Signal Request: Increase ETH-A Risk Premium

Overview

MKR holders have been subsidizing the risk of ETH collapse since Black Thursday in order to bootstrap and encourage DAI supply growth as the peg has stayed above $1. With the ratification and creation of the base rate, we should begin to look at that as the lever to use to encourage DAI supply growth/retraction. Therefore I am asking the community whether it is time to re-add/add a risk premium to ETH-A to insure the Maker system against future ETH collapse. I look forward to your feedback.

Pros:

  • MakerDAO begins collecting surplus from ETH-A (Positive impact on MKR price)
  • Collected ETH-A stability fees go towards insuring future defaults
  • Promotes the use of adjusting the Base Rate instead of Risk Premium

Cons:

  • May temporarily reduce DAI supply from ETH-A (as we adjust to using base rate)

Should we increase the ETH-A Risk Premium?

  • Yes
  • No
  • Abstain

0 voters

What should the ETH-A Risk Premium be?

  • .25%
  • .50%
  • 1%
  • 2%
  • Let Risk Team decide
  • Abstain

0 voters

This poll will run until Wednesday, August 5th to provide ample discussion. If you can think of any other pros/cons I will be sure to add them to the overview. Looking forward to hearing the communities thoughts on the matter!

5 Likes

I think it would better to include a 0% (no change) answer “What should the ETH-A Risk Premium be?” question.

In my view polls should structured in the most unbiased way possible. Surely the status quo should not be out of the question here.

3 Likes

Wouldn’t that be answered by no in the first question?

1 Like

Yes, and really this could just be one question.

But splitting it into two questions and making the status quo not expressible in one of them seems, to me, to disadvantage the status quo.

2 Likes

Thank you for your input. I was merely trying to expedite the process in the event that “Yes” won. In the future I will make sure to express the status quo in subsequent polls.

1 Like

I don’t think we should take any profit until DAI MCap<$1B. If we earn income through the SF in order to control the peg, we should “reinvest” it.

We don’t charge for oracles for 1 year - I’d start there if we want income.

1 Like

It’s not about taking profits, it’s about mitigating risks. The higher dai oustanding the higher the surplus should be unless of course auctions are working as intended.

If we can’t scale dai taking into account risks, what’s to say that the artificially generated dai is going to be sustainable once we input the risks for maker holders?

I agree we need to “scale or dai” but I don’t think charging 0,25% is a contrarian measure to that approach, even that amount in my opinion is subsidized but we have to also take into account the peg.

1 Like

I think the risk of Ethereum is increasing because when its price rises and its proportion becomes heavier, we must increase the risk premium.

If it is to solve the PEG problem, I would rather reduce the USDC risk premium to solve it.

When we moved to the base rate and risk premium model to price risk, I viewed that as taking the “safest” collateral type and assigning a 0% risk premium to it. Then all other collateral types should be compared to that asset, and assigned a premium. I’m not sure if there is a safer asset right now than ETH, so if we want to increase the stability fee, I think it should be done by adjusting the base rate.

5 Likes

I believe that volatile assets (ETH, stocks) are not relatively safe assets, while stable assets (fiat currency, national debt) are relatively safe assets.

Every collateral has risks associated to it. It is the risk team’s job to evaluate the potential of said collateral failing and assign a value that will insure the system over time to that possibility. 0% means we believe that collateral will never fail or we have decided that any losses we are just going to absorb.

1 Like

Really, it’s just semantics what the risk premium gets set at. If the we set the ETH-A risk premium to 0.25%, we may see governance decide to set the base rate at -0.25%.

I think most people understanding that setting the base rate at 0% is a subsidy. Especially after the covid crash.

2 Likes

Even though it is semantics they are the right ones and I agree, what I meant is that there are no free risk collaterals. The base rate should be adjusted and then yes have eth follow the base rate with no increase in the risk premium for the time being. ETH is the safest form of collateral for maker so it should have a preferencial treatment.

2 Likes

Seems premature to be moving in this direction before the peg is restored.

2 Likes

In order to solve the pegging problem, I prefer to use USDC (lower LR and lower risk premium, similar to the passive version of PSM) instead of ETH, because ETH is prone to price fluctuations and the proportion of ETH is too large (please don’t forget Black 3.12).

I think that raising the risk premium to 0.25% or 0.5% might even lower the peg. Right now you pay $0 if you take out a $20 million loan. You can just hoard the DAI and it doesn’t cost you anything. You can use up all the debt ceiling and just troll the whole system.
Having 0% risk premium is not very smart from a game theoretical perspective. It is better to hoard up all the DAI for free than to hope that someone else does not take the free DAI before you.
After all the yield farming craze is over, I am guessing that DAI will dive below the peg very hard.

4 Likes

My intuition believes this as well. You were able to articulate it nicely. I actually have a sneaking suspicion that increasing the SF/RP will actually have a net positive on the peg counterintuitively. Folks need to stop thinking so straightforward that low SF = more DAI. In theory that makes sense but we have no idea what the motivations of each vault holder are and what drives their decisions.

It’s our job to 1) Keep the peg and 2) Ensure that the system doesn’t collapse by insuring it. Right now we’re doing neither. Maybe by doing 2 we can solve 1.

I was not a supporter of increasing ETH-A risk premium. But I should recognize that @FabianSchuessler arguments are quite strong. This is definitely what is going on, a whale gets a 1M-10M loan without issues, and place it in one of those big pools earning big interest. No DAI in circulation, DAI price continue growing.

That said, I would prefer to have an ETH-B Vault with 1% and see how it influences the price before raising further the debt ceiling of ETH-A vault and adding a risk premium. I’m just not sure it’ll be simple to have it ready as easy as voting for changing ETH-A parameters.

3 Likes

So now that the base rate is being reduced to -4%. Any chance some of you no voters would support an increase to ETH-A RP?

2 Likes

Still has to pass the executive, but now would be a safe time to consider adjusting.

It’s just how we set perspective. Do we want our safest asset set to 0% premium, or do we want to assign some nominal base points because we acknowledge there is risk.

I still feel like we are a bit away from ETH-B

1 Like