Given the pre-MIPs extensive community discussions and apparent interest in and request for this collateral type, we are proposing to add a second USDC collateral type to the Maker Protocol (‘USDC-B’). The purpose of this additional variant of USDC is to act as an emergency credit facility during times when keeper liquidity is overwhelmed (such as busy liquidation periods with large amounts of collateral being auctioned). This is in contrast to how USDC-A is currently being utilized (primarily as a tool to arbitrage the Dai price back down to $1.00). Ideally, the USDC-B collateral type should remain unused unless there is a severe and acute liquidity issue in the Dai markets. To incentivize this behavior, an abnormally high stability fee is being proposed to discourage long-term usage.
There have been numerous prior discussions in the community regarding the risks of USDC as a collateral type. Here is a compiled list of prior analysis for governance to review.
Original USDC discussion thread: Onboarding USDC as collateral to mitigate liquidity risk
Original USDC onboarding proposal: Proposal for Collateral Onboarding of USDC
Discussions on the need for both a USDC-A and USDC-B collateral types: USDC: Peg Arbitrage vs. Auction Liquidity
Governance call discussing USDC risk: https://www.youtube.com/watch?v=YZFfGlp01q0
Other related threads: Summary of USDC protocol risk
[USDC plus additional Stablecoins] Risk Parameter Request for Comment
What's the point of adding stablecoins as collateral?
As is the case for USDC-A, liquidations will be disabled for this proposal, and the oracle price would be fixed at $1. Metrics for USDC can be found in our TUSD proposal [TUSD] Proposal for Collateral Onboarding
We propose a 120% liquidation ratio for the same reasons as USDC-A. Specifically, the goal is to strike a balance between keeper capital efficiency and debt ceiling abuse through recursive leverage (which is made easier at lower liquidation ratios).
We propose a debt ceiling of 10 million. This number is slightly lower than what we might have preferred, but due to a) the OSM risk, and b) the 20 million debt ceiling of USDC-A, we are wary of the total counterparty exposure towards USDC. Additionally, for the time being the unutilized portion of USDC-A can also be used for emergency liquidity. In the future, the usage of Instant Access Modules will allow governance to keep this debt ceiling low, only to be increased on the go as needed.
We propose a stability fee of 50%. This high stability fee is designed to discourage long term sustained usage of USDC-B. Otherwise, during a liquidity crunch the keeper community may come to find that their emergency credit facility has already been used up for other purposes. At the same time, the stability fee should not be so high such that keepers’ Vaults would quickly become undercollateralized and liquidated. Even though liquidations would be disabled at the start, there is always the possibility that they will be enabled at any moment.
The USDC-A Vault behavior shows a median collateralization ratio of ~125%, implying that Vault owners are targeting roughly a 5% buffer over the liquidation ratio. If we assume USDC-B Vault owners will also keep a 5% buffer, then we would be interested in knowing how quickly Vaults would become undercollateralized at various stability fees.
At the proposed stability fee of 50%, keepers would have roughly 1 month to close out their Vaults before liquidation would occur (assuming they begin with at 125% CR and do not add additional collateral).
This proposal will go up for a governance vote this Monday.