Everyone sees ES as catastrophic, but we need to engage with that mechanism to understand our options.
Potentially it will be much less catastrophic if initiated before losses get extreme and while the system is still collateralized. Determining what is extreme is the question. Aka COST BENEFIT ANALYSIS of ES. Without ES as an option we risk really destroying dai holders, vault owners and/or mkr holders. It is clear that this could occur quite rapidly if eth drops again (based on global markets this is more likely than not). This is well outside my domain of understanding, but I don’t see a thread discussing this very possible reality.
A few topics which input into analysis
Cyrus showed three scenarios in https://www.youtube.com/watch?v=AIW7lFg6gBI.
Discussion of USDC parameter adjustments to promote keeper liquidity vs dai peg here: USDC: Peg Arbitrage vs. Auction Liquidity
There are also potential issues in the SCD situation: Signal Thread: SCD Shutdown Cyrus pointed out in the meeting the risk PETH holders face if keeper stop biting in SCD. SCD is also
Liquidation freeze is not audited afaik. Also requires two executives, unclear how fast mkr holders will respond, it certainly depends on many different factors, from Cyrus:
“As a result of this proposal, the MakerDAO governance community, by full executive vote, will have the ability to temporarily disable Vaults from being sent to the auction liquidation module. To re-enable liquidations, MKR Holders would have to pass a subsequent executive vote. Critically, this proposed module lives outside of the GSM and is not subject to any delay.”
The concept makes sense. Having a rate limiting mechanism intuitively helps liquidity risk. However this is a completely novel tool and new code (unless I am corrected on the new code part), which in highly volatile/congested times injects a ton of uncertainty/risk. We also need to monitors signals from keepers. Since the auctions occur concurrently we cant rely on simply viewing the discount from the market price. In the call Cyrus mentions we can estimate Keeper liquidity to guess when to trigger the circuit breaker. Governance does not want to be trigger happy since the circuit breaker could potentially hurt the protocol in highly volatile market conditions.
So the important thing for governance tomorrow to decide is agreeing on estimations for keeper liquidity. I am sure @cyrus and co is working on this. The obviously depends on USDC adjustments as well, further complicating the estimations.
Otherwise we need to be asking as many questions about https://docs.makerdao.com/smart-contract-modules/shutdown/end-detailed-documentation as possible. Who is the authority on ES? Elucidation of that process should really be a higher priority that has not gotten attention.
- Future develoment
My perspective is maybe guessable at this point, but preemptive ES while the market isnt melting down might not be the worst option. We are approaching highly uncertain market conditions and already hold a deficit.From what I understand an issue with ES right now is the 5 mil deficit encapsulated by sin. I am confused who sin would be passed to if ES occurred before the flop auction happens (or if the flop auction can even be canceled after cage is called). Unless the technical specific of ES are completely untenable even right now, unwinding the system would give us time to develop answers to several big issues that have cropped up post MCD launch.
One is the auction system. Cyrus basically admitted that it needs to be overhauled eventually https://youtu.be/AIW7lFg6gBI?t=2407. What happens if we keep adding patchwork solution after patchwork solution on a weak foundation
Another is governance, governance has been flying at the seat of its pants, without the foundations support of ALL domain experts (cyrus/rich/mariano/so many other badasses) I highly doubt this method would last long. MIPs have plenty of big questions and from what I have seen are not ready at all. “Scientific governance” does not exist in the governance design itself, I have not seen a single citation and many decisions clearly were rushed or reactive to outstanding circumstances. Governance design cannot be rushed if we want to achieve self reliance.
A third is emergency response tools. Considering the last minute nature of the circuit breaker and desperate addition of USDC, our emergency tools appear under developed (in hindsight easier to say obviously). The catastrophic aura around ES and its uncertain/highly complex dynamics have basically precluded it from all discussions. As noted by others that is very dangerous. Testing emergency solutions in the wild seems vital for confidence. No test of ES had ever occurred.
Okay I’m sorry for maybe the least comprehensive post by someone in awhile. Basically all I am trying to do is express the info I have gathered and follow up on the call to discuss exit strategies. This was rushed since time is an issue. I hope the smarter/more conceptually organized people in the community can engage and help develop a clearer picture of what we need to consider with ES. It takes the community to deal with this outstanding complexity. Even then the complexity still appears pretty dominate.