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.
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-riskchannel, 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.
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).