I think there’s a big difference between Maker accepting USDC as collateral, vs Maker outright owning USDC (or other real world assets). If a government wants to target the Maker protocol, or if a lawsuit receives a judgement against the protocol, it will be much more difficult to freeze/attach USDC collateral assets that belong to a user, and comparably much easier to do that to assets belonging to the protocol itself.
I think that if a government wants to target the maker protocol the consecuences go far beyond USDC, how probable are RWA under that scenario?
On the other hand if the government wants to target USDC we still have 11m under custody, doubt we would get any dai back
I believe there isn’t a perfect solution therefore we should act upon those that we believe may have the highest impact with the lowest risk.
Currently with the peg still hovering above 1 I find the approach interesting, it could even be a temporary one while we keep onboarding new collaterals, RWA included, if not we may be facing the fact that we are months away from a peg stabilization (if this idea actually helps the peg), isn’t that a far higher risk?
This step. You deposit 101K USDC and want 101K DAI in return. This is called printing DAI.
In this plan Maker is set up as a trader in its own currency with more privileges (a special USDC pool and exchange mechanism) than no other market maker has access to.
If the community uses such a solution it will cause a massive blow to credibility. You will probably be able to fix the peg in the short run but at the cost of sinking Maker karma below that of Tether.
I would argue that printing mean issuing DAI without having a same value collateral. Here we only do what we do every day, making credit. Take collateral and offer a credit on it. the only difference is the SF and LR ratio. SF is just and accounting trick (we don’t pay ourselves), the LR doesn’t change the risk profile. The USDC risk is in main part binary (backlisting or default). It’s still MKR that hold the risk in any case.
I understand that a special poll can mean more privileges. In any case, it seems less privileges than running a PSM which would do the same with more contract risk, more market risk and less operational risk. In fact, I’m just suggesting a manual PSM.
@monet-supply I fully agree but is really the US government our biggest problem? And do they really have only this option? The PSM would have the same issue (and I’m not talking about RWA). If we keep having the peg issue, the US government will be the last of our worries.
There is 80M on ETH-A and there was 130M on USDC-A. MakerDAO is not at ease to rush increasing WBTC-A. Therefore I’m not sure debt ceiling are the issue but would suggest you propose a signal request to increase the DC as you see fit.
You are nicely summarizing our problem. I would say that we are not constraining the supply but that the supply is not here. Like any marketplace, if the supply is not there, you make it. I would love to spend time figuring out why the supply is not following. Let’s solve the peg and work on that problem.
The add more collateral argument
As a lot of people think adding more collateral is a better way, I would say that I’m 100% in and we can/should do both. Quantitative easing is a problem fix, not a business model.
I’m super excited that we get PAXG this month but I’m not betting Maker life on it. It’s a long way and I would prefer the peg to be fixed during this journey.
On the next collaterals for inclusion, I see nothing that will solve the peg with an high probability. Are we okay to keep the peg broken for at least the next 3-6 months?
The flash loan option
The key issue (that isn’t often cited, interestingly) is the operational risk. But the flash loan option seems to me working, so we don’t even have to touch the surplus buffer. We just need the vault. The whitelisted wallet would be known by everyone for scrutiny and the vault can be disabled at any time.
Scale of the quantitative easing
The amount needed to bring DAI under 1.005$ is 40M on Curve (most likely some will frontrun us if we announce that, meaning we may need way less than 40M). No one can tell if that’s durable after that or if it will revert to 1.015. What is sure is that no one is doing it. Obviously, we will have to test it with a lower amount at the beginning and understand the market dynamics.
This is a great idea, and the kind of bold move we need right now to keep our position in the DeFi economy. My suggestion is that instead of having the LR all the way at 100%, it could be set at e.g. 100.5% with a small stability fee, in order to capture a decent profit for Maker. It would still fix the peg within a reasonable spread of 1 USD, but would be a better trade for the DAO.
@Replenish2030 thanks for your support. The stability fee is not needed as we pay it to ourselves. Both ways it end up in the surplus buffer.
The LR can be set at 100.5% but it increases the complexity of management as the spread is thinner. It’s our vault so we can limit ourselves to any leverage we want, I see no need to set that in the vault.
I would like to see this exact same thing done in the long term with uniswap v2 tokens, balancer tokens, other crypto derivatives with lower volatility than bare crypto assets, no custodial risk, and yield.
But in the intermediate time period this seems like a good compromise since it achieves largely the same thing, only involves taking on temporary custodial risk, and these other assets which I think would be a better fit are not yet onboarded as collateral in the maker protocol.
I prefer this to the PSM since we have direct control over how much USDC we take on, and when we buy or sell dai on the market.
Actually if you look at this carefully from an ES perspective all DAI holders basically own the collateral in the MCD system. Maker DOES NOT own the collateral in this protocol the DAO only manages this facility like all the other facilities for DAI holders.
While I am a strong advocate for direct intervention in the form of the above one thing no-one has considered is what the heck happens if the markets goes against this facility. When I look at what Central Bankers do there is something that as far as I can tell CAN’T be done by Maker DAO.
Stealth and power. Central Banks when interviening in currency markets don’t advertise what they are doing (price limits), nor how far they will go (liquidity they will throw at this). While they privately have a price target they generally DO NOT publicaly advertise if/when or how much they will move. The point here is facilities and activities like these are best accomplished with secrecy, and some stealth as well as real unknown financial power and then once they begin often times an announcement is made to try to influence the markets. These types of direct market interventions are tricky and require significant exposure as well as coordinated efforts not just in markets but with news releases. Meaning if one is going to mess with the Yuan say - you better have brokers that have direct access to all the markets at once because the power of these moves is that they happen across all markets simultaneously limiting arbitrage opportunities. You don’t want to be driving down DAI-USDC on DYDX and not also selling on Coinbase for example. I think there are real legal and tax hurdles in doing this kind of direct market interventions for this reason. It was why I wanted to advocate a more dynamic PSM that moved its pricing brackets when utilized and only allowed so much liquidity at a time to be pushed into or removed from these markets so that people could ‘expect’ there would be intervention - but market participants could NOT anticipate how much or at what prices the PSM would act. Hence in a way I wanted not just moving price bracketing based on the facility usage and OSM prices but also to use the actual decentralized users of the facility to drive an element of randomness in how such a facility priced and how much volume it would provide. (I never posted details of this as the PSM appeared to already have too much controversy and was not moved forward as far as I could tell)
I also felt it was important to couple an auction that constantly drove auctions when this facility was actively filled with assets on one side or another.
Example lets say this facility has like 80M DAI of 100M DAI utilized and basically sold at an average price of 1.01. There is no reason NOT to do constant reverse auctions for buyers between 1.005 and 1.01 while having the PSM decide to set the DAI buy back price at say 1.005 for users until the next market fill happens and then these would be dynamically adjusted again.
For such a facility to be useful it should appear pretty unlimited and should act somewhat randomly so as not to be easily gamed or gamable.
My growing problem with a lot of these tools as well as the increasing complexity not just of Maker but the entire DeFI system is that it is becoming more and more difficult to understand what the real ramifications of such a beast will be. Also we have governance decidedly unwilling to take on significant USDC/stablecoin risk. It has become pretty apparrent to me that governance really needs to sit back and take a look at what the future of Maker is. I started constructing a post but life events have side swiped my ability to contribute much lately.
Put simply when network tx fees are growing at the current rate we basically are pricing out many smaller decentralized players in Maker and pretty much destroying any ability for Maker to serve the underserved except by another third party who can in-expensively take on collateral and make micro-loans (i.e. loans in the 100-5000 DAI levels). Unless somehow this entire system gets the massive tx capacity boost we are rapidly going to see DeFI on Ethereum become the playground for the rich and so some level of discussion within governance on what the future looks like for Maker and decentralized users at not just 400-500gwei/tx but 4000-5000gwei/tx really is in order.
I saw wouter posting that fees just to run Maker are now running 50K/month. That is 600K DAI/yr which could rapidly grow to 1-2M if fees keep running like this. I don’t know about the rest of you but fees are pretty much locking up most of my positions in places and forcing me to do less not more in terms of market making activities. It is a prime reason that low cap collateral is somewhat pointless and why Maker is going to see risk clumping in virtually ALL of the MCD classes - particularly the small ones which generally is bad for bankers. We don’t want to have like 5 MANA holders or 3 wBTC holders taking up the entire DC because then there we have a huge and growing liquidation risk in these things. It is my hope the liquidation system upgrade will be up to this task - but this will be new and itself may have bugs or attack surfaces that may only appear when we have real clumping in liquidation risk.
I’m not very convinced that transparency about what Maker is doing will cause issues. Sure in theory there’s some way gamification can happen. But I think in most cases the market front running us actually helps us because it creates a situation where the peg stabilizes without the need for MakerDAO to take on any assets.
Doing random things and losing the transparency we have which is one of our core tenants would be terrible. I believe that clear decisive action that market actors can count on creates a better dynamic. It’s possible that things can be gamed and for example the peg does not return to $1. However we have full control over these funds and can stop and find new solutions any time. I doubt there’s any real risk here besides the prior mentioned custodial risk, and the risk that dai will not return to a $1 peg.
The tax considerations are interesting and I’m not sure what they would be. But taxes in the crypto space are terribly nasty and convoluted already and probably should not greatly impact what kinds of decisions we make for government policy. If there are ways to do this and optimize taxation, we maybe should look into that, but there are a number of significant differences between this and PSM which are unrelated to taxation.
If this was true one could just make a news release and markets would move to the new price. Typically the move is made and the news about it is releases so that market participants are ‘guided’ to stay in the new range. My point here is that typically these types of operations are tricky at best and one key component to any chance of success is stealth with power. Maker misses two things here, stealth, and with a fixed DC uncertain power.
One can still have things happen programmatically but using random elements. In PID control loops one normally doesn’t use such features as there is no outside agents acting to game the PID controller.
I think we will have to disagree. One can have clear decisive actions but do them unpredictably. We know that IF a system CAN be gamed - IT WILL and doing something like the above basically will reduce the effective power of such actions because as the DC fills up the gamers will know the price can be pushed over until ‘governance’ does something else. If this is programmatic it ofc will be frontrun. This on first glance looks like it will help but there is a reason currency interventions don’t do things this way and it is because the markets often themselves will do the unexpeted. Think of it this way. Do you think you would ever win at poker if your opponents could always see your hand?
As to tax implications. My thought was not dydx but trying to do these kinds of open market operations on CEX’s. Who is something like coinbase going to send a tax bill to? Which means they would be done outside of the CEX’s and arbitragers would make bank doing the arb on these - reducing the overall financial power of such activities.
I want to add one last thing. I really want to see something like this as a tool in the arsenal but some really clear thinking needs to be made as to how it could work and my primary issue here is that there is no stealth possible (AFAIK) and no uncertainty in ‘power’ that would be applied and so becomes a new system for outside agents to find ways to game for profit.
Doing operations on CEX’s? Can you even interact with coinbase via smart contract? Sorry but I find this idea completely wild, and I’m not even sure how it helps. The entire point of decentralized finance is we believe it will eventually be more efficient/cost effective and overtake centralized financial markets, at least within the crypto space itself, right? Why would we want to bake interactions with CEXs into the protocol even if this was possible?
I still don’t buy the stealth idea, or that we need to use random number generators to make decisions. Can you provide some evidence of this claim? It seems like one of those things that maybe feels intuitive, but it’s also a significant claim which should require data. Even the US fed nowadays tries to be predictable and reliable for markets. There were examples in the past of the Fed trying to be unpredictable and outsmart markets and it ended poorly. Here is an article about federal reserve policy over time.
It seems to me the thing we need to do if we want to emulate the more successful aspects of the US federal reserve is provide forward guidance and MORE predictable long term policy decisions, not less predictable. Market actors will make the trades that are profitable. We just have to make sure that what is profitable provides incentives that align with government policy. And if new issues crop up, we have the capacity to find new solutions to those problems.
Some very good points in your discussion , I will try to address some.
MakerDAO doesn’t have any power in any statement it can make currently. There is no “whatever it takes” possible because leadership is decentralized in people no one knows. WBTC to capped by a debt ceiling for weeks before it gets raised. We have this issue for months now and we have tried 2-3 new policies, not even one per week. Moreover, the subject is very complex and we don’t have the manpower to do proper research on the topic.
I would argue that the Fed isn’t stealth. I’ve not seen any research on a spike in volatility on Fed meetings. The market and the economy dictate the Fed action more than the opposite.
Making power statement is powerful, and most of the time, the market front run the Fed so the Fed has almost nothing to do. The last example I have is buying corporate bonds ETF. The announcement was enough to get price in check. For government bonds you know exactly what they will buy each week.
It could be that having a USDC-M vault capped at 100M is 10x less effective than having a vault capped at 100 billions and it require less minting the later case.
The way I see it, the peg is taking most of our governance bandwidth. We let others fires burning. We lose momentum. I want to fix the peg because it should be easy to do (in this direction at least) so we can focus on others problems.
In my view, on this side of the PEG we should have:
inside the range $1.0 < DAI < $1.005 the market should be able to fluctuate and market maker do the job to absorb small imbalance of supply and demand.
at $1.005 the PSM should absorb a medium imbalance automatically with a buffer. It’s the outside spread from the money view so arbitrageurs have support.
over $1.005 manual intervention should take place. It can be lowering the rates (subsidize the borrowing) or stuff like quantitative easing.
For the tax implications, that’s already here with earnings in the surplus buffer. At some point we may probably have to pay taxes. That’s not a near term problem. I would be disappointed if the first project being a government target is not Maker. That’s a success metric.
By design quantitative easing can be unlimited (let say billions of dollars), I don’t see how someone can go against. Most likely, we will stop before, but that’s a governance call. It’s the same problem with the PSM.
While I think increasing the DAi minted and adding more collateral will help. I believe that having open market operations to manage DAI supply are important but I am conviced there is a better way is using something like the PSM that acts differently and doesn’t require manual intervention.
What I really want to see is a serious and well thought out as well as complete discussion regarding the topic of long term Maker goals against the constraints as I still do not have a clear feeling what the community (ala governance) sees in this regard. I am beginning to think that we are going after tons of different issues and no-one is really putting together a long term plan for Maker that has a vision as well as an approach to achieving that vision.
At some point I may post a new thread - Long term Vision for Maker where anyone and everyone is enouraged to submit their visions, discuss them civilly ofc, so that the community might come to grips with what our long term goals are and then work on determining the metrics for achievement of those goals.
Put simply I think we are using a pea shooter to deal with issues when if we can look at the entire Maker system globally with all participants from a vision perspective perhaps this will elicit more concrete long term plans to solve the issues we are dealing with repeatedly almost on a weekly basis now.
I think this is a good idea! At least worth trying on a small scale with, e.g., the current surplus available.
Ideally, it should be done in just 1 transaction (flash loans) etc, but I really like that we can try it “by hand” quickly with the surplus, without requiring much additional complexity/smart contracts, etc.
My impression is that having SF=0% is simply not a sufficient mechanism to keep the peg at 1:1.
People in the forum suggested that RWA will solve the problem, or additional YFI liquidity, etc. But for the moment (today) this is not available/working.
So I am totally inclined to experiment with your idea, on a small scale first.
We all expect that, eventually, the peg will be stable at 1:1, because once the market players truly trust that MakerDAO can keep the peg, they will sell DAI whenever 1DAI>1USD and buy day whenever 1DAI < 1USD.
The idea proposed here basically amouts to let MakerDAO itself play the role of the player trusting the the peg will be reached.
This can be powered either by flash loans or, in a more conservative way, with the surplus. In the latter case, the MakerDAO is simply choosing to invest its money in this arbitrage activity (between DAI and USDC, for example) rather than burning MKR.
It all seem pretty healthy to me if only surplus money is used.
You are right. We may decide to unwind before reaching the peg but the USDC selling price should be lower than the buying price or we take a loss (and it’s not even possible with flash loan and no capital).
The overall idea is to have this supply of DAI as long as needed (until 1 DAI < 1 USDC). The discussion shift from how to solve the peg with existing tools (which takes a disproportionate amount of governance bandwidth) to developing those tools (onboarding RWA for instance).
It may also be the case that such tool will impact the market behavior and anchor the price 1 DAI = 1 USD for market participant. This is still not a given as the peg was broken for so long.
It seems that TUSD will available as well soon and domain teams are working on cDAI and PAX. I especially like cDAI as it would be like having a Maker vault for Compound borrowers yielding 3-4% SF (excluding COMP farming).
I would personally prioritize the increase of stability fees (up to competitive levels) over unwinding those facilities. I want to highlight that when we add RWA, the SF will be less effective to reduce DAI supply (because RWA will have a quite low SF ceiling it seems). We might need to have some ways to tighten the DAI supply soon.
Overall I see the unwinding risk lower than using consumer vault doing the same. MKR take the same risk but Maker can manage its own vault more easily than customer vaults (swapping the collateral for instance).
Currently DAI Utilization is approximately 59.4% and the peg is 1.014196 DAIUSDC at 12:24 UTC. Can we agree that an abundance of DAI is also Not going to fix the Peg?
Also, if we do implement QE, or the PSM–I believe it will have a lot of short-term Tax consequences in the U.S./EU–therefore we will need to form a separate LAO/Corp. and appoint/elect Board Members. This is one of the reasons why the Maker Foundation could not help the community w/the PSM, in my opinion. I hope we are ready to organize as ONE, and make things happen. Honestly, we don’t have much of a choice.