust parameter for at least one of the vault type groupings above.

10 Likes

And what do you plan to do for small users? let’s say those who want to open small Vaults of 1000 DAI or less?

1 Like

If people want to borrow dai they should use compound or aave for small amounts. It just doesn’t make sense from a cost perspective.

I find it acceptable, thank you very much for your answer.

I saw an interview with a TikTok “influencer”/ “Dev” – he said the reason why he’s built on Binance Smart Chain is because “Ethereum is for Rich People:man_shrugging:t4:

What can you do–best to look at Matic (polygon), or wait for Optimism. Compound at times will cost $100 to $200 to deposit 1000 DAI–pretty much destroys your Yield. I’m actually interested in checking out NEAR – seems to be gaining traction slowly but surely.

Also, Compound will roll-out their own Chain soon and that should help with gaining Yield without getting hit-over-the-head with Fees.

I use Polygon a lot, in fact we even created tutorials in Spanish to encourage our community to use it, to return to a more decentralized and economic network, not like BSC where there are times when an exchange costs 4$.

In fact I like to be able to mint DAI with my wBTC, with almost no costs.

2 Likes

Reminder that there’s 1 more day to vote in this signal request!

Recently gas prices have been on a downtrend, with prices falling to as low as 10 gwei. However, I think it still makes sense to adjust the dust limit per the original signal request, as gas prices also fell during the Sept-Nov down market last year before rebounding quickly. Any significant market drop could also trigger 3-4 digit gas price spikes during periods of peak liquidations.

3 Likes

I’m a bit late to say this now, but I’m assuming a specific ETH price is being assumed here?

If ETH prices go up, will we have to correspondingly keep raising the dust parameter and also always have vaults falling below the dust threshold as times goes by (assuming crypto prices rise in the long term).

1 Like

Yep, you’re correct. The tables above were based on a $2400 ETH price. You can make a copy of this sheet and simulate for different ETH prices.

1 Like

Forum polls are closed. Thanks to everyone for participating!

Based on the final results, I’ll submit the following changes to be included in an on chain MKR poll:

  • Increase dust for all vault types (excluding ETH-B, ETH-C, and PSM-USDC-A) from 5,000 to 10,000 DAI
  • Increase dust for ETH-B vault type from 15,000 to 30,000 DAI

The dust limit for ETH-C vault type will remain unchanged at 5,000 DAI. The dust parameter does not apply to the peg stability module (PSM-USDC-A).

2 Likes

This signal has passed the on chain poll, and is currently live as part of a pending executive vote. The executive is still about 70,000 votes short of passing, if you support the included changes please be sure to vote at your earliest convenience!

2 Likes

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