The only role of DSR as a promoter of DAI supply!

With SCD we have successfully kept the peg depending only on changing the SF.
This success in keeping the peg has a side effect (too high SF which is slowing the growth of DAI supply). That’s why we need the DSR. Its real role is to fix the problem of the slowing growth of DAI supply.

DSR fixes this problem by encouraging holding DAI which in return cause needing lower ST to keep the peg. Lower SF encourages minting more DAI and that’s the real goal of using DSR.

So what is DSR % should be? (1%, 2%, 5%, or 10%)?

The answer depends on the targeted total supply of DAI we are trying to achieve.
Of course, we want the DAI supply to be as high as safely possible.

the limiting factor in achieving high DAI supply is having enough collaterals to grow the DAI supply.
with MCD we will have Eth and few low market caps ERC20 tokens

if we assumed 5% of the total market cap of these collaterals as the upper safe limit.
we will have 1.2 billion dollars as maximum available collateral with the 300% collateral ratio we will end up with 400 million maximum Dai supply we can safely achieve with the currently available collaterals.

of course, the DAI supply should be the lower than the upper safe limit.
If we considered the range of 50% to 75% of the upper limit as a healthy target, we will end up with 200 to 300 million DAI as the targeted DAI supply for few months or even a few years until we could secure better and larger collaterals.

so DSR should be changed accordingly if the DAI supply is below the targeted range then we should increase the DSR to increase DAI supply to reach the targeted supply. on the other hand, if we have exceeded the targeted range we should lower DSR to decrease DAI supply.

what I wanted to say is that it is a mistake to change the DSR as a response to losing the peg (this should be kept as the SF job). DSR should be changed only to control the DAI supply.

imagine this scenario! the DAI supply is 350m (which is too high) and the DAI lost its peg lower 1$.
what should we do in this scenario? if we increase the DSR to restore the peg we will push the DAI supply to higher and riskier levels. on the other hand, if we decreased the DSR to lower the DAI supply we will worsen the peg issue.

this is why we should separate the tools. so that the peg is kept by SF and the DAI supply by DSR.

I dont quite understand how the DSR can be used to affect just supply. Doesn’t it primary affect demand through peoples decisions around earning interest vs holding other capital. DSR comes from stability fee. Stability fee influences the attractiveness of taking on debt (drawing dai (supply)). If people lock/draw more collateral/dai then the supply will go up.

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DSR increases supply by encouraging holding DAI which in return cause needing lower SF to keep the peg. Lower SF encourages minting more DAI and increasing the supply.

let’s say total fees = SF (to control the peg) + DSR (to control the DAI supply) + other fixed fees (risk or governance fees)

we have 2 primary goals: first to grow DAI supply as much as possible but within safety margins and second is to keep the peg while growing the DAI supply.

so we should change DSR % to reach the wanted DAI supply range (200 to 300m as I assumed) >>> the first goal.

and we should change the SF to keep the peg >>> the second goal

Isn’t that the same as saying demands affects supply? You cant ignore the primary affect is on demand, simply people buying dai wont immediately translate into a structural supply/demand imbalance that requires SF adjustment. So far the movements of the collateral itself seem influence cdp owner behavior, regardless of demand for dai.

I am not ignoring the demand. I am saying that increasing demand will lower the required SF which probably will lead to increasing supply.

But the stability fee is more a function of the behavior/risk of the collateral right? That’s independent of dai demand.

Also the DSR is inherently limited by the stability fee.

that’s why I suggesting this equation or something similar
total fees = SF (to control the peg) + DSR (to control the DAI supply) + other fixed fees (risk or governance fees)

Interesting, okay lemme think on that. I have a couple initial reactions but need to ponder more.

I guess on one level this comes down to how much value makes sense for mkr holders to extract out of the system. However first complaint is that making cdp users pay a higher total fee to pay a high DSR, so more peps want to hold dai, could reduce CDP attractiveness, thus actually reducing supply. To reach the goal of safest increase of dai supply + peg stability we need to spur the natural demand for a stable SoV and medium of exchange (which should be massive), while keeping CDPs attractive as safely possible (so supply can match that organic demand for a product like dai).

However first complaint is that making cdp users pay a higher total fee to pay a high DSR, so more peps want to hold dai, could reduce CDP attractiveness, thus actually reducing supply.

a scenario of high DSR + closing CPD will cause losing the peg to higher than 1$ which will promote lowering the SF and thus lowering the total fees

to reach the goal of safest increase of dai supply + peg stability we need to spur the natural demand for a stable SoV and medium of exchange (which should be massive), while keeping CDPs attractive as safely possible (so supply can match that organic demand for a product like dai).

DSR is a tool to promote DAI. It’s the strongest tool that no other stable coin can compete with.

depending only on the organic demand of DAI means we should abandon DSR.

But then what pays the DSR? You just increased the proportion of DSR to total fees by eating into risk premium based stability fee. Isnt that injecting risk?

Secondary lending markets offer the same opportunity to other stable coins. The strongest tool is the fundamental need in our cultural paradigm to exchange goods and services through a stable/valued/secure medium. Thats all the arguing I got in me for today. You made me think alot appreciate your opinions. I’m curious what others think.

But then what pays the DSR? You just increased the proportion of DSR to total fees by eating into risk premium based stability fee. Isnt that injecting risk?

risk premium fees should be calculated within the fixed fees not within the SF in the suggested equation
total fees = SF (to control the peg) + DSR (to control the DAI supply) + other fixed fees (risk or governance fees)
this means that SF can go to 0 without affecting the risk premium fees.

Secondary lending markets offer the same opportunity to other stable coins. The strongest tool is the fundamental need in our cultural paradigm to exchange goods and services through a stable/valued/secure medium.

secondary lending markets offer the same opportunity for all stable coins including DAI. The difference is with DSR DAI has additionally a very strong advantage on other stable coins.

Why would someone lock up Dai for a DSR that is anything less than what Compound is paying?

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Good question, took me some time to rationalize it but it should not matter. Every dai in circulation comes from MKR, every dai has an eth collateral in the maker protocol.
A dai deposited in compound only makes the revenue better for maker since we will be loaning at x% and not having to pay interest fees for the deposit.
Those deposits in compound which already exist enable lower interest rates CDPs through compound but when their dai usage reaches limit their interest rates go above maker´s and therefore people move to mkr to mint dai at cheaper rates.
Compound rates are dynamic if I´m not mistaken, maker DSR will be more predictable (as is the stability fee, predictable in the crypto term of predictable I mean), maker is the issuer of dai so there should be a trust component too and last but not least the option simply isn´t there now, we could presume that all compound dai deposits are 100% market share or most of it, a piece of the cake should go to maker simply because the option does not exist now.
It´s a very interesting question!

Much less risk, since its insured by MKR

Good point. dYdX is insured. They will also push the rate up. I think Maker is going to need to pay 75% or so of what projects like dYdX and Compound are paying for it to affect demand. And there will be more “competitors.”

Wow I did not know that,

I think market cap of MKR will be bigger then dydx insurance fund