[USDC plus additional Stablecoins] Risk Parameter Request for Comment

This thread is for discussion of risk parameters for additional stablecoins, as well as changing the current USDC risk parameters. An earlier discussion can be found in this thread [Action Required] State of the Peg.

The community should discuss 1) which stablecoins in addition to USDC are desired (PaxUSD, TUSD, etc), 2) what risk parameters they should have. The parameters to discuss are

  • Debt ceiling
  • Liquidation Ratio
  • Stability Fee

Auction parameters are likely not needed as the stablecoins will go in with a fixed oracle price of $1 (the way USDC currently is). Additionally, liquidations will remain disabled. As a result of this thread, a governance poll will go up (likely) Wednesday with a specific package of risk parameters.

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As a straw-man proposal to get the ball rolling, I suggest we include all the stablecoins that are technically feasible to get working short-term. I suggest we use the same liquidation ratio as we’re using for USDC. As for stability fee, I advocate for 2 vault types, one with a low stability fee (maybe equal to current USDC) to help the peg and another with a higher stability fee for emergency liquidity. As for debt ceiling, let’s take the current USDC ceiling and split it up evenly among included stablecoins and vaults.

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Agreed with @Joshua_Pritikin about:

  1. Using same liquidation ratio as currently for USDC
  2. Using two vault types, one with high stability fee whose debt ceiling is reserved as an emergency/liquidation liquidity facility
  3. Spliting debt ceiling evenly among the stablecoins.

I think the serious stablecoins that should be considered are PAX, TUSD, and USDT. I think if USDT proves to be politically contentious then rather than waste time arguing about it we should drop it.

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I’m not in favor of usdt, seems to have both financial and reputation as risk.

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We agree with the community’s sentiment on adding multiple stablecoins and amending the risk parameters for the USDC vault.

Suggested Parameters:

USDC

  • Stability Fee: 0%
  • Liquidation Ratio: 110%
  • Debt Ceiling: 10-20MM

We believe a 0% stability fee is the most effective given the spread of secondary borrowing rates relative to the stability fee.

Additionally, we believe a liquidation ratio of 110% is more capital efficient for market participants than other secondary platforms with liquidation ratios between 133%-150%. With liquidations disabled, MKR holders are still protected.

We see value in having a debt ceiling between 10-20MM for USDC. Given PaxUSD, TUSD, and USDC involve 3 different counterparties, we propose having the combined debt ceilings of the 3 stablecoins be less than 20MM to mitigate counterparty risk.

PaxUSD and TUSD

  • Stability Fee: 0%
  • Liquidation Ratio: 110%
  • Debt Ceiling: 2.5-5MM

PaxUSD and TUSD would be new stablecoins for Maker, so they may warrant a lower debt ceiling. If the demand for PaxUSD and TUSD increases substantially, governance can always raise the debt ceiling.

USDT

USDT likely requires significantly more time on the diligence side, so we propose focusing on USDC, PaxUSD, and TUSD.

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In addition to USDC, the two other most relevant stablecoins are Paxos Standard USD (PAX) as well as TrueUSD (TUSD). The third obvious candidate, Tether (USDT), is a special case so I will not include that one in this analysis.

Do they have the funds they claim they have?
Both USDC and PAX provide monthly attestations where a law firm provides a written statement about the number of outstanding stablecoins and the corresponding amount of fiat reserve. TUSD provides realtime attestations of funds through Armanino.

USDC: https://www.centre.io/usdc-transparency
PAX: https://www.paxos.com/attestation/
TUSD: https://real-time-attest.trustexplorer.io/token/TrueUSD

Although not perfectly watertight, as the attestation could be manipulated by financial engineering (i.e. ABB 2002 scandal), the setup will hold in the vast majority of cases especially as it is done on a monthly basis.

Additionally all the companies in this analysis are US based, so the uniformity and strictness of accounting practices should rule out most if not all attempts to present wrongful data.

USDC: Consortium owned by Coinbase and Circle. USDC managed by Circle Internet Financial. Registered with FINCEN as a Money Services Business in the United States.
PAX: Paxos Trust Company, LLC. Jurisdiction: United States.
TUSD: Trusttoken. Listed as private company registered in San Francisco, US.

That were the obvious parts - now on to the details. It is in the interest of MakerDAO that collateral types have high market cap and distributed use in order to maintain liquidity and lessen the risk of centralized failure. All data from Coinmarketcap.com.

USDC: USD723 million market cap. Listed on 220 exchanges. 75% of volume on BitMart, Omgfin, Folgory, Fatbtc and Binance.
PAX: USD245 million market cap. Listed on 96 exchanges. 80-85% of volume takes place at BitMart and BitZ exchanges.
TUSD: USD136 million market cap. Listed on 156 exchanges. 78% of volume takes place at the BitZ exchange.

Conclusion
It is identical collateral and same security but with varying market cap and concentration of volume.

The Planet_X recommendation:
USDC: Debt ceiling USD40 million. Liquedation ratio 120%. Stability fee 2%.
PAX: Debt ceiling USD10 million. Liquedation ratio 120%. Stability fee 2%.
TUSD: Debt ceiling USD5 million. Liquedation ratio 120%. Stability fee 2%.

The only difference between the collateral types is the debt ceiling which is based on the market cap. It is debatable whether it is worth adding TUSD based on the small debt ceiling, but in the interest of widening the collateral base they are included.

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What is the reasoning that motivates each of those numbers?

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@swakya,
I have set the proposed stability fee to 2% to correspond to a bandwidth of related fiat interest rates:

3% - lowest collateral based lending (fiat stock) I could find (Norway). We need to beat fiat.
2% - real estate loan - typical.
1% - savings account, if you have a good one.
0% - I want to avoid handing out free lunches and 0% could distort incentives.

So I proposed 2%. But I agree it is debatable.

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I just wanted to point out the following from the USDT actual FAQ page. I know that not everyone is from the U.S., obviously. I don’t know what portion of users are (I am) and the risk that U.S. based individuals could open vaults with Tether not knowing about these restrictions makes it ultra-super-oober risky

In what countries and states does Tether have limited functionality?

Tether is committed to operating in a secure and transparent way, while adhering to all government compliance and regulations. This includes the regulations and economic sanctions that prohibit transactions from persons and entities connected to certain high-risk jurisdictions.

Persons domiciled or resident in the following jurisdictions are prohibited from using the Tether platform.

Cuba; Democratic People’s Republic of Korea (North Korea); Iran; Pakistan; Syria; the Government of Venezuela; and Crimea. Verified Users’ access to the Tether platform will be restricted while they are in these restricted jurisdictions.

U.S. persons are also restricted from using the Tether platform unless they are Eligible Contract Participants (“ECP”) pursuant to U.S. law.

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Though I am more in favour of parafi’s recommendations than Planet_X because I believe that

is a more relevant metric than “a bandwidth of related fiat interest rates”, I am actually gonna throw my bag in with @equivrel and @Joshua_Pritikin because it makes the most sense to me of options so far presented:

I’m with @monet-supply in being against USDT, because they are neither transparent nor compliant, and think we should drop it for now due to its contentious nature (though I freely admit this is the idealist in me speaking).

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Two supplemental polls are up: USDC liquidation ratio and SF. The polls end in 13 hours and will be bundled in friday’s executive.

http://vote.makerdao.com/polling-proposal/qmwdspr732kcrymg87csubobig9ms4avxzbbhwtrhwbp7v
http://vote.makerdao.com/polling-proposal/qmqza5ad5pdlduzyd29akfoixcgcpkggaesc3bu75w95nr

What’s the resolution if the supplementary SF poll doesn’t gain more than the amount in support of 8% on the other poll?

With 9 hours before the poll ends, currently the winning liquidation ratio is 105% with 6500 MKR or 66.7%.

I think 105% is a bit dangerous. It’s going to be hard to transition to turning on liquidations or raising the sf. No safety buffer at all.

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