[Signal Request] New vault-type for YFI with a higher LR

Overview

Following up on the update from @nadia at the G&R-call on May 6th I had the pleasure to join a call with the Yearn-team to find out what they are missing in our portfolio so far.

One of their needs is a YFI-based vault-type similar to ETH-C with a higher Liquidation Ratio to get a lower Stability Fee. Yearn is currently using YFI-A to run their treasury and would like to mint a lot of more DAI but are blocked by the line of YFI-A.

This poll is to find out if the community supports the idea of creating a new vault-type for YFI

  • with a higher Liquidation Ratio (200%, 225%, depending on a decision by @Risk-Core-Unit)
  • a lower Stability Fee (again, decided by @Risk-Core-Unit)
  • a much higher gap than YFI-A (at least 300MM, also based on an assessment by @Risk-Core-Unit)

Pros

  • more DAI in circulation
  • further building up the cooperation between both protocols

Cons

  • as the treasury would move away from YFI-A we would lose some fees (that might get compensated by a higher DAI volume)

Should we add a new YFI-based vault type with a higher LR and a lower SF?

  • Yes
  • No
  • Abstain

0 voters

Next Steps

This Poll will run until 2021-06-02T22:00:00Z and depending on the result will move on-chain assuming the outcome of the poll deems it necessary. If the domain teams feel this should run shorter so it can be implemented earlier, I will update here accordingly.

12 Likes

I am sure that it will attract plenty of users.

Several people have already asked me my thoughts on this, so let me weigh in both immediately and unambiguously:

This is the way forward for Maker in its current form. The liquidations yesterday were overwhelmingly smaller vaults that lacked the ability, attention, or resources to recapitalize in a congested, sharply deteriorating market. Not only does the overwhelming majority of our revenue come from a few dozen users with several dozen vaults, but those users have heretofore acted in more risk-averse ways, while also actively managing their own risk.

Not only is this one of our largest users, but they are asking for an even more risk-averse way to increase their credit line with us. They also demonstrated strength yesterday, buying back their tokens, just as we did.

This is the kind of long-term relationship that is the bedrock of Maker’s current profitability, and we should encourage more of these lower-risk, lower-rate vault types. As their business grows, so will ours. Not only is that in the long run higher profit potential for Maker, but it also speeds up the increase of DAI out in the wild – which we desperately need to grow faster.

Contrast this with focusing on a wider array of collateral – many collateral types do not even come close to covering their own oracle fees. While I do not think we should stop experimenting with new crypto collateral types, the easiest avenue of growth of DAI supply and Maker’s profits are to court more mature, large customers such as Yearn.

ETH-C, despite being the newest vault class, has quickly become the third largest in terms of debt issued, and has issued almost 2.5x the debt of the next largest class (LINK-A). There is demand for this type of product, and if we do not meet it with DAI, someone else will meet it with something else.

I fully support this proposal, pending an evaluation by Risk. And I would like to see as many deals like this as we can get.

11 Likes

I’m not sure if a 300MM DAI gap or even line for that matter would be warranted. I don’t think YFI has enough liquidity to support this amount of debt.

Eg liquidating the 5,370 YFI we have as collateral currently would cause huge market impact.

image

9 Likes

Wow that is a good visual of risk. That is quite a bit of illiquidity.

1 Like

Given the concentrated exposure we now have to USDC and the overwhelming support in this poll, I move that this move on-chain before the June 3 closing date unless that runs contrary to our governance policies.

Atomic dumping 15% of supply doesn’t seem like a fair estimation of YFI liquidity. The coin has been very liquid, consistently demonstrating over $1 billion of daily volume.

3 Likes

I dont think Coingecko is a good representation of trading volume; it has a bunch of fake volume exchanges. Much better estimate would be Messari - Bitcoin & crypto price, news, charts, and research, where the volume is considerably lower. But what we care the most about, is the on-chain, real, on demand liquidity. Right now, Maker already holds more than 100% of current sushiswap liquidity, which is the largest source.

2 Likes

Wait WHAT!?!

I think I need to reconsider my poll vote based on this data Rema and @monet-supply have presented to the community.

Y’all okay with your “Yes” vote? @PaperImperium @mkrorbkr @ejbarraza @alexis @makerburn @Aes @hexonaut @Aaron_Bartsch @Jiecut @swakya @ultraschuppi

Or, maybe I’m misunderstanding…

2 Likes

For a higher collateralization ratio, yes. We’re already exposed to slippage >liq penalty in more than a $15 million event.

I’m not opposed to risk. I just want the terms to be appropriate for it.

1 Like

I’m ok with the idea as long as the parameters are set by Risk. I trust them to keep us safe.

1 Like

Atomic dumping is pretty much the situation we’d be in if we were forced to liquidate the debt. Not expecting to ever be in that position, Yearn has good position management and avoids liquidations. But we need to approach risk parameters with a worst case scenario in mind.

5 Likes

As shown an instant sell will bring to a 225% +, so basically if we sell all in one go we are flat, but Banteg loses YFI control.

I think it needs to be seen the same way as RWA or a B2B deal.

If that help we can probably ask him to spread the risk inside the vault. I believe he will be also better off in case of failure.

3 Likes

After talking with Risk I’m switching to no. I like Yearn but the 300M debt ceiling is too high. We would be approaching 30% of the total market cap which is an unacceptable risk in my mind.

4 Likes

Also liquidation V2 is not selling all in one go, I believe there is a sort of box param too.

1 Like

The slippage for total liquidation of the YFI vault at $300 million is the same as estimated slippage for total liquidation of ETH-A. It’s good to think about worst case scenarios, but in this case, the apocalytic estimates look pretty similar in percentage terms.

That said, I suspect the exact DC is probably negotiable, but I don’t know.

From a portfolio perspective, we also need more deals of this size so we are not so heavily exposed to individual counterparties. Many of these deals are individually risky – the Nexo ETH-A vault alone has ~36% estimated slippage – and having more of them makes the protocol as whole safer.

Also, while it is true YFI-ETH correlation is pretty high at the moment, most things are. And in the past appears to be only about half as correlated as it is today. Will it be tightly correlated in the future? Who knows. But we desperately need some diversification in our underlying revenue sources. Maker is even more reliant upon ETH-A alone for its revenue than it was last year as a percentage. ETH-A accounts for ~48% of all past stability fee revenue. Forward projections assuming current rates and debt levels put it at ~77% of all stability fee revenue for 12 months.

We need to remember we hold a basket of these, and while I am sure we can find comfortable terms for this one on its own merits, remember that we need diversification of not just our collateral portfolio, but of our user portfolio. Yearn does not appear to my quick look to be anywhere close to one of our largest customers, and adding them does increase our exposure to YFI and Yearn, but also dilutes our exposure to Nexo and other large customers.

Add in that they seem to be conservatively managed and bought back just like we did while the market was in a tail spin, and that seems like it should make them more creditworthy than anonymous users in the standard YFI vault class.

3 Likes

Slippage estimation for selling $300m ETH in one transaction is 19% while YFI is 73%, per 1inch; YFI-A - Maker Risk Dashboard | Block Analitica

I dont think we should consider YFI-ETH correlation at this point, as YFI only exists for 11 months and they are fundamentally different assets, they would behave differently in certain situations because ETH is the native asset of Ethereum. In the case of the worst possible scenario ETH will be a much stronger and reliable asset to back dai.

Diversification of users is preferable, but we must consider all factors when deciding such actions. Just the fact that it happens that Nexo is a large user, does not imply we should increase our debt limits to levels where we are not comfortable with.

Increasing YFI exposure via SLP-YFI-ETH would be a safer approach.

6 Likes

Yearn is a startup (just like MakerDAO). Startups die. ETH can die as well but in such a case, we die for sure anyway.

The ability to dump quickly is what saves us for crypto vaults. But during the last crash, most have seen ETH price falling faster than the liquidation price for a big ETH-A vault until there was a bounce.

We want to dump quickly but this “quick” is 1h40 after the fact. Leaving much time for cascading liquidation and fire sale to occur, liquidity to be removed, … hole is saving us from bad timing but is increasing the risk if this is an extinction event for the token.

Moreover, Yearn is innovating by using leverage, minting DAI against YFI. This is a sure recipe for disaster (not saying for them but someone will abuse that). It will magnify all crashes.

At some point, something bad will happen with one of those startups. Our slowness to react and the leverage will make it quite a mess. This is not an if question, it’s a when.

The DC is 90M and the SB is 37M. So we have already quite a significant risk.

1 Like

All companies die at some point,

YFI is not doing leverage, it just borrows with its token at a risk level and lends the dai to an higher risk level and takes the difference or loses it. They are a sort of hedge fund. But they also spread the risk they have multi vault type, multi version, multi type of assets.

Now,
1/ they are definitely better than us to do it, so they are not a competitor.
2/ it is also what nexo does, and a lot of our clients, they borrow and use curve.
3/ is the risk param ok, that need to be decided but the CF is probably the most important for us. Tho 225% is probably way better than anything we can get with RWA.
4/ can we liquidate RWA easily? No we can’t either.
5/ what type of CF do we have with RWA?

I think we are getting picky with our own environment.

1 Like

Here is the last Yearn balance sheet. This is leverage. Super small for now, but I guess it will grow. As a hedge fund, there is an incentive to mint their own token and increase the debt (this doesn’t create any selling pressure on the token). At the extreme, it’s just like unsecured lending. In the end, you end up with worthless tokens just like an unsecured lender would end up with worthless equity.

As a lender, we should limit and monitor our exposure.

image

3 Likes