Hey guys, last week TUSD submitted a MIP6 application and as a result we have done a risk evaluation for governance to consider onboarding it into the Maker Protocol. Tomorrow we’ll do a presentation on the governance call as well.
Overview
The primary use case of stablecoin collateral types is to increase Dai liquidity, particularly in times of distress or when Dai is trading at a significant premium. Stablecoin collateral helps generate Dai that is then used to push the market price down, supply liquidity to secondary lending platforms, or provide keepers with adequate liquidity during auctions. As a result, the appetite for stablecoin collateral tends to be conditional on market environments. Based on USDC vault usage, we can infer that Dai is not typically generated unless there is a sufficiently high premium on Dai or when there are short term bursts of Dai demand (i.e., collateral auctions, Vault deleveraging in distressed situations, or debt auctions). Otherwise, the debt ceiling is likely to remain unutilized.
Oracles and Liquidations
Similar to USDC, we are proposing that TUSD maintain a fixed oracle price of $1. Until a more robust keeper ecosystem emerges, it is potentially risky to liquidate stablecoin collateral. Due to what would likely be a very narrow distribution of collateralization ratios, large blocks of collateral could be auctioned off in short periods of time and overwhelm keepers. Additionally, on-chain liquidations may not even be desirable at this stage, and therefore we propose disabling liquidations altogether from the start. Until the community has a better understanding of counterparty risks and the potential off-chain mechanisms that may be needed to resolve any disputes, auctions might accidentally result in unnecessary firesale prices.
Liquidity Analysis and Metrics
A volume analysis shows that TUSD has low volumes on decentralized exchanges, both in absolute terms and in comparison to USDC. Volume is more competitive on centralized exchanges, however. This introduces a risk when users would potentially need to acquire Dai by exchanging their collateral to close out their Vaults. However, we note that such an event may be unlikely given that stablecoins are generally not expected to trade away from $1. Nonetheless, liquidations would be disabled, mitigating liquidity risks.
| USDC | TUSD | |
|---|---|---|
| Marketcap | 708,112,192 | 137,882,778 |
| Daily Volume CEX - median 90d | 39,708,401 | 17,932,161 |
| Daily Volume DEX - median 90d | 1,337,859 | 59,995 |
| Supply + Borrow DeFi | 48,500,500 | 1,597,564 |
TUSD has also slowly been losing market share compared to USDC
Daily volume for various DEX protocols vs other stablecoins
Secondary Lending activity for TUSD vs other stablecoins
Counterparty Risk
Given that USDC already exists in the Maker Protocol, the primary benefit of adding alternatives such as TUSD is the diversification of the stablecoin set. However, it is difficult to quantify the extent of the diversification benefit without a comprehensive due diligence of the issuing parties. Due to lack of relevant legal precedent, we omit a counterparty risk analysis. However, we encourage the community to consider the following discussion points:
- If USDC and TUSD are issued from the same jurisdiction, the diversification benefits might be limited. From that perspective, could other stablecoins such as USDT provide better utility?
- What are the mandates for blacklists, freezes, or seizure of TUSD?
- Would stablecoins tied to currencies other than USD provide better diversification?
Risk Parameters
Given the significantly lower volumes, DeFi presence, and relative usage compared to USDC, we are proposing a debt ceiling of 2 million for TUSD. This amount could be raised in the future based on improved liquidity metrics or Vault adoption. Additionally, governance may want to consider putting a cap on total debt ceiling exposure to stablecoins (and potentially reduce the USDC debt ceiling simultaneously).
The stability fee would normally be a function of the counterparty risk and liquidity. Given that we are ignoring counterparty risk, the stability fee should track higher than USDC due to
reduced liquidity. However, given the current campaign of easy monetary policy, we propose a stability fee of 0% until the Dai peg concerns have been fully alleviated. Afterward, governance may charge a stability fee comparatively higher than USDC.
We propose the same liquidation ratio as USDC for TUSD: 120%. Lastly, for auction parameters, we propose the same set as USDC. However, as noted above, liquidations will be disabled for the foreseeable future.
(me showing my smaller MKR holdings than I’d like voting support) 