I believe the 250M figure is based on the DAI currently available to sell on DEX platforms for over $1 (of USDC or USDP). This amount would probably be filled immediately because it represents risk free arbitrage. But we may also see greater demand for DAI if it trades at a 1:1 price beyond this - in some ways this is the point of lowering PSM spread to 0%, it increases DAI’s utility for RWA, OTC trading, and other use cases.
Regarding USDC exposure
We have had this problem for more than a year now. One year ago the stablecoin ratio was 53%, it’s 56% now. We kept market share.
Regarding the tail risk of USDC, no fees can compensate for that. Taking 20bps or 0bps is quite the same when you lose your principal.
The last published solution to solve USDC exposure was gelato USDC <-> DAI where we have all the protocol risk (105% LR is not helping). We can still send those PSM stablecoins in DeFi protocols and achieve similar results.
DAI being more valuable
DAI > $1 can be seen as people wanting DAI because it’s better. Yet, we have only 5-6% of market share and not growing above-market growth.
Most new stablecoins are above peg mainly for farming (directly or indirectly). There is an inherent link between the yield you can achieve and the stablecoin buy pressure. I wrote about it last year and while the theory was not fully fleshed, it was kind of correct. The interest rates are now quite in line between USDC and DAI on Aave. This means that people don’t care much about DAI or USDC, they care about the yield. More precisely yield + stablecoin risk.
It’s difficult to analyze in detail as some players might be delta hedged (debt in DAI ~ asset in DAI so insensitive to DAI price).
Impact on stablecoin exposure
The $250M figure is coming from 1inch, how much DAI you could get with a risk-free arbitrage USDC <-> DAI (the PSM). Could there be second-order effects? Sure.
We have close to $600M DAI on Curve. Let’s assume it no longer make sense to swap there, and they all look for yield in another stablecoin, the net impact might be up to -$350M USDC in the PSM.
We might be able to do the same thing with D3M (depressing DAI yield on Aave to make people move to USDC lending), but the farming incentive makes things less simple.
I don’t see the problem, if it’s working, we just have to double down.
This is important to elaborate on. The Curve pool is not a bucket that we can reach into and swap $250mm in liquidity out of to get the price to peg. The price on Curve is more akin to a tidal watermark. $250mm represents a single swap which will get Dai price parity for a block or two, but which will quickly be refilled from arbitrage trades coming from every other exchange on the market. We’re not looking at bailing out the Curve pool to get to peg, we’re looking at bailing out the entire DeFi market.
So far we’ve taken on 3 billion USDC to get the Curve balance from about an $800mm difference last year to the $250mm difference now. As we get closer to the peg the liquidity gets deeper and it requires us to take on increasingly more USDC to reduce that spread. Our 3 billion USDC represents the long tail pricing that gets us to the price that we’re at now, but that’s small change compared to what it’s going to cost to hit true market parity.
Unrelated, I’ll add that from a vaultholder perspective, generating Dai in the traditional (revenue generating) way is very expensive in gas fees, even for large amounts. The handful of extra basis points on the market can somewhat help in the recovery of those costs and reduce the cost of vault ownership. By further dampening the benefit of generating Dai in favor of these risky and unprofitable solutions we continue to discourage vault ownership, which is still the bread and butter of this protocol.
Maybe the fact that DeFi exploded again in spring is of somewhat importance here.
We introduced the PSM on December 28th with a 1% tin decreasing to 0.1% over 7 days (a 90% cut!). The PSM was filled quickly and was free to increase from January 27th. There was no significant impact over the next month (which I would say is even a bit odd and would require more research).
In fact, the main driver of stablecoins was the crash end of May. Our lending activity is in line with ETH price. There is an imbalance between DAI demand and DAI supply as ETH price didn’t increase as much as stablecoin DeFi activities. Should we penalize DAI holders?
By having DAI above a $1 you win when you borrow but lose when you repay so … ok you win the SF on the 0.1% of the loan. We should maybe ask what our biggest borrowers think.
The $250M number is from 1inch so all DeFi on Eth of which $200M is Curve. Sure there is a bit more, but hard to think a lot.
Sorry guys, slightly emotional rant incoming. I really don’t like the argument that because massive USDC exposure is bad then we should shoot ourselves in the foot and deliberately damage Dais position in the market as a stablecoin. If that’s the way we wanna go, why not just shut down the PSM entirely and turn into rai? It’s not like the 4 million in income per year does anything to protect us against the hypothetical blacklisting risk of USDC, and similarly its not like having 3 billion vs 6 billion USDC makes a difference. In both cases it’s a fatal exposure.
Why do we want to hurt ourselves if it doesn’t actually help us in a meaningful way? This is really Makers biggest achilles heel: getting stuck in a spiral of self-flagellation where we are shooting ourselves in the foot on obvious decisions that anyone else would be able to get right, but we faceplant on them so we can pat ourselves on the back and feel like we are being “risk averse” even though we aren’t because we are refusing to move forward so we can deal with the problem at its root.
Choosing growth and accelerating forward actually provides us with a real, proper, long term solution to the problem of overexposure to stablecoins rather than half measures like shitty UX-destroying fees. We can solve the problem of USDC exposure without also punishing our users. Most of all, having a huge amount of USDC accumulated in the short run will act as a big, flashing beacon to all the potential RWA providers out there, proving to them that Maker has a lot of very scalable business to offer and this will help them muster the massive motivation they will need to jump through all the hoops and barriers to set up proper scalable and secure RWA facilities. The larger Maker is, the more Dai there is in circulation, and the better Dai is as a product, the more likely we are to attract the kind of high powered partners we need to place 100s of billions of future collateral in globally diversified bonds and sustainable and resilient flagship projects outside the US.
I am working really hard trying to get these kind of deals set up, but they are very complicated and it takes a lot of luck and effort to get it done. It sucks to put in all that effort if the DAO is also meanwhile making things harder by choosing to have Dai be a worse product for crypto insider virtue signalling reasons (when it doesnt actually solve the problem!). It just makes it more difficult to explain to potential partners of the future why we are a rational and reliable partner they can count on to help their business thrive and survive.
In the grand scheme of things, in terms of exposure and in terms of where the project will be 5 years from now, 3 billion USDC or 6 billion means nothing, and there’s no difference between the two, so we should just choose growth and focus on real, endgame solutions rather than half measures.
The other massive possibility having a 1:1 PSM opens up for are direct deposit modules that have a simple PSM integration allowing them to deposit large amounts of Dai that gets converted into USDC at a 1:1 rate into aave and compound. We could potentially deposit all 6 billion USDC or however much we will end up with in this way, within a very short amount of time.
I am relatively new to this space but here are my thoughts.
It seems we should keep the Maker mission in mind as we decide these key strategic issues.
“The mission of the MakerDAO products and the Maker foundation is to create an unbiased currency for the world, which of course means for everyone all across the world.”
I believe this means we want to develop a GLOBAL unbiased currency, where Maker becomes the dominant (or at least a key) stable coin worldwide and can be easily used by anyone. So we need to design a stable coin that has broad appeal across the world. Thus what key features does THE stable coin need to have? I strongly believe that two key features are mandatory:
Folks want frictionless transactions: thus no transaction fees.
Folks want value stability: thus minimal ‘bank run’ risk
The Maker folks have built something wonderful here and created alot of value. But there is still a long way to go before making Dai a global unbiased currency. This audacious goal cannot be achieved without taking risks. A low risk strategy at this point would result in Maker being a niche success, at best. Being true to the mission requires taking risks to build a better, more appealing stable coin and in turn significantly increasing Dai usage.
I just dont see how maintaining transaction fees helps us achieve the audacious mission…
Lets stay big and bold in our vision and execution
The market structure and economics of stable coins is iimportant to issues such as this. Do stable coins have INCREASING RETURNS TO SCALE? Basically this means that for a given stable coin its marginal costs of production decrease as their volume increases for all volume levels. For Maker that would imply that creating/servicing the 100th Dai would be cheaper than the 99th, and the 1,000 Dai would be cheaper than the 999th and so on.
Search engine is a typical example of a business with increasing returns to scale. Once Google builds their search engine, the marginal cost of servicing additional customers is very low & and the development costs per customer fall as they are split across a larger group of customers.
If stable coins have increasing returns to scale, this implies the industry should become a natural monopoly or at least an oligopoly (a few huge players) at scale, tending towards a winner take all industry. I suggest that stable coins ( and digital currency) do have increasing returns to scale. I also suggest that stable coins have network effects which means that the stable coin becomes more valuable to a customer as other customers adopt it. Products with network effects such as Facebook tend towards monopolies as well.
Here is my main point: assuming that stable coins have economies of scale and/or network effects, the stable coin market at scale will have only one or a small group of huge competitors. Thus there is a race to scale to become one of the few winners. Slow careful growth will be quite risky as it allows as other stable coins scale more quickly than Maker.
QUESTION: do folks believe that stable coins have economies of scale and/or economic network effects? If so, Maker needs to prioritize rapid growth. (I didnt say reckless growth - one might suggest that Tether is growing recklessly)
I’ve been very consistent in my remarks around setting PSM fees to 0. I contend that the likelihood of getting USDC blacklisted is significantly lower than the scaremongering of crypto-libertarianism and paranoia makes it out to be. Given that the current USDC on the balance sheet is already fatal, there’s no difference between a little bit fatal and a lot fatal. We should maximize the benefit we get from having USDC on the balance sheet. By setting fees to 0, we can suck up USDC into the protocol like a Dyson. This serves multiple advantages.
- A hard peg at $1, which has multiple tangible benefits around integrations, RWA, and marketing.
- The more USDC we have, the more drypowder we have for re-allocating that USDC into whatever configuration we want our balance sheet to look like. This includes ESG bonds and green works projects as proposed in @rune 's clean money proposal.
- Scaling the Dai supply which is critical for the Maker Protocol to sustain it’s leadership in the market.
I can add that more USDC backing means more flexibility when investing in longer term products because it lowers duration mismatch risks. It is much easier to offer fixed rate vaults, liquidity mining, invest in ETF bonds/RWAs and so on if you know that you won’t need to immediately start thinking how to decrease DAI supply if for some reason stablecoin backing decreases to lower levels.
It seems part of the community is still confused about “too much USDC” narrative and I do understand it, because at the same time we are making efforts to decrease or hedge USDC exposure: lower rates, G-UNI LPs for blacklisting reasons, diversification with different PSMs, generous fixed rate vaults and many other attempts to boost supply from non-USDC collateral. But in reality we are mostly switching 0 yield USDC collateral to something more yielding and this is actually a good problem to have, unless you are very worried about holding USDC right now. We are probably talking about <10% increase in PSM which won’t change things much risk wise, but yes it might have negative PR for those who still look at the USDC backing narrative differently.
As someone who a few years ago would have gone with some kind of mantra about keeping USDC exposure low at all costs, I’ve turned around and think scale&ammunitions dominate here. Thinking long-term and in terms of phases actually helps here. Fees at 0 give us a stronger path to the next phase at a cost of 0 new existential risks.
I find it very concise.
The USDC we receive immediately produces some profit, the profits generated can be used to buy back ETH, wBTC or even DAI.
It builds confidence for investors because it diversifies us, it builds confidence for those who are against USDC being in our system and at the same time it can protect the system from overexposure of USDC in the long run.
FYI, some stablecoin protocols see the value of this proposal.
For Fei Protocol, they might switch from ETH to DAI as a peg mechanism.
I am personally against abolishing PSM fees at this time. Centralized stablecoins in Maker were introduced as an emergency measure after Black Thursday, where we had dai liquidity crunch due to how the old liquidation system worked. Today dai premium mostly exists due to how price is defined inside AMMs and the ever growing amount of USDC and other centralized stablecoins in the crypto economy. Additionally dai is more valuable because of unique features and advantages over centralized stablecoins. During a large market crash event, demand for dai suddenly increases which could result in higher to normal premium, where current PSM parameters prevent the large premium, without accumulating excess reserves when that is not crucial.
We went from high LR stablecoin vaults, to low LR stablecoin vaults, to PSM with fees and now we are possibly going to complete USDC=DAI PSM. PSM was introduced as a mechanism to prevent large premium of dai but suddenly we are discussing it as a mechanism of acquiring reserves, which can later be deployed into different assets or to achieve yield or a mechanism to pump supply of dai artificially. I think this is a completely different strategy as PSM and stablecoin vaults were introduced for. This strategy should first be exactly defined and accepted by the community and not “semi-forced” upon with changes to mechanisms, which can be irreversible later in time. Defining and agreeing upon this takes much longer than it takes us to lower PSM fees.
Under current strategy and market conditions, slight premium is not problematic for anyone, but RWAs and can even be an incentive to issue debt from crypto collaterals. So before we exactly define what the future strategy is, I don’t think we should prematurely decrease the PSM fees and subsequently increase USDC reserves.
From the risk perspective, this would obviously lead to an increase of risk. I believe that zero fees could potentially increase the USDC in reserves for much larger amounts than a few hundred million, especially as USDC and other stablecoin supply continues to grow.
The poll was closed and it is passing by a significant margin. Thanks to all of you for your participation. The proposed changes will be submitted for an on-chain governance poll.
For information, in the meantime, there was a GUSD-PSM proposal.
Upon more thought, I think this is not the right move for Maker at the moment. Field Technologies will be voting against this when it appears as a poll this week, but is open to considering it again in the future.
Reasoning number one:
Not all stablecoins have the same value (which is the whole reason the PSMs exist). With regards to DAI, it has several features that make it a better medium of exchange than other stablecoins – namely the inability of Maker to implement capital controls such as freezing, burning, blacklisting, etc; also it has marginally lower gas fees associated with its use.
This is not dissimilar to gold coinage in pre-modern times. A useful analogy is with European medieval monarchs, who did not actively source precious metals to mint coins, but instead allowed private actors to bring bullion to their mints and pay a fee (similar to our “tin” parameter) to melt down the bullion into standardized weights and purities that were easier to transact with (coinage).
DAI’s position is similar to that of those old gold coins, and USDC, USDP, and any future stablecoins are similar to gold scrap or bullion that private actors want to convert into currency for lower friction transactions. I don’t see an obvious reason for DAI to prop up a discounted price of centralized stablecoins more than is absolutely necessary, and the 10 bps tin has served Maker well historically.
This small amount of friction also leaves room for AMMs to still function profitably elsewhere, which further reduces Maker’s risk of an individual blacklisting event. Note that stable-stable LP tokens are an increasingly successful form of collateral, and generate fees while still exerting some non-real-time pressure to stabilize the DAI peg.
Reasoning number two:
This is one of the very few monetary policy levers that Maker has available to pull (and it’s a fairly small one). Maker is a price-taker with regards to stability fees and size of its monetary base, and this toll is similar to the medieval minting fees referenced above. It allows for some (small) control over size and composition of our monetary base and dollar-proxy reserves. The success of the diversification of USDC to USDP is a clear example of the value of this tool. This tool does demand, however, that our tin/tout policies serve no other masters (like revenue generation or strategic initiatives to position Maker as the source of stablecoin-stablecoin liquidity).
Reasoning number three
One of the major (but not mentioned that I’ve seen anywhere?) benefits of setting all tin/tout to 0 is to reduce the risk of hedging on the part of RWA/fixed income counterparties for whom even a small deviation in DAI<>USD peg can be significant due to the scale of transactions being proposed.
This is a real concern, but probably easier to hedge on Maker’s side by simply allowing a way for debtors to repay in USD rather than DAI should DAI deviate beyond an acceptable exchange rate band with the dollar. In my mind, this was the most compelling reason to adopt a 0 tin/tout parameter, but is most easily hedged on behalf of those for whom it matters with other solutions that don’t affect the total flows of stablecoins in and out of our reserves.
Which is not good for a stablecoin. Price of a stablecoin shouldn’t be in nominal term but in interest rate. We should be quantity elastic and price inelastic.
The fact that DAI is preferred over other stablecoins is a myth until proven otherwise. First, the market cap show that USDC, Paxos (incl. BUSD) and even USDT are still winning. Second, due to the nature of curve, the 3pool should be split between assets at par. So with a $6B 3pool, you have not much of the market cap on USDC and USDT but 25% of the DAI market cap which adds a buy pressure for purelly technical reasons. As some people are delta hedged on DAI (borrow + lend somewhere) and therefore not impact the price, this is even more than 25%.
USDC is currently more valuable than DAI on Curve as the share of DAI is at an all-time high. Now you pay only 2bps (meaning a price of DAI before fees of 0.9998).
Therefore we already passed our arbitrage price from 10bps to 2bps. There was an argument that decreasing it would increase exponentially the amount of stablecoins on our balance sheet.
Well, the opposite happened. You can argue that there was a lot of minting against crypto for sure. You can also argue that as we decreased our stablecoin exposure, people started to see DAI as less attractive (correlation is not causation).
For reason #2, I would cite that 2 rivals in Scotland were able to accept notes at par 300 years ago. The fuel of MakerDAO is DAI issuance and investing this float. We can control by DC and by changing the tin/tout at some point if necessary. But at least one tin should be 0 and one out should be 0. Then the market-making can do the rest.
For reason #3, it was voted against by a poll last year. Moreover, this is adding quite a complication and make DAI less suitable to be the stablecoin of the RWA financials markets.
Maybe we should revisit that.
In general, I think much of what you’re saying is true, but simply disagree upon whether a commitment to make major stablecoins fungible is worth what Maker would give up. Namely, a small tool to guide composition of our dollar-proxy reserves, and the potential to make stable-stable pools less profitable after Maker has been successful in attracting Uniswap and Gelato stable-stable LP tokens as collateral.
I don’t think it’s any kind of disaster to set tin/tout of all current and future PSMs to 0. I just don’t want to risk losing the ability to encourage diversification between PSMs or risk reducing collateral that helps maintain the peg indirectly (but keeps blacklist risk at arm’s length and generates revenue).
This signal request successful passed in this executive vote. Thank you to all who voted.
A few hours after this change, the USDC PSM outflow is the biggest. This is probably not related but shows that the expected massive inflow of USDC did not happen.
Dai from volatile assets increased faster than expected in the past month or so, mainly WBTC, where two largest vaults mint dai and swap it for USDC or USDT. Also, USDC supply can potentially increase faster than dai did in the past month, which would probably increase USDC allocation across AMMs, which would create pressure on dai price and subsequently produce USDC inflow into PSM.
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