USDC vaults VS arbitrage reservoirs

adding USDC as collateral was an important decision to provide liquidity in emergencies and to prevent the peg from going too far above 1$.

however, having USDC (or any centralized stablecoin) have several disadvantages, for example:

1- illegal earned USDC can easily be used to open a vault and mint DAI… which might expose the USDC in the vault to be frozen
2- arbitrators will have a limited ability to help with liquidity and the peg if there is a systemic problem that could keep the peg above 1$ for a long period of time

so to have the benefits of centralized stablecoins vaults and to decrease their disadvantages, I am proposing to have arbitrage reservoirs

Arbitrage reservoirs: simply it is a contract that let you swap USDC to mint DAI at a fixed rate (let say 1.02)…
and let you swap DAI to get USDC (if there is any in the reservoir) also at a fixed rate for example 0.98

This means that once the peg is over 1.02 it will be possible for anyone to use this contract to get a cheaper DAI by using the reservoir to mint DAI at the fixed price of 1.02.

so this will offer the same advantages of stablecoins collateral in providing liquidity and will be a more powerful tool in regard to helping with the peg since the peg will always be below 1.02
also will let us get rid of some of the centralized stablecoin disadvantages that I mentioned above
and the money that will be generated from the arbitration could represent another stream of income to the protocol

So there is always a 1:1 backing of USDC to DAI locked in the reservoir? Could we get the same effect by creating a vault type with SF=0%, but with a collateralization ratio of 100%?

I don’t follow how you obtain these benefits.

I used USDC as an example, we can have different reservoirs for different stablecoins each with its own ceiling

if the swap rate of generating DAI using USDC is at 1.02 we will have slightly more than 1:1

lowering SF to 0% with 100% collateralization will probably let us have the benefits of reservoir in regard to having better peg and higher liquidity but it won’t protect us from illegal USDC deposited as a collateral and we would lose the arbitration fees for no thing

I don’t understand how your proposal would do that either. Once USDC is transformed into DAI and that DAI is fungible then what?

the reservoir will act like a DEX in which you can swap usdc to DAI at a fixed rate unlike the Vault in which you are putting collateral to take a loan so with vaults the USDC ownership is still related to the illegal account, however, the reservoir will be as any other DEX like Uniswap

I thought that will decrease the legal threats… If not then I guess all DEXs are vulnerable for the same threat

If it works like a DEX then what asset is backing the newly created DAI?

I suggested something similar a little while ago. Introducing the Stablematic On-Chain Market Maker

Feels like something in this area might be worth looking into.

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when the peg get lower than 0.98 there will be an incentive to buy the usdc in the reservoir with DAI at the fixed price

The difference between buying DAI at 1.02 and selling it at 0.98 represent arbitration income for the protocol

I know that this proposal is not practical to implement in the short term but I think it has a better balance of risks and benefits in compare to staclecoins collaterals

these reservoirs will do the arbitrators job with less risks, more efficiency and the protocol will get the arbitration income

You keep repeating that, but I still don’t understand how this is suppose to work.

I think we can already do a lot just with the surplus buffer. If we collect lots of DAI into the surplus buffer during times of positive sentiment then we’ll have plenty of DAI available to initiate flap auctions on the next downturn. If we’re going to add capabilities to the protocol then it would be cool if the protocol could place limit orders in the MKR/DAI order book. Using the surplus buffer, we could place limit buy orders at the bottom of the range and limit sell orders at some crazy high P/E ratio (100-200).

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Actually there isn’t a 1:1 USDC for DAI backing in this proposal since if 1 USDC can mint 1.02DAI we basically will have a 2% USDC to DAI deficit.

Because this would look like a vault with SF of 0% and collateralization of 100% inherently a bad idea. No-one would use the USDC vault if such a beast was set up.

actually 1.02 usdc will be needed to mint 1 DAI

Ah shit you are right as long as PEG is above it is over collateralized.

I should just delete my post my brain needs to finish the liquidation report. I need to noodle on this one.


let’s say you have 10k USDC
and DAI peg was 1.04 in secondary markets
you can buy DAI at 1.02 (coded fixed rate) using your USDC holdings from the Arbitrage reservoir… this means you are getting newly minted DAI at cheaper price than the market price

now go to Uniswap and swap your new DAI to USDC at the market price 1.04 (this means you are making 2% profit) so you have 1020 USDC now

now go back to the Arbitrage reservoir and buy more DAI with your usdc at 1.02 (the coded fixed rate)

and sell this DAI at Uniswap again and collect the profit

you will be able to do that until the DAI peg get to 1.02 or lower… at this point there is no incentive for you to buy new DAI from the reservoir because you can’t sell it with profit in the secondary markets

so we may end up with 1 million or 20 million of udsc held inside the reservoir

now let’s say after 2 months with 0% SF and DSR on ETH and other collaterals vaults the peg get down to lower than 1$
let’s say 0.96$

now you can collect the cheap DAI from the market and trade with the reservoir at the fixed coded price of 0.98$

you can do that until the peg is above 0.98 or the usdc held in the reservoir are exhausted

so you alone with relatively small capital could keep the peg below the hardcoded fixed rate that means it will practically be impossible for the peg to be above the coded fixed rate

since this reservoir is selling DAI when it is above the peg and rebuying DAI when it is below the peg that means that the reservoir is making a profit…in the example above the profit will be 4%

of course, these hardcoded rates are just suggestion we might be able to make the rate tighter… for example 1.01 to buy DAI from the reservoir using usdc and 0.99 to buys USDC from the reservoir
this will keep the peg much better but we might end up with very high holdings of USDC

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So the reservoir is holding USDC without any risk accounting? Why do we even have vaults? What’s the point?

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USDC vaults first were introduced to relieve the liquidity crisis and now we are lowering SF and LR of USDC to help with the peg by encouraging arbitrators to mint more DAI… I am proposing that Maker can benefit from these arbitration opportunities (a new stream of income) while doing the arbitration process more efficiently

So what you are saying is that we don’t need vault participants anymore. Maker can just internalize vault management within protocol.


yes we don’t need centralized stablecoins vaults

maybe this would have been a better title?