Given the current low SF, it will take a long time for a substantial surplus to build up just from operating cashflow. I know that the idea of “pre-printing” MKR was brought up on the call last week, and while I would be supportive of issuing capital to build up the surplus buffer, we could potentially issue other types of capital instead of just equity.
Traditional banks often issue financial instruments called contingent convertible bonds as a supplemental source of reserves in addition to common equity. During normal times, the instrument works like a bond, paying a fixed rate of return from the date of issuance until the full face value of the bond is repaid at maturity. However, the bonds have built in triggers which allow for them to be converted into common equity at a predetermined price under certain circumstances.
An example of how this could work in the Maker system:
Each convertible bond is represented via an ERC20 token (BOND). Each BOND has a face value of 200 DAI, and will be redeemable on or after the maturity date of the BOND. BONDs are sold via auction at a discount to the face value price of 200 DAI, with the discounted price and term length implying the buyer’s yield to maturity. Proceeds of the auction would be held in a segregated account, and would be topped up to 200 DAI per BOND from the system’s DAI surplus to make up for the original issue discount.
Some numbers to make this more concrete:
Par value per bond/value at maturity: 200 DAI
Term: 91 Days (13 weeks)
Cost at issuance: 195 DAI
Based on the cost at issuance, face value, and term, the buyer of the above BOND would earn an annualized return of roughly 10% over the 13 week term. Note that Maker would need to top up the 195 DAI supplied by the buyer with 5 DAI from the surplus in order to fully back the BOND.
Whenever a flop auction occurs during the term of the BOND, proceeds from the segregated account would be used to make the initial bid of 50,000 DAI (200 DAI per MKR). Any uncontested auctions won by the BOND account would convert a portion of each BOND’s maturity value from DAI to MKR.
BOND holders would be able to earn a fixed return on their DAI in excess of money market rates, in exchange for taking on the risk of potentially acquiring MKR at an above market price.
MKR holders would be able to limit the insolvency risk of the system overall, and in the case of MKR price performing well, the overall cost of capital would be lower than printing MKR tokens directly. In the medium term once DAI supply improves, issuing “debt” capital instruments like this could be a more cost effective way to control the liquid DAI supply, and on a macro level it could help the system sustain a wider DSR spread.
This also avoids some potential issues @cyrus eluded to about the risks of holding substantial assets on the balance sheet. Because Maker doesn’t hold the DAI free and clear, it would not be at risk of governance attack or other asset stripping maneuvers.