I was looking at what the real answer is here about this compound farming but have not taken on the risk of the new compound governance change here to DAI and maker.
@cyrus Your analysis looks correct.
The risk is of taking on the trade in/out over the time frame expected and prices of the assets. USDC has less of a pricing risk but ETH could be used to Mint DAI and swapped for USDC. There is a time/pricing on DAI risk here. How much of a premium that can be paid see numbers below. The other issue becomes if supply return rates rise enough to pull in more compound supply as the supply side of the equation that puts a rate and comp drag on the rest. I don’t think it is big enough to offset the leverage available here and the rate of return given comp drip and price in USD. So once this starts to move it will max out available supply depending on the DAI/USDC pricing risk over the time of availability.
It is entirely unclear how the farming mechanics will play out in detail but given the returns available below based on the new comp metric about to go into effect is significant and the analysis above pretty correct.
Here is what I have as a basic financial analysis on this.
$1B compound supply+borrow assets under deposit (doesn’t matter exactly HOW it got there - it IS there). The yield it is currently seeking is .5COMP/block or 2880 COMP/day. I think they lowered this slightly to .44COMP/block. We should check and post numbers for the calculations here.
Release 2880COMP/day valued at 240USD and compound is offering approx .7M USD/day for $1B of assets under depost (all that is changing is the value of comp and the amount of deposits seeking these 2880 COMP) that is all.
$1B earning .0007 or .07%/day available at current comp prices and current drip rate (doesn’t matter the model) works out to 29%/yr - on the entire $1B however it is portioned out (some deposits will earn more some less)
This is going to screw with whatever interest rate model you are dropping on top of it and changing the nature of how the comp will be rewarded just shifts the 29% yield around in those $1B in assets.
Given the size of this yield currently it is causing unusual behavior driving defi liquidity availability to extremes. Fortunately with BAT this has not seemed to cause a price problem. Given the recent increase in reserve requirements (50% on BAT/ZRX/etc) and interest rate models will drive assets into the lower yield spread instruments (USDC and DAI as well as possibly USDT to some extent) and if leverage can be applied to lever up this return it will.
I completely agree that something needs to be done, but it is unclear what can be done. Add more DC and all that will happen is that it will be soaked up - entirely.
The problem here won’t be the DC, but the PEG mechanics will be completely broken.
I do NOT think we can up the DC enough to satisfy this and the question becomes how do we do this safely with respect to assets. I know this is counter intuitive and may cause even more pressure on DAI/USDC PEG price in the short term but I would be prepared to soak up some of this problem with a somewhat higher SF (now rather than later) and allow the system to expand into this with a high DAI/USDC PEG rate against not just an across the board SF increase when the DC needs to be expanded but also a preemptive SF rate increase to build some surplus reserve incase things go whacky. Ideas to expand borrowing into B,C asset classes to expand the DCs with higher rates and higher LR as well as higher Liquidation Fees in particular may help.
Remember we still have a somewhat liquidity constrained liquidation system and we don’t want to stretch this. Right now the only deposit system that DOESN’T have an auction system is the USDC ones This needs to be fixed ASAP before Maker gets trapped in some wierd USDC/DAI price swing and can not auction the USDC position. We need USDC people to manage their LR’s against liquidations like normal. Whether to lower the LR there I’d say no. Honestly I would want to increase the LR on a new facility so that we can sop up some of the USDC looking to find DAI and reduce leverage available. People using ETH to borrow DAI should be ok. Be prepared to expand the DC’s into this as demand is driven into it and make bloody sure to increase the SF (now) rather than later. We already know the PEG price mechanics are going to be screwed due to this and there will be nothing we can do about that. Literally may not be able to expand borrowing into this to provide enough liquidity and anyone trying to take the DAI USDC short here could get really hurt in multiple ways until compound fixes the problem.
I honestly would consider governance minting ‘out of thin air’ DAI to exchange for USDC or other assets during this price rise to try to manage the increase and PEG somewhat. We literally are going to have to, by force and temporairly reduce the assets backing DAI, to make it LESS attractive to own it. Playing the liquidity game directly within the protocol and hazarding (to some extent) our DAI holders I think is the only way to have any hope of managing this situation so that the DAI USDC price doesn’t get totally out of whack with no way to bring it back.
I do have an idea for how compound can mitigate this issue that i have mentioned in discord #governance channel, but need to formally write up, but each time I have brought up pieces of this idea it has been rejected.
Conceptually the problem here as illustrated above is the high $$ comp value. The solution is basically to take the remaining 4.4M being portioned out and doing the following:
D1_D Democratically distribute N comp to all wallets that so that D1=wallets*Ncomp
a) Have at least one deposit tx to compound AND
b) Still have at least $100 worth of cTOKENs OR $100 worth of debt currently.
c) Drip it out at a rate determined by age of (a) the older the wallet the faster the drip of N to that wallet. or do it all as an air-drop based on a chain snapshot at some time T (preferred)
D2_I Use the total interest earned and paid on each wallet (i.e. real compound useage) prior to this debacle to calculate a air-dropped distribution to all the wallets. We voted at compound some time ago on what assets to add to the protocol based on interest/paid earned so I know this is doable. It is a fixed distribution based on the snapshot time T
D3_C Use the rest of the Comp to distribute based on a $$ value model of comp with a cap of D3_C/4years so that the distribution model does not distribute more than C% $$ value of comp for $$ Total value of assets so that the interest earned on the $$ value of the comp is no more than 1%/yr in USD value.
Additionally taking some restrictions off the holders of the first 5.5M comp distributed so they can sell would help but only after D1, D2 are distributed. (give your users with comp first shot at these markets as a reward for being there before everyone else)
D1+D2+D3=4.4M and D1+D2 should be >= D3 to deal with comp liquidity and price problem.
The point with the above is that there simply is not enough COMP distributed yet to drop the price to realistic levels. One could allow the insiders to sell it all but why not simply air-drop COMP based on PRIOR use and performance to reward your users and help depress the price of COMP with supply. D3_C is the critical component to eliminate this COMP farming though. If one sets the yearly return on $$ value COMPed to be a small % in $$ value relative to the Total $$ supplied - adding assets will NOT increase the value relative to assets until the price of COMP drops so that the D3_C supply cap for the 4 year distribution works out. Basically this becomes ‘solved’ when the price in USD of COMP drops so that the max D3_C drop of .44COMP/block has a value < 1% yrly return on the supplied $$ value of assets.
Note 1% is arbitrary but needs to be reasonably low. IN this low rate environment 1% is literally double the current returns on most assets. It was picked to literally be as low as reasonably possible but still drip out some in D3 until comp prices normalize much lower. The other key component is to get liquidity out there based on some snapshot for the D1, D2 air drops of COMP. I honestly don’t know why the team there did not consider doing this so the markets instantly get a good chunk of liquidity so price wouldn’t get out of hand. The final piece is not allowing COMP not matter what the price to be driped out at a rate higher than 1% $$ return on total assets supplied seeking this return. I consider even 1% to still be somewhat high but tolerable as compared to the current 29% return rate on $1B of assets supplied.