[TUSD] Proposal for Collateral Onboarding

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
photo_2020-05-06 22.49.56

Secondary Lending activity for TUSD vs other stablecoins
photo_2020-05-06 22.50.45

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.

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Firstly, thank you Cyrus and risk team for this analysis!

I don’t think USDT reserves being held outside the US provides meaningful regulatory risk diversification. The US Treasury can blacklist foreign entities, which prevents any other financial institutions from transacting with the affected Tether reserve holders or acting as correspondent bank to process USD wire transfers. This would lead to immediate halt of USDT creation and redemption, and the underlying Tether banks would probably default almost immediately due to being unable to issue or repay USD debts.

For context: https://www.reuters.com/article/us-huawei-tech-usa-treasury-exclusive/exclusive-white-house-considered-kicking-huawei-out-of-u-s-banking-system-sources-idUSKBN1Y717U

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Hi Cyrus,

I can address some of these concerns.

One distinction I’d make here, and more generally, is that the counterparty risk of TUSD is relatively low given that the money is held in escrow for the benefit holders of the tokens and not by our company. This is a distinguishing feature of our token versus some other US $ stablecoins. We work with multiple trust company and banking partners to custody the respective USD. Our company does not have a legal claim on their funds

You can review our Terms of Use for our AML-CTF standards and our prohibited uses to get the clearest answer to this question.

I addressed this question in my initial post on the forum. You can find the answer here.

We do also have tokenized versions of HKD, GBP, CAD, AUD, though they have limited usage compared to TUSD. We’d love to speak further about how we could collaborate on these, as well.

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These are ranked fairly well in uniswap liquidity among the stablecoins. There is no superior non-USD token in terms of dex liquidity and volume, unfortunately.

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There’s quite a bit of on-chain stablecoin liquidity for TUSD via the curve y pool. https://beta.curve.fi/y

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Saw @rune comment on twitter: https://twitter.com/RuneKek/status/1263937698953416704?s=20

Seems like we are trying to go out of MIPs process (I.E. Community Greenlight and the like) to get this on-boarded and I am curious to the reasons why.

Basically if you check the recent presentation from the risk team there are several concerning metrics in the way of market cap growth stagnation and low trading volumes that sort of all roll together to be a bit of a cause for concern pertaining to TUSD’s long term viability. For pretty much every metric that they showed TUSD basically was ranked last among the stablecoins they presented.

Based on that presentation I’m a bit surprised to see that we seem to be fast tracking this app. Especially given that based on the fact that the risk team seemed to imply that the main risk here is a non-diversifiable regulatory one. Is there some bit of context that I am missing on this?

I understand that we are saying that the debt ceiling will be set appropriately low, but that still doesn’t seem to explain why we are going outside of the established process for a particular asset that we don’t even feel THAT bullish on.

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While personally I disagree this Rune’s call on this being the next collateral to onboard, I’m not against it as the downside risk is small, the upside opportunity is there (they’re banking in HK afaik, and establishing multiple fiat coins in different geographies which may be a larger story to Rune’s support!).

The only reason I don’t 100% like this play is that the fragmented mentality already existing surrounding off-chain assets means that any misstep will have 3x the weight on the public sentiment of DAI/Maker as a whole, and with the spotlight getting brighter on Maker as it’s gaining ground with the non-DeFi space and on the radar of a lot of the established fintech teams (Robinhood/Cash App/Etc…).

Either way, I 100% support Rune’s call on this, and if it’s not the right call, we can learn from it as a community which right now is not bad. Any mistakes made now/lessons learned are cheaper than they’re going to be in 6 months, 12 months, etc…

:raising_hand_man: (me showing my smaller MKR holdings than I’d like voting support) :raising_hand_man:
“I disagree, and commit.”

+1 on this

Given that MIPS are still in their infancy, I think it could be probable it was already discussed and considered? In which case, and for the near term I personally don’t mind the premise of discussions being “grandfathered in”. It’d be good for the community to formalize them into MIPS (even if just for the result of following process. Sets a good example for the community.

I’m literally filling up screen real estate with word salad and not answers to your questions. Sorry! Stopping now! :crazy_face:

Yeah I mean I’m all over this forum being bullish for off-chain assets, and I agree that the downside is small given the $2MM debt ceiling that I think we are talking about. That is not really my holdup here.

What I am trying to point out is that we seem to have sidestepped the governance process established by the whole MIPS framework (and ratified via executives for that matter) for seemingly dubious diversification benefits, and a minimal overall benefit in terms of DAI generated.

My question here is why are we doing this? What is the benefit that the foundation seems to be pursuing? If it isn’t diversification and it isn’t DAI liquidity what’s the point? Hell hard to even make the argument that we need more liquidity to bring dai back to peg these days (trading on coinbase currently @ ~$0.002 over peg atm). If HK banking is the reason then let’s hear the justification.

Ultimately, my point here is that unless the foundation has a strong reason for expediting this it just seems like it should be going through the MIPs process just like any other asset, and by not doing that they are SORT OF acting in bad faith as that is the process that was ratified via executive vote.

Just seems like they should have to abide by the MIPs process the same as the rest of the community.

All of that said, there might be something that I am missing here. I would love to hear any thoughts from the foundation concerning why we are planning on polling for this collateral next week as opposed to the many others that have been suggested.

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Thanks for your question (and attentiveness) Andy. Here’s how this situation played out. The MIPS process as far as I’m concerned is still a work in progress. We cannot hold up all aspects of governance until this becomes really robust. (For example, the proposal for USDC-B is something that we want in there sooner rather than later. I don’t think we should sacrifice safety for the sake of governance right now.) One of my jobs (literally) is to help bootstrap collateral onboarding and get the flywheel spinning, which is why TUSD and USDC-B are coming this month as part of a “pseudo-MIPs” process.

But to the broader question of “Why TUSD in the first place?” Well, the Maker philosophy from the start has been to add any and all collateral types so long as they are not literal scams. We do not try to be gatekeepers and pick between good or bad collaterals, but rather price the risk appropriately. Hope that clears up some of your questions.

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