The Rates Working Group is looking for feedback from governance on how to proceed with the stablecoin vaults. In particular, the lowest collateralization stablecoin vaults will start dropping below 100% collateralization ratio (CR) on December 19th, 2020 at the current rate of 4%. To see why this is an issue please review the most recent G&R call (~57 mins in). I will attempt to summarize the pros and cons of each option below.
NOTE This post has been edited after the failure of Option 3 to secure enough MKR in the governance poll. I’ve added 2 options based on feedback - Do Nothing and Option 1 variants which are reflected in the new governance poll.
In the do nothing option, MKR would be burned and stablecoin vaults will become undercollateralized.
Option 1 - Keep Raising the Surplus Buffer
In this option we let Stability Fees continue to accrue and increase the surplus buffer so we don’t end up burning MKR only to re-mint it later. The reason is that fees collected after 100% CR are virtual in the sense that, when the vault goes to auction, the revenue collected will be deducted to cover the bad debt. If we had previously burned this revenue it may result in a debt auction.
Variant A) Keep Stability Fees at 4%
Variant B) Lower Stability Fees to something still above 0%
- We continue to collect fees from newer vaults.
- The lower the CR, the less likely vault owners will close their own positions. Auction inefficiencies may cost us some money - even with auctions V2.
- We aren’t burning MKR.
Option 2 - Lower the Stablecoin Stability Fees towards 0%
In this option we will lower the fees towards 0%. Initially we would move the fees down to 2% with the expectation of lowering fees further as we approach 100% CR.
- Higher chance of vaults closing themselves out.
- We miss out on fees from newer vaults.
Option 3 - Migrate Users to a new Vault Type
This is the option discussed in the call where at the threshold of 100% CR for leading vaults, we set the debt ceiling and stability fees on USDC-A/TUSD-A/etc to 0, and open a new vault type USDC-C/TUSD-B/etc with the same parameters and some positive debt ceiling. To be clear this will not result in any immediate action. We will schedule the new vaults and DC/SF to 0 whenever the leading vaults reach 100% CR which will occur approximately on Dec 19th.
- Maximizes fee collection while minimizing the amount of vaults that need to go to auction.
- Technical complexity - there is a fair bit of work involved with rolling out new vaults.
- We are bloating the vault types for a possibly one-time event.
- We may have to keep doing this if Dai doesn’t return to $1.
- Option 1 - Keep Raising the Surplus Buffer
- Option 2 - Lower the Stablecoin Stability Fees towards 0%
- Option 3 - Create a new Vault Type
This signal request will run until Thursday, October 29th, and can be extended if there is not enough activity or consensus. Next step is an on-chain governance poll followed by the Rates Working Group implementing whatever course of action wins.