System Reserves

I’m pretty sure that I agree with you that there is a probably a problem with the protocols capital reserves, and with the SF heading to 0% who knows when that situation will improve.

However, why is having the protocol take on debt a preferable option in terms of risk mitigation as opposed to something like raising the liquidation ratios.

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I think of contingent convertible bonds more like purchasing insurance than taking on debt. But to your point I don’t think vaults would be competitive with other lending/leverage options if we required too high of a liquidation ratio.

I pitched the debt idea internally several months ago, but it didn’t gain any traction =(

Why is the convertible useful here? Why is it “purchasing insurance than taking on debt?”

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One thing to note regarding monetary policy. Raising DAI in this current situation, through bonds or equity, puts more pressure on the peg.

Though convertible bonds are cool. Sort of the opposite of a normal convertible bond, it’s more like MKR holders are buying a put option. An interesting way of purchasing insurance.

I do think it’s a good idea when the stability fee is high to build up DAI reserves. There are many benefits:

  • a buffer in case of liquidation losses
  • won’t need to cyclically sell and buy MKR.
  • Also, the big one is that holding DAI has a positive return for MKR holders. DAI held in reserve, effectively earn the SF.
  • It may also suppress the SF a bit which is good for growth of DAI, less sf volatility
  • DAI reserves could possibly be used to purchase non DAI reserves. (when low sf AND dai persistently above peg)

(Also MakerDAO will also be effectively able to earn the sf on the convertible bonds too, it also becomes more like a fixed rate product for bond holders if they value the cost of selling a put option as low)

(These put options could also be less costly for MakerDAO to sell if they have a floating interest rate (earn the DSR as a coupon), depends whether there’s more demand for a fixed interest rate product or variable)


Agree with basically all of this.

I feel like having a much larger Dai reserve makes sense for the mid-term, and we look into holding reserves in other assets at a later date.

I think the sensible next iteration of reserve policy is to:

  1. Accumulate large Dai reserves during periods of high SF (reserves equalling 5-10% of total Dai.)
  2. Sell accumulated reserves to burn MKR when the Dai peg is high and we’ve hit 0% SF / DSR.

This would appear to have the following advantages:

  • Dai liquidity at the time we most need it.
  • Reserves to balance potential bad debt.
  • MKR burn at a time when MKR is probably trading at a lower price.

At the cost of:

  • No MKR burned during reserve accumulation.
  • Potentially difficult to release the reserves quickly without overwhelming keepers. Assuming we had 1mil DAI of reserves, even dropping 1mil DAI per week would require 100 parallel FLIP auctions per week (with current auction parameters)

On balance it seems like a win.


The big problem with using the buffer as a system reserve (which is not its intended use) is that it means the game theory of emergency shutdown and its effect on the peg gets very screwy, since the contents of the buffer go to dai holders in an emergency shutdown.

In times of uncertainty when emergency shutdown become a possibility, the price of Dai will trend towards the expected payout in an emergency shutdown. If that payout is significantly more than 1 USD per dai, then it creates a self-reinforcing effect where uncertainty causes the peg to break, increasing the likelihood of an emergency shutdown. All in all, while the intention of increasing the size of the buffer is to increase robustness of the system, it may actually have the opposite effect and make it more fragile and susceptible to cascading failure.

The solution is the theoretical guardian system of legally bound entities that hold reserves and use them according to pre-defined logic to prevent MKR dilution and reimburse dai holders in the event of a dai haircut. They would need to be distributed across many jurisdictions to minimize the likelihood of failure, and it will take a lot of effort to get it set up in a legally compliant and safe manner, but it is so far the best option available that is future-proofed, and doesn’t negatively interact with the game theory of the core system mechanics.

IMO it is less problematic to mess around with the buffer if it is just for shorter durations, but a very bad direction to go when looking for long term solutions.


why do the contents of the buffer go to DAI holder in ES?
if there is no bad debt (no uncollaterized DAI) then it should go to MKR holders


@monet-supply Personally I feel the bigger risk is us loosing faith with investors. Growth is great and all, but probably going to be difficult in this climate despite our best efforts.

We just had a round of “angel funding” that we used to write-off the system debt. Here (with the BOND option) we would presumably be asking those same people to come to the table with a few million more DAI so we could sure up our balances, so what happens if it is not enough and MKR issuance happens again? Do those investors keep coming to the table for this money pit? IDK.

My vote would actually be to start slowly raising the LR a few basis points at a time to de-risk, and we can worry about making DAI loans more attractive once things stabilize in the financial markets globally. Just my opinion though.

Hey that kind of sounds like my option two :smiley:! I personally think this is a great idea, but I worry it would take years to properly setup. In the meantime though, we are unable to keep enough cash on our books, so we might want to consider a trade-off. I mentioned building the reserves onchain with synthetic gold assets as my 3rd choice. Curious what your thoughts are on that @rune. To me it seems like the preferable option in the short/medium term because it seems straight forward to implement and could always be dissolved/redistributed once these “trusts” were setup.

If we ended up in this situation of uncertainty and the peg broke upward for this reason would we not just be able to release the reserves at that point? It seems like this would have a significant effect due to the combination of reducing the ES payout, and also flooding the market with Dai.

Any Dai reserves of that nature should reduce uncertainty anyway, and they would almost certainly be deployed before any sort of planned shutdown in the event of the peg rising significantly above $1.

Would it not be possible to operate an on-chain guardian system in the form of smart contracts? I’m guessing there is a reason this isn’t desireable, but if you could spell it out for me that would be great.


This is a simplified explanation: The system cannot know in real time if there effectively is bad debt or not, so if you give the contents of the buffer to MKR holders it is possible to have a situation where Dai holders get an effective haircut (even if the system doesn’t think there is bad debt, because the price feeds haven’t updated yet), and yet MKR holders would get value from the buffer if it is still positive. Leaving MKR holders with value while letting Dai holders take a haircut would be a violation of the social contract since MKR holders are supposed to be the backstop.

you should remember that the contents of this buffer was supposed to be used to burn MKR and we are deciding to not burn MKR and use it instead to build reserves to add another layer of collateral… so even if in ES the buffer wasn’t used to help with the bad debt it will just go back to MKR holders

also, you are talking about a very specific situation

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I’m having trouble imagining a situation in which we’d have this problem. The ES would have to be both expected and unexpected at the same time.

If the ES was expected by the market in the form of an increased Dai price, we’d release the reserves (or let them be burnt up by bad debt) before contemplating shutdown. Any non-malicious MKR Holder should make this choice, everyone wants the system to survive. If we have a malicious shutdown then I’m not sure how we’d be more screwed than in the general case? It’s also hard to see how a malicious shutdown would be expected by the market.

If the ES was unexpected by the market then we wouldn’t have the issue of the market pricing in the value of the reserves in the case of ES.

Like bottom line, MKR Holders have no incentive to shutdown while reserves are unbalanced by bad debt, we don’t gain anything, it just gives Dai Holders more collateral. In that situation we can always (and should always?) wait for the reserves to be erased. The average Dai user will probably know nothing about this, but it’s fair to say the ‘advanced’ Dai user would both know that Dai Holders get a share of the reserves and that because of this there is no reason for MKR Holders to ES the system while reserves exceed bad debt.


I think we can ignore the system reserves for now - it will not be too late to discuss them when we fix the peg. In general, I think it’s better to develop new DAI design (which can include system reserves) than to try to fix the current design with system reserves.

If we’re doing synthetics, why gold? Why not just synthetic short term treasuries that can be easily converted into Dai when needed?

Yes, these are good points and it does probably reduce the issues of having a positive buffer in the short term. I’m not convinced there isn’t a case where the twisted incentives can play out over a period of time that is too short for governance to react, so I still think it would only be appealing as a temporary measure until something better is in place. There are also other problems, including dai holders being incentivized to trigger ES in edge cases, and technical ES (from e.g. a governance attack) resulting in dai holders getting additional funds.

Either way I think having actual off chain reserves that behave differently depending on the scenario (so e.g. an ES during a black swan event means the value goes to dai holders, while an ES during normal conditions results in the reserves carrying over to the new deployment) is better for the long run as it avoids these issues entirely.

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My concern with off chain reserves is that they are fundamentally not verifiable, subject to credit risks, and could become a honey pot for frivolous lawsuits or government interference. I wonder if it would be possible to address concerns about a large surplus buffer by making adjustments to the ES procedure?


My reasoning is that i just don’t think that there is as much existing work in that space, and I’m hypothesizing of a medium term solution to use while you worked out the various legalities of holding assets on the behalf of the protocol. Gold seems like a semi-reasonable choice in that regard since A there are existing on-chain projects with reasonable liquidity and B there is some precedent. There is also all the stuff that @monet-supply listed above that might slow down the creation of these “trusts.”

However, once you had the “trusts” setup no need to really limit yourself in that way.

Could just not be informed here though. To my knowledge there aren’t any existing treasuries options onchain at this time, correct?

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Poll needs an ‘other’ option.
Buffer should be a percentage of the Total Dai in existence (excluding the buffer).


Hi all,

I have closed the poll and wanted to quickly recap this thread:

  • The poll seems to show there is general consensus for increasing the level of system reserves

    • ~75% of poll voters favored increasing the surplus, including ~55% in favor of increasing to more than 2MM DAI
  • The system surplus buffer is currently designed to go to DAI holders in the event of emergency shutdown, so it could be problematic to use the surplus buffer to increase reserves

  • Discussion also touched on:
    • The potential benefits of having a larger pool of reserves, and costs (in MKR dilution) of having low reserves
    • Which assets should the protocol hold as reserves: DAI, other on-chain assets (ETH, PAXG, etc) and/or off-chain assets and relationships with guardian entities
    • The potential of using hedging strategies (options, etc) to build loss capacity
    • Whether the DAI surplus buffer should be a fixed amount or targeted to a percentage of the circulating DAI supply

Thank you to everyone who contributed!


Personally, while I no longer support increasing the surplus buffer (for the reasons mentioned by @rune above), I still think that the protocol should hold a decent amount of reserves on-chain to help stabilize DAI and avoid diluting MKR at low prices. To do this safely, we will need a way for Maker governance to hold funds outside of the surplus buffer / Vow. Has this possibility been discussed before or does anyone know if there are plans to create a treasury management system for MKR holders?