[Signal Request] Should MakerDAO signal that it prefers for COMP rewards for DAI suppliers and borrowers to be disabled?

Summary of the situation

As first described and discussed in Upcoming COMP farming change could impact the Dai peg, a patch to Compound’s COMP distribution mechanism which went live on the 2nd of July resulted in the leading asset used for “COMP farming” to shift from BAT to DAI. The underlying reasons for this are believed to be that: (a) the DAI market on Compound has a special interest rate model which guarantees that the spread between the supply and borrow rates for DAI is almost always lower than for any other asset; and (b) since the supplier COMP yield is proportional to the borrow size of that asset, the mechanism encourages farmers to crowd into a single asset to maximise their COMP yield.

The negative effects of this phenomenon on DAI stability have been widely discussed, but the main concern is that the COMP reward acts as an extremely high “external DSR” for DAI at a time when existing DAI supply does not warrant a high interest rate in order to promote adherence to the $1.00 price target, resulting in DAI getting bid up by COMP farmers and ultimately getting locked in Compound.

Disabling COMP rewards for DAI

On the 3rd of July, a discussion took place in the #governance-and-risk channel on rocketchat which raised the possibility of simply disabling COMP distributions for the DAI market, until both Maker and Compound communities arrive at a better understanding of how to avoid creating excessive pressure on DAI. This change is expected to be a simple one (for example, SAI is already excluded from receiving COMP rewards), and some members of the Compound community have signalled that they are open to supporting such a change.

Alternatives

There are a number of alternatives that have been discussed, which either seek to address the Compound side of the problem by changing either the DAI interest rate model on Compound or the COMP distribution methodology, or to address the DAI side of the problem by increasing DAI supply. They include:

  • A forum poll and executive vote this weekend increased the USDC-A debt ceiling to 40mm and the RP to 4%, in response to this problem.
  • A poll was made on the 30th of June to consider options, though this poll did not include the option of signalling to the Compound community in favour of disabling COMP rewards for DAI.
  • There have been discussions in Upcoming COMP farming change could impact the Dai peg, the #governance-and-risk channel, and other places concerning the changes required to the DAI interest rate model on Compound that would push the farming equilibrium away from DAI.
  • The PSM proposal has an ongoing poll asking if the PSM should be urgently implemented as an emergency measure.
  • Implementing negative interest rates to counteract the excess demand (while effectively penalising COMP farmers who hoard DAI), even though a specific proposal for negative rates has not yet emerged.

Should MakerDAO signal that it prefers for COMP rewards for DAI suppliers and borrowers on Compound to be disabled?

  • MakerDAO SHOULD signal that it prefers for COMP rewards for DAI suppliers and borrowers on Compound to be disabled.
  • MakerDAO SHOULD NOT signal that it prefers for COMP rewards for DAI suppliers and borrowers on Compound to be disabled.
  • Abstain

0 voters

Next Steps:
This poll will run for 1 week from the time that is being posted. If the number of votes cast at that point is less than 30, the poll will run for 1 additional week thereafter.

If the outcome is that it SHOULD signal, then the MakerDAO community should formally propose to the Compound community that the change be made (whether or not this poll itself would be sufficient to act as this proposal is unclear, since the ultimate decision on this rests entirely with the Compound community).

7 Likes

As new users enter the DeFi space and more entities integrate Dai, the demand for Dai will continue to increase in the long term. Therefore, the focus should be on increasing the supply side to fix the peg.

12 Likes

Wanted to ask why DAI has this special interest rate model that makes its spread the lowest?
Is the reason known?

The Compound rate curve is dependent on the ETH-A stability fee. In this way Compound rates should always be similar to the Maker rates on ETH-A.

1 Like

No.

This won’t fix the issue, and people will just pull collateral out of MKR vaults and put it into Compound directly which makes the problem much worse.

What Maker needs to do is mint additional MKR and give it to borrowers to incentivize creation of more Dai.

Yes.

The Dai supply side should be incentivized by minting MKR and paying for Dai to be generated until the peg is below $1.

Ok, editing it a bit to respond to IslandHunting’s point.

It’s my personal opinion, but subsiding via minting MKR is quite inefficient way to fix the peg.

I saw many posts point out that they are against it because it will trigger “the race to the bottom” and that this kind of subsidy is not sustainable.

Both are good points, but here is why economically speaking, it’s less efficient than alternatives.

Maker system shares many characteristics with countries with fixed pegs. And for these countries, it’s relatively easy to fix the peg when it’s above the peg. Why? Because they can print their own currency to buy other currencies to depreciate their own currency while increasing their foreign reserve.

However, the current Maker system is less efficient at dealing with such because it requires excess capital as collateral to do so. In addition, as many collateral types are highly volatile, that means, further excess capital as collateral is generally practiced.

In addition, while there are different ways of looking at it, circulating Dai supply seems quite inelastic because while the price and supply of Dai increased, Dai liquidity on Uniswap is flat (If it was elastic, a small increase in Dai should have significantly increased Dai liquidity and volume on exchanges such as Uniswap to sell Dai).

Considering that it took a high stability fee to restore the peg when Dai was trading below $1, that also seems to hint that circulating Dai supply is inelastic.

This means that even if there’s subsidy, the effect will be quite small.

In this regard, a more direct approach such as PSM is more capital efficient. In addition, PSM will likely make the circulating Dai supply curve more elastic as it makes “the production process” of Dai simpler.

10 Likes

@ericDeCourcy @cazala @Santiago_Sabater1 @chapati @experience @nightjoy @jabaripamoja @brock @vikram @borovan

All of you have extremely new accounts, could each of you please share some details of why you are voting the way you are?

@LongForWisdom I very much share Doo’s original point of view. The purpose of the Maker governance is to maintain the peg in the face of DAI demand, not complain about said demand. The demand will increase across the DeFi space with projects like Augur v2 integrating the stablecoin tightly. Therefore, MakerDAO should focus on ways to get DAI back to the peg. Furthermore, signaling is a bit futile and just leaves the problem open: Compound might not change anything, or if not Compound, another project might do something similar and not listen to anyone telling them to stop.

8 Likes

Voted NO because we need to learn to handle demand spikes, not try to avoid them.

8 Likes

Thanks for sharing @experience, welcome to the forum.

@LongForWisdom voted no because it shouldn’t be up to Compound to manage Maker’s design flaws.

1 Like

Nailed it! I could not agree more with this statement.

1 Like

Compound is throwing a ton value into the ecosystem

Farmers are utilizing (read: exploiting) the Maker/Dai system to capture that value.

Maker could capture some of that value by increasing the base rate. We moved from 0.25% -> 0% with no meaningful change in the peg (IMO). While the peg is off, I understand the optics are bad for any non-zero base rate. But with the PSM in place, that may give us an opportunity to increase the base rate and start to capture the value COMP is creating.

Vote No Change 2020!

4 Likes

I was abstaining, but I am now a very strong no. I believe that this will communicate to the community and market that maker are reliant on the goodwill of our players in the ecosystem to maintain the peg and system - and that will lead to another slow bleed of confidence, since it shows that MKR is not able to handle market changes on its own. And foundational confidence in the system, particularly in time of criss, is the ultimate determination of success in financial infrastructure.

4 Likes

I voted no because it’s treating the symptom rather than the cause. As long as people can make a yield higher than the +2% premium they aren’t going to dump their DAI into the market. If compound disabled this then balancer or another protocol is going to be next. I think the PSM is a better solution for the peg going up, although I think it falls short for when the peg goes down due to its 1:1 rate, at some point the USDC reserves will dry. But that’s not the current problem and I understand something more sophisticated like what mich suggested (Peg Stabilization Modules: A Pre-MIP Discussion) would take longer so I think the current proposal is the way to go.

3 Likes

[I apologise for not closing it after 7 days as promised, time flew faster than I thought!]

Summary: after 9 days of polling, the poll was closed, with 113 votes in total. 67% voted in favour of not signalling, 15% voted in favour of signalling, and 18% abstained. The stated reasons for voting against can be roughly summarised as:

  • we should address the problem by increasing supply, not by trying to decrease demand
  • doing this would cause people to close their vaults and move to Compound
  • we should not rely on the Compound community’s goodwill to solve our problems, or it is not Compound’s responsibility to solve Maker’s problems
7 Likes

This topic was automatically closed 7 days after the last reply. New replies are no longer allowed.