00:00: Intro with LongForWisdom
10:53: Governance at a Glance with LongForWisdom
14:17: Weekly MIPs Update with Charles St. Louis
20:50: Governance Polls Review with LongForWisdom
22:19: LEND Token Upgrade with Wil Barnes
25:09: Oracles with Nik Kunkel
31:18: Vault Compensation Update with Monet_Supply
35:18: PSM Update with LongForWisdom
47:37: State of the Peg with Vishesh Choudry
Hello everyone, welcome to the MakerDAO Scientific Governance and Risk meeting number 102, taking place on Thursday, July 23rd, at 4 PM UTC. Welcome, everyone! We are joined by 40 people currently and still climbing, so thank you all for coming. My name is LongForWisdom, one of the Governance facilitators for MakerDAO, and I'll be chairing the meeting.
Discussions happen in the Forum.
I'm stepping away from my role at the Foundation at the end of the month. I am moving on to a different role, which is an extended amount of doing absolutely nothing, which I'm enormously looking forward to. That presents interesting shifts in the paradigm of what's going on in the Governance's ecosystem and the Foundation and a bunch of other things too.
I had a habit of sticking my nose all over the place. Happily, a part of this transition is that it has been in the works for a while; it's not a last-minute decision. It's the most amicable moving-on process I've ever been involved with, and probably the most bittersweet but mostly sweet because of the teams that I'm handing off responsibilities to fantastically talented individuals have been attracted to this ecosystem. The work that they do blows me away once a month. In the context of this call, the person I'm talking about specifically is obviously LongForWisdom, who came into the ecosystem a while ago and has moved from success to success to success and has been an absolute rockstar as a Governance Facilitator. So I can hand off the mental responsibility knowing that the person who's taking over those responsibilities not only has taken them over months ago - I think people might have noticed - but is doing a far better job than I ever did and that's what the community deserves. It's a really cool opportunity for me to catch up on some sleep, so that's the situation.
As part of LongForWisdom's transition from mentor to master, he is officially firing me, and that is going to be a tremendously healthy activity for the ecosystem because the Maker Foundation's responsibility is to decentralize itself and to bootstrap the protocol and ecosystem. The way that we do that is we work with the community to identify roles and responsibilities help formalize those things, we work with community members to establish what those things actually mean, we help out as much as possible, and then we step away. This is a fantastically healthy example of that because back in the olden days, when we started off these calls, it was a couple of other people and me awkwardly staring at each other trying to figure out whether there was anything worth talking about when it comes to Governance. That has obviously iterated a bit. So now we are looking at a call where there are now 51 people anxiously waiting for me to stop talking so we can get into the issues at hand. The handoff process has arrived, and this is the perfect example of the Foundation taking this opportunity to step away because this process is working. LongForWisdom will be expanding his team of governance facilitators. He has also put out a call for help, so if you think you could help out with Governance, please, reach out to him.
The Evolution of Decentralized Governance
I want to leave on a super high note and do some self-congratulating. Well, I shouldn't have said that myself laughs I want to congratulate the community on what it's accomplished here too. At the very beginning, there was definitely this question: "is there something worth talking about here? Should we have a call maybe every week to talk about this? What are we going to talk about every week?" How that situation has evolved! The work I did at the Foundation and with the Community has been some of the most rewarding work I've ever done, and if you guys knew how old I actually was, you'd understand how much weight that carried. The things that we are doing in this Governance ecosystem can feel like a slug sometimes, it can feel a bit chaotic sometimes, but it's important to remember that when we all got started, DeFi wasn't a meme yet. Community Governance; obviously, we didn't invent it, but, in the crypto space was largely unheard of. The constant iteration, the passion, intelligence, and work that the Community has brought to the table here has not only created something special and important for the Maker Protocol, but you don't have to cast your eyes too far to notice that there are five or six other protocols that have governance now as well and it looks a lot - suspiciously - like Maker Governance. With some tweaks and optimizations, but the principles and the basic frameworks were sorts of my author. Many of them were discovered in these calls and in our forums and in our chats because of the work of the people that come to these calls every week. Maybe take a moment to congratulate yourselves on the fantastic amount of work that has happened here. I know that I will be congratulating myself secretly and congratulating you all as well.
Rich as a Community Member
I am going to be around, I'm going to transition from the Interim Governance Facilitator role into the role of a community member, and I'll be joining the rank and file, which I think it's going to be the most fun chapter yet. Thanks to LongForWisdom for picking up the mantle and thanks to this community for doing something really amazing here.
That's it for my sincerity! I hope I didn't get too emotional.
Thanks From LongForWisdom
LongForWisdom: You have been a massive part of this community since I joined. Seeing you in the Governance calls and everyone else in the Governance calls from the beginning is one of the reasons I got involved. Everyone was talking about everything so reasonably, generally. There were a lot of interesting discussions going on, and I know you are a big part of putting that together. On a personal note, thank you, and I'm sure the Community very much appreciates your efforts as well. If anyone else wants to come in and embarrass Rich, now is a good time!
The Second Generation
Rich: I just want to touch on that point again that this is this great inflection point where it's time for this second newer, more energetic generation to take over. LongForWisdom and the rest of the team and a lot of people in this call have been deeply engaged with Governance and actually actively governing the ecosystem by putting forth proposals, coming up with new initiatives, refining the way that we think about things and this is a great opportunity to step back and watch other people do some work, so thanks again!
Governance at a Glance - Forum Thread: If you have the time to read over and vote in active threads, that would be much appreciated.
This week most of the active discussions have focused around the PEG, the PSM concept, and around other options, we could take to move the PEG in the right direction.
Rune shares some details on the Foundation’s focus over the next few months, and explains why the Foundation will no longer be working on the PSM. In case you weren't aware, I would recommend quickly browsing that thread before you get into the discussions.
OliverNChalk begins a discussion and argues in favor of negative rates.
Combined with the MIP20 proposal from Lev.
And other options in terms of influencing negative rates, which has been good to see.
Increase duration of governance security module? - Failed to Pass
A couple of weeks ago, Joshua_Pritikin asked whether we should increase the Governance Security Module delay to 24 hours to make it easier to defend against governance attacks. That has failed.
Concerns Surrounding the TUSD Collateral Type - Moving On-chain
Lucas Manuel from the Maker Foundation Smart Contracts team asks how governance wishes to move forward with the TUSD collateral type considering the recent contract upgrades.
Adjusting the TUSD debt ceiling to zero was the chosen path.
The Smart Contract Team thinks that's probably a wise call.
Adjust the WBTC Debt Ceiling and Risk Premium - Moving On-chain
Prompted by Andy.
I just realized it was left out of Governance at a Glance forum thread.
Adjust the ZRX and KNC Risk Premiums - Continuing
Monet-supply proposes decreasing the risk premiums for KNC and/or ZRX.
@hexonaut asks if Maker governance should increase the USDC-A liquidation Ratio and/or Risk Premium to help fix the recent peg deviation.
LongForWisdom asks for applicants to help out with some of the necessary governance work.
Ironically I decided to post this one day before I realized that Rich was leaving, so it becomes more important now that I have found out.
If you want to get involved more in governance, please drop me a line.
Initially, there were seven proposals. Two got rejected from the Governance Poll.
The Governance Poll did pass unanimously, which is great to see.
As a reminder, if the vote doesn't pass within four days, the proposals be rejected. So, it is important to vote when the MIPs Executive does go out as soon as possible to make sure the proposals we want to effectively become law or technical implementations to get added to the Protocol and Governance.
Next Thursday is the final meeting of July's Governance cycle, where we'll do a review of what happened throughout the month. We'll look at what worked, what didn't, and we can consider specific amendments to certain processes.
MANA could be added to the Protocol over the next week or two, depending on the time the vote passes.
LEND: There are some considerations to keep in mind that the domain teams have been thinking about with respect to the token upgrade from LEND to AAVE, which will be happening towards the end of the summer.
The eleven Collateral Onboarding Greenlight polls are live, so go ahead and vote to whatever you feel are great opportunities for Maker to consider.
As we know, MIP17 was rejected from the Governance cycle this month. Whether that was because it wasn't completely supported with answering questions, or maybe it wasn't the perfect solution for fulfilling Maker's needs. I want to hold a working group next Tuesday about how we can improve and modify this proposal. Some considerations could be to use it to modify debt ceiling adjustments, rather than pairing both the
DC and risk premium adjustments. But I want to take this time to work with the community on really improving this proposal so that we can get a solution in place for quicker adjustments of specific parameters that the Maker protocol considers. I'll post those details in the forums and in rocket chat.
If there is a proposal that has been rejected from the Governance cycle and you are the author or you really support it, consider holding a call or even doing a forum thread on how we can improve the proposal, because the onus is always on the author to get it proposed. By holding these working groups, you can really work with people in the community that have a stake in that type of expertise. So, I just wanted to remind everyone that it is on the author, and they should take the initiative, and if the authors don't want to do that, they can definitely transition their ownership of the proposal over to someone who would like to lead it going forward.
TUSD: If that passes, it will proceed to a weekly executive on the following Friday.
PSM Vote: Sam MacPherson on chat
PSM did not pass
Charles St-Louis: I checked five minutes ago, thanks for that correction.
As Charles said, the poll passed 18 thousand Maker in favor and zero against. I don't see any reason to prevent that from continuing to the executive. We will continue with the executive on Monday, according to the MIPs process.
Sam just informed us that the PSM poll did not pass. It ended 50.04% against, which is perhaps the closest poll we've had so far.
Charles St-Louis: thanks for that correction.
Yes, it was very split. We will talk about it tomorrow, hopefully.
Since there will be some changes and upgrades in the LEND token, Aave has asked us to postpone consideration for a later MIP Cycle, so we're going to postpone, possibly to September. We will reassess the token at a later date.
Mariano: Much like Maker did a few years ago; we had an old MKR token that was migrated. Aave is going to be doing the same. They will be migrating LEND to AAVE tokens. I think 1 LEND is going to be 100 AAVE tokens. It will be optional, but we expect most people to upgrade, as AAVE will be used for Aavenomics and probably some other things. So it's easy to wait and onboard AAVE instead of putting LEND now to migrate it in a month or so. We're in contact with the Aave team, and they will give us access to the token contract early so we can start checking it as soon as possible, and then we do the actual AAVE onboarding.
I don't know if you guys know this, but for those that have not been in Maker Governance for a long time time, this used to be a bunch of hangover 20-year-olds showing up on a Sunday morning. And Rich Brown is really the reason that we're here today and have this formalized governance process that is community-driven. This did not happen organically. It was very much orchestrated by the master Rich Brown. If you guys want to ping Rich after this meeting, I'm sure it will make him uncomfortable, just to thank him for how much he has done for the community. Fun fact about Rich: he comes from a long line of Maker people that have basically hired themselves. There was never a job posting about needing a Rich. Rich started hanging around in the RocketChat a bit too much for a normal person and started to do stuff. And eventually, we started needing him to keep doing stuff. I respect a lot the Maker guys that came in this way. I'll stop making Rich blush now.
We've had a slight issue with Gitcoin. It was voted as a light feed. They provisioned the VPS that was running the oracle feed with way too little source space. They had 8 Gb of storage, and the OS was taking 7.7 Gb. So it quickly blew up. They managed to lock themselves out. They couldn't get into the box because they screwed up the partition so badly. This, in combination with the fact that they never backed up their keys, means that the entire key that they were using to sign their oracle prices went up in smoke.
We need to do a new executive vote to swap their old key for the new key. In the Gitcoin light feed application forum post, the founder of Gitcoin has submitted a signed message with his new key, saying that he wants to swap the key. I've talked to Kevin, and we have already set up the new feed on much better hardware producing the VPS. He's already been signing messages for the past week and a half with the new key, and everything looks stable. It's a matter of basically lifting the new key and removing the old key. It's quite a simple swap to make.
We'll remind all the feeds to exercise proper key management. I thought this went without saying, but we still need to remind people.
Kevin is a great guy. No harm, no foul. These situations come up, so it's important to have smooth processes for dealing with them.
The Argent proposal just passed this morning, so we will be helping them set up over the next week or so, so expect an executive vote within two weeks to vote them in on-chain as well.
The poll last week failed by about 25,000 to 17,000, with 33 voters. Participation was down over half based on the amount of MKR voting as independent voters. I think the original poll back in April was about 62,000 Yes to 33,000 No. So participation was definitely way down.
Over the past week, we've got a little bit of feedback in the forums. Potential things that might get more support for the poll going forward. We have heard:
Too many steps and votes.
Too much governance overhead, making it less appealing to MKR voters. Simpler and fewer steps might be good.
Not having clarity at the very beginning about potential costs, which would have been made clear later in the process, had it been approved—still a fair concern.
Not enough time or awareness built about the vote. More people to get more publicity on it. Possibly a longer voting period: maybe a couple of weeks instead of a couple of days. MakerMan suggested waiting until you get enough quorum of MKR before closing it. Not sure if technically possible, just an idea.
Not enough clarity between MakerDAO and Maker Foundation, and who would be responsible and where the money would and should be coming from.
That was most of the feedback. My take on that is, "How much overlap is there between the people providing feedback and the people voting no?" You can't be sure, but my guess is, "not that high." So some of these ideas might be speculative about what would make it more appealing for MKR voters.
The working group, including myself, will have to discuss during the weekend and give at least some sort of status update early next week.
PSM Parameters Vote Postponed
I'll start with a brief clarifying statement about how the Peg Stabilization Module(PSM) is going to work now, considering the statement from the Foundation. I previously stated that we would have another vote next week about the PSM parameters and that they would be included in the executive vote either the week or two after. Seeing that there's no one developing it, that's probably not going to happen. I don't think it makes sense to vote on the parameters when any community implementation probably isn't going to be ready within a reasonable time. So if we vote on parameters now, we could find that the market has changed later.
In addition to all this, the Governance Poll failed.
So we don't have any further on-chain votes on the PSM for the time being.
The Future of PSM on the Community
That said, if the community does want to pursue it separately from the Foundation, there are avenues we can start to work on. Any implementation would probably need to go through the MIP process at this point.
A good start might be a Declaration of Intent, through MIP13. I'm trying to confirm whether MKR holders want the PSM, which may be a little bit difficult considering the recent vote. That would be the place to try and resolve the blockers and move forward.
Lowering the USDC-A Liquidation Ratio
Sam MacPherson: With the poll that I put out yesterday, I'm thinking maybe we should lower the USDC-A liquidation ratio to try to get more collateral moving through that venue to mint more Dai. To me, it seems like all the people on these farming behaviors want to stay in stablecoins. Looking at COMP, for example, they want Dai for COMP. There are two mechanisms that make them want to stay in stablecoins. There's buying Dai on the market, and there's minting Dai through USDC. We should make USDC-A as attractive as possible so that we prevent this market buying behavior. Please respond in that thread I made.
Matthew Rabinowitz: I definitely agree. Going down the path you mentioned makes sense. Getting USDC as a mechanism to have market makers arbitrage in that space will help adjust the peg back down. The real solution is a market-driven solution.
YFI Farming Unwinding
Cyrus Younessi: Most people generally agree that we need to increase the supply right now. I want everyone to understand that everyone understands that the current demand is almost certainly likely going to alleviate by the end of this weekend. A big source of the recent surge has been the YFI farming, which has generated extreme demand for Dai. I think that's scheduled to stop either Saturday or Sunday. I think that some 100 million Dai is sitting in that contract. When that unwinds, I'm expecting to see a lot of that Dai return back to where it came from. We've seen the Compound utilization ratio increase significantly. A somewhat more conservative option would be to wait for a few days to see how that unwind looks. Before the YFI farming, the Dai peg wasn't great, but it was at the very least under 1.01. I just want to caution from some sort of extreme overreaction when in just a few days, we should see some lightening up of the pressure anyway. This is just a best guess on my part.
USDC Usage and Collateralization Ratio
Matthew Rabinowitz: We also haven't hit the cap on the total amount of usage on USDC-A. As of right now, it's some 28 million out of a debt ceiling of 80 million. So there's still plenty of utilization capable on that area, which we can incentivize by lowering that collateralization ratio. We just need to be mindful that it creates an exponential effect on how much leverage you can get out of it. I don't even remember right now what the collateralization ratio is, but I know there were discussions to pull it down to 110%, or even lower. It's a good issue; it magnifies the benefits for it, we just need to be mindful, because we take on more risk when we allow higher more leverage.
Sam MacPherson: Even going down to 110% may have a fairly large effect, those who are looking to move into Dai through USDC, paying a 1 or 2 cent premium is not that much when looking at these yields, which are like 1,000% sometimes. Having to lock up 20% extra collateral as opposed to just buying it on the market, may not seem like a very attractive option at this point. Going down to 110% or 105% may help a lot to alleviate upward pressure.
Impact of the Foundation Announcement on the PSM
Matthew Light: It seems that the Dai peg slipping seems to coincide with the post yesterday about the PSM being abandoned by the Foundation.
Sam MacPherson: It's maybe coincidental. We can effectively get the PSM at least in one direction by lowering the collateral ratio on USDC-A. If we went to 101%, it would be pretty close to being similar to what the PSM could do at this stage.
Matthew Light: It's worth the try.
The Importance of the Peg
Matthew Light: When the peg goes this high, it produces the desire of people to borrow in Dai, because they're facing issues. If they borrow 30,000 Dai and the peg slips a couple of points, they may lose thousands of dollars pretty quickly. The peg not being in control really does affect demand for borrowing Dai, especially the demand for borrowing Dai to bet on assets.
Yield Farming and the Peg
Matthew Light: The yield farming doesn't affect the peg very much, what affects it, is when Dai is used to buy assets, like Ether, on the market. That brings the peg down. Yield Farming doesn't have that feedback loop.
LongForWisdom: It's worth noting that if people buy Dai to use in Yield Farming, then it does have that effect. It's not entirely separated, I would say.
Matthew Light: Yes. I don't think people are buying Dai. For the most part, I think that they're mostly borrowing it.
Sam MacPherson: For farming, there are two points. Buying ETH will have a negative pressure on the peg, to go down. But it's also effective to prevent upward pressure from market buys to use for this farming. I wouldn't say that it's clear that people aren't market buying to get into Dai for this farming.
Vishesh: There are two important clarifications. Some people buy Dai and place it in a pool, it 100% drives the peg up. And even if they're not specifically purchasing Dai, if they're taking Dai that otherwise would have been sold, and dumping it into this Farming Yield platforms, it's also drying up the liquidity and driving the price up. That's pretty clear.
Room for 345 million Dai to be minted.
Right now, 235 million Dai have been minted.
184 million is Dai from ETH
3 million from BAT
26 million from USDC
20 million from WBTC
less than 1 million for ZRX and KNC
BAT-Dai pool was capped out at about 3 million.
Dai from WBTC has remained sustained at 20 million.
Dai from USDC-A remained steady for a while.
A small amount was minted in the last couple of days.
Then a big chunk of that, about half, was cleared out overnight.
There were a few mintings again bringing it back up about halfway to where it was before, at around 30 million.
That's what we see over here.
WBTC being capped out.
USDC-A being only at about a quarter, 26 million, of where it could be.
Dai from KNC is a small amount.
Overall, we've seen a steady increase.
After March 12th, there was a steady recovery in the Dai from ETH-A supply.
Around July 2nd, COMP farming started to hit.
A few days ago, a lot of the YFI Farming out there and other types of yield that have emerged, precipitated a further acceleration to jumping straight up 20 million, more or less overnight.
That brings the total Dai from ETH-A supply up to 184 million.
Compound has dropped to a net 27 or so million Dai being supplied there.
You can see here the Dai deposits in Curve.
That has grown rapidly over the last couple of days.
A lot of this goes into the YFI Farming activity that's been going on.
We can look at Balancer as well.
Trading volume in these pools has grown significantly, even compared to their previous peak in June.
It makes sense that it's pretty frothy since there are lots of yields to be made.
We were already discussing the above-dollar sustained price with periodic run-ups in between.
In the last 18 hours, we saw an increase of trades at 1.03 or 1.04 reflected in pairs other than just ETH.
A huge volume at elevated prices in the last 24 hours.
In the current order books on DyDx, USDC/DAI is sitting at about 1.03 right now.
In the grand scheme of things, this is not representative of what the previous peg problem was.
The previous problem was dealing with it at 1.01 - 1.02
This is an overnight trend at 1.03 - 1.04
Whether that's actually going to be sustained is questionable. That's important to keep in mind.
I'm not saying that overnight it's going to go back to 1.00, but it may level back to 1.01 - 1.02. We'll have to wait and see.
13 or so million was dumped into Curve.
20 or so million was dumped into Compound Farming.
As these yields shift, so too does the money.
No one is married to the platforms where they dump Dai right now. They chase the most attractive yield short term.
These could be very impermanent trends.
The question of how much this upward pressure will sustain is the question of how much these yields will sustain.
A huge chunk of Dai is being minted to go into these platforms but, more importantly, very little Dai is minted and being sold on the open market. That's where the elevated price pressure comes from. There are questions:
How long will the price pressure last?
What does the Maker Community want to do about current Dai liquidity?
How much of an impact will that have on the peg?
The third question is nested within the second because the amount of price impact that increases market liquidity for Dai would have on the peg is primarily a function of how much people are willing to relinquish that Dai and sell it in order to arb the current profit.
The problem right now is that a 3% or 4% haircut is something that people are willing to take in the short term to get access to 600% yields on some of these platforms.
Those yields are likely to dry up very soon, as Cyrus mentioned. Will the next yield come up? Probably not to that same extent.
Matthew Light: Looks like the YFI will dry up on Saturday or Sunday. But mStable is going to have a yield of maybe 100%.
Vishesh: YFI is a slightly outsized yield right now compared to the others available. So it's an extra-large sink, a bit atypical. But it does appear to be continuing a trend that has kicked-off with the COMP Farming activities available. There are questions about why, though. Why Dai? Why Dai for these ventures.
At the end of the day, Dai is visible, interoperable, integrated into a lot of these platforms, but it's also an asset with a comparatively small volume and a small supply. I've spoken before about how often Dai carries a premium with it. How it innately has access to yields outside of this Farming stuff. It's basically a call option on illiquidity, for example, when liquidations happen. People hold in the hopes of making a profit in those times as well.
There are a lot of reasons why Dai has sustained an elevated premium and why it's worth more than holding one USDC lately. You throw Farming on top of that, and it only exacerbates the premium. If Dai was as proliferated and had as large of supply as USDC it probably wouldn't be as attractive as a target for some of these Farming opportunities.
All that, coupled with the fact that Dai has been a well-used asset with very decent transaction volumes for its supply.
It's a potentially sustained trend that farming opportunities will exist around Dai even though what's currently happening this week is atypical.
Let's look at the impact that this has had on the underlying collateral supply.
We're talking a lot about monetary policy, price, premiums, and usage. Also, consider the underlying risk that are being underwritten by MKR holders and the system. Interestingly, in the last week, the ETH CR has gone up. Very simply put, ETH price also went up, so that's primarily a function of just the ETH price.
Vaults have also lowered their CR in that same time frame. It's important to consider that what goes up comes down. What we've seen in the past, is that when ETH rises suddenly, there's a tendency to come back down as well. In the elevated ETH price, we've seen increased amounts of Dai living at this lower CR.
That means that there could be some liquidations. That's a risk to be aware of.
At $220 ETH, you'd have 12 million Dai being liquidated.
At $150 ETH, you would have 92 million being liquidated.
Those are big jumps. Although, yes, only a small amount is at risk for more realistic price drops.
$150 dollar price is not completely out of reason for ETH. It's important to consider that on a percentage basis, it's not out of pattern, but in nominal terms, that is huge.
What would happen is there were a price drop and massive liquidation events to Dai? Given the liquidity problems right now, and given just the degree of Dai that's locked up in farming, at the moment, that could be a potential problem.
For WBTC, If there was a small disruption in the price to WBTC there would be about 10 million liquidated.
BAT is relatively low risk since it's well collateralized.
Why is Dai attractive on COMP Farming
Sam MacPherson: I want to make a point on why COMP farming is Dai specific. It comes entirely from the interest rate curve set by Compound Governance. They have very very low-interest rate up until 90%, and then there's a discontinuous kink at that point. It's because of that structure that Dai is the most attractive. They can totally change that if they want.
Current Gas Prices and Arbitrage
Christopher Mooney: It remains to be seen whether this will or won't have an impact on the Dai peg. If you already have a vault, and your collateral is already locked, and you want to generate Dai against it, the "slow price" is right now over 100 Gwei. I just got a price quote of about 10,50 dollars, just to generate Dai, which means that you need to generate at a reasonable volume to start to approach a good arbitrage. If you do the full cycle; lock collateral, generate Dai, sell it in the market, buy Dai back, and pay your vault down — for an entire tier of retail arbitrageurs, it may mean that it's not economical at 1%, 2%, or 3% above peg. Nik brought up a good point that most of the arbitrage is probably happening by whales. So once you hit a certain volume of Dai, the gas price becomes irrelevant.
Act or Wait
Cyrus Younessi: Vishesh, that was a great summary of what's going on. For me, I'm waiting for Governance to see how aggressive they want to be with any changes, such as the Liquidation Ratio or if they want to wait for a few days to see how the unwind of the YFI Farming happens. I also want to highlight that just in the past day, we've seen a lot of Dai being generated, especially from the recent Debt Ceiling increase. It's not really as if Dai supply is slowing down or anything. I don't have a strong view one way or another, but I do think that some sort of informal consensus could be really useful at this point.
Seeking Signal Thread
Sam MacPherson: With regards to the signaling thread I've put up, I've delayed the vote until next Wednesday. So we can wait and see what happens on Saturday.
Christopher Mooney: Do we have any executive votes going out on Friday right now?
LongForWisdom: We do. We have the Gitcoin thing that Nik mentioned and possibly something else.
Mariano Conti: There are a couple of things regarding Oracles, but did anything pass regarding risk premiums, base rates, or anything like that?
LongForWisdom: I'll double-check.
Taking Action in the Executive Vote
Christopher Mooney: If there isn't too much competition on this week's executive vote, we may want to consider creating a really quick ad-hoc bundle set. Ultimately Maker Governance gets to decide whether or not they want it. We'd be able to possibly do the USDC CR. Maybe BAT DC. It would break our normal flow, but we're at a 1.03 Dai price right now.
LongForWisdom: That's a good point for me to go over how it would happen again. In order to do something outside of the governance cycle, we need to, in some way, say that this is an emergency. Currently, this could happen from Cyrus or a Risk Team, saying that they think it's an emergency. Or it could happen if there's a poll in the forum getting a majority saying that there's an emergency and we want to do these things. Given that all the things we're discussing are stuff we've done before, I don't think there's any reason to make it more than 50%. If someone wants to see emergency action in some form, they need to create a signal request forum poll and get people to agree that we need an emergency action for this.
Christopher Mooney: How detailed does it need to be?
LongForWisdom: I would prefer it if it said what we wanted to do as an emergency measure. But we have had more general ones in the past that just declare an emergency situation and the will to do things generally. So it could be flexible, but I would much prefer it if there was a specific proposal.
Sam MacPherson: With regards to the signal thread, there does seem to be the vast majority of people wanting to lower the LR of USDC-A to some number, if that helps. Cyrus would need to make that call if it's an emergency, though.
LongForWisdom: I think that Cyrus's point is that he would take leadership from the community in this case. It's a reasonable assumption to create a poll.
This Spike Might Not be a Trend
Vishesh: This COMP Farming Yield has existed, and in the last few days, we've seen an extra elevation of the price. So we have to ask ourselves what's changed in that timeframe. It's primarily this YFI Farming Activity. That has a defined expiration day on it. Of course, there are others that will exist after that, but it doesn't appear to be at the same rate. It seems like there's a strong case for waiting to see what happens in a few days. I'm not telling people how they should choose to respond to that. But in terms of what trends are likely to continue, there's reasonable doubt whether that's actually a long-term trend. It hasn't even piped its way into the 24-hour moving price yet. Acting on that in terms of emergency action is questionable. But whether that's actually the current sustained trend, that doesn't appear to be clear right now.
Fixing the Peg
Matthew Light: It's been five months since the peg went above 1 dollar. Whatever has happened, we haven't been below since then.
Vishesh: Yes. But is that what we're talking about solving right now? We're mixing threads there. The current question was about the 1.03 / 1.04 price, which has not been the case for six months.
Sam MacPherson: I'm looking at lowering the liquidation ratio as a general mechanism to alleviate this past few months' COMP Farming altogether.
Matthew Light: I think that just having the peg at 1.03 and going up constitutes a crisis of trust in the peg, going down and the potential of global settlement. People want to borrow Dai, confident that they can pay it back at the rate of 1 dollar instead of 1.10.
Matthew Rabinowitz: Having the LR lower and having something that's a hard number to trade-off will directly help that.
Structuring the Question
Vishesh: Just to keep the questions clear. One was the sustained peg elevation, what to do about it. The second one was the 1.03~1.04 price, is that an emergency? My point about the second question was that it's yet to even be sustained for 24 hours. There's a question there as to whether that is what the peg is at, or whether this is a short term spike.
Adding Enough Diverse Collateral
Matthew Rabinowitz: It's almost like a general question of when the price is volatile like we had earlier in March, there's an implicit bias that the fundamental collateral is ETH, and you borrow against it, if you're concerned that the price might drop precipitously, you just tend not to borrow as much as you would. There's a natural bias to be slightly above one until we add enough collateral that it creates a diverse portfolio that will pull it down.
Vishesh: I'm not sure if it's the collateral portfolio that necessarily dictates that. I wanted to clarify that it's not necessarily about the collateral. In the long term, there's this potential premium that exists due to the usage of Dai. If we hearken back to last year, we were having the flip conversation about Dai when it was below the peg. The concern there is that Dai was being used much more for leverage than for actual transactions. At that time, the conversation was that too many people were dumping Dai into the market to sell it and rewrap for leverage. There's now a different way to get yield, which involves purchasing Dai instead of selling it. It's kind of a mirror problem of what was happening at that time.
Negative Cost of Capital
Matthew Rabinowitz: 100% agree. My point is that now we have hit a cost of capital at zero, and we don't want to go lower than that.
Matthew Light: There's a negative cost of capital right now. We're in a negative interest rate market on Ethereum. That's a big part of the problem. I can borrow money and get paid to borrow money from Compound, and we're getting ready to see that from Aave and these other protocols.
Is Minting More Dai the Solution
Vishesh: It seems the interest is to talk about the long term issue. There's a question of, "are you actually going to do anything by minting more supply?" Are people willing to come and say, "I will take Dai, eat the cost, I will sell it, and I will arbitrage that profit." I don't think SF has any impact on the decision-making process much as they weren't back then. On a nominal basis, what's the difference between a 300% yield and a 296% yield? Right now, the SFs are very low. There's very little cost associated with minting Dai from Maker right now. And there's plenty of room in the DC. Why are people not doing that? That's one set of questions around user behavior. The other thing is, "what is the impact of those actions?" If that Dai is not making its way to the open market, it's being minted for other things, I get the idea that it's soaking a little bit of demand, but at the end of the day, it's not having a short-term price impact. That's what you're targeting right now. There's a bigger thread here that I want to bring up in terms of the forest from the trees. Getting more supply minted as a method of solving the peg may be coming at a square peg with a circle thinking. There's maybe a different conversation to be had around how are we actually solving the peg problem.
Sam MacPherson: I respectfully disagree with that. You are right that the ideal scenario is people minting Dai and selling it. It's also beneficial to prevent people from buying Dai to put it into these farming opportunities. I'd rather them mint it. In that sense, increasing the supply does help to prevent the peg from shooting up more than it needs to.
Vishesh: There's a question of capital efficiency there. I'm not sure that it will ever be more capital-efficient to mint Dai than it will be to just purchase it. There's a price premium, and there's the potential loss, but there's also capital efficiency. If you're going to mint Dai from ETH, for example, the CR is going to determine whether or not you engage in that minting behavior in order to chase that yield.
Sam MacPherson: I completely agree, and that's why I'm advocating to lower the liquidation ratio on USDC.
Capital Efficiency and Lowering the Liquidation Ratio on USDC
Vishesh: The liquidation ratio for USDC is comparatively pretty low right now versus some other things that exist in the space, and certainly compared to ETH. So there's a question of how low do you want to go. What is your goal? What is your role in this market ecosystem in terms of providing this liquidity to the market, and what's your goal in terms of Dai peg management, MKR holders managing system risk, etc.? You're ratcheting up the amount of risk that the system is underwriting there.
Matthew Rabinowitz: The LR wouldn't change the underlying risk. It's the DC. What surprises me is that the utilization ratio of USDC is not already at 100% right now.
Vishesh: My point is that since it's not even at 100%, I'm not sure that dropping that LR to anything other than even 99% would do anything or force it to be capped out. It's a fundamental question, not a percentage question. Is it ever fundamentally more efficient to lock up collateral in the platform to mint that asset and then go dump it somewhere for a short term yield versus getting 1:1 for your capital and buying it on the open market?
Sam MacPherson: I'm trying to approach that 1:1 by lowering the liquidation ratio down to 101% or 105%. As we approach it, buying it on the market would be less attractive, because you can pretty much mint it 1:1.
Risk and Maker Making
Vishesh: That's where you bump up against what's the goal. I think it's fundamentally wrong to say that that does not increase risk. It does. If you assume there's zero risk, then there's zero risk. But I don't think it's correct to assume there's zero risk. That's a separate point there. I'm just trying to encourage the focus of the discussion so that we're not necessarily chasing how do we get the most Dai minted versus trying to more directly tackle the problem. How do you facilitate people's market-making Dai right now?
Increasing Total Supply to Lower the Peg
Matthew Rabinowitz: If there's more Dai outstanding, the overall yield drops, whether it's dydx or Compound, assuming the quantity of borrowing doesn't change. If there's more supply, the yield goes down.
Vishesh: It's also shifting a bit from COMP Farming to other forms of yield. What impacts those yields? Does this solution solve that next thing? Emergency action versus long-term solution, I think we're discussing long-term solution here. As far as emergency action goes, I don't think we're discussing anything that would make the peg to change in the next two days.
Potential Factors for the Spike
Matthew Light: I think that the Foundation dropping the PSM has had psychological impacts on the peg. I think we saw a change in the price after that happened.
Christopher Mooney: There's a chance that there's a correlation with the Binance announcement today. It looks like it spiked up to 1.14 at one point. When we see Dai hits new markets, when people don't know what it is, we have seen occasions where people trade Dai like if it's some speculative asset, and they don't realize it's a stablecoin. There's a possibility that we do have some traders on Binance thinking that. Just adding another possible correlation.
The Opportunity Costs of Arbitraging the Peg
Vishesh: The problem right now is that no one is arbitraging the peg because there's a ridiculously outsized yield available from doing other things with your capital. That's the core problem. How are we addressing that problem?
Matthew Light: I agree. That's what I've said about negative real interest rates. You basically have people paying you to borrow money.
Vishesh: I try not to comment too often on the more speculative components of what's going on. My goal is to make sure that the community is considering all the possible solutions as well as the problem. Making sure that we're not chasing a red herring and tackling the core problem, which is that no one is arbitraging the peg. What I'm missing from the whole thread is the actual solution to facilitating more arbitrage behavior of the peg.
Matthew Light: At some point, it may be necessary for the Protocol to arbitrage the peg directly. Let's look at scenarios that could happen. The peg keeps going up, and at some point, the options are: Emergency Shutdown, or buying ETH on the market with newly created Dai to make the peg go down, or maybe there are some other options.
Matthew Rabinowitz: I think you will also find a scenario where just like an Algo trading in the stock market made a ton of money, which ultimately introduced a ton of market participants that made more money, up to a point where they put themselves out of business. So the yield COMP Farming, while interesting, at some point it will go naturally go away because of the competition that it creates. That capital will ultimately circle back to things it can do, like people who are just happy making 30% per month doing a yield arbitrage against the peg.
LongForWisdom: I agree that long term it will probably go away. But we're dealing with a medium-term issue.
Matthew Light: Why would Compound, for example, stop issuing COMP tokens?
LongForWisdom: Because the COMP token holders are not going to be happily diluting themselves forever. Maybe they are to some extent.
Cost of Capital
Joe Quintillian: I would like to mention that the allocation of capital that has gone to yield farming and has a lot of people's money tied. If they go and arbitrage the peg like this, they get less return on capital. We have a significant move in terms of Binance listing Dai, YFI, a whole bunch of things. At some point, 1.03, 1.04, it gets tempting for people who were Yield Farming to lever up a little further to hit down the peg.
Vishesh: It seems like half the Dai out there is locked up specifically the YFI farming activity right now. That's not counting what's locked up in COMP right now. So, yes, 100%, that's what the numbers are showing. All the Dai capital out there is allocated to this farming behavior. It's not being used for arbitrage, so the peg movement has been elevated, and it's made it easier for upward price pressure to take hold. That's 100% what's going on.
Dai Locked Up in Yield Farming
Matthew Rabinowitz: How much money is actually in aggregate or moving around on a daily basis as a part of this COMP Farming?
Vishesh: In COMP there is a net 27 or so million locked. I think there's another 100 million in YFI.
Matthew Rabinowitz: I'm talking about including all the daily trade volume from Curve and Balancer. It feels horrible that the peg has drifted from 1.01 to 1.03 now, but we might also take into consideration that that maybe 700 million Dai of transactional volume a day that's causing the Dai peg to move by 0.01. That might be a reflective point about how stable the system is, even with how much capacity is moving around in it.
Vishesh: It's important to keep perspective. There's over 100 million Dai in the YFI pool across Balancer and Curve. The fact that that did not cause a larger price movement is important to consider as well. At what price would you buy Dai to lock it up? You would get 600% yield annually, but over the next few days that you have access to that. There's a calculus there, what degree of profitability justifies that behavior. That crazy yield is short term. There will be others yields, but lesser after this dries itself up. And yes, there's 100% long-term question that needs to be tackled about what to do about the fact that Dai has sustained an elevated price, on average.
I would like to thank everyone for coming and hope to see you again at the next meeting. If you do want to see the action happen on the peg or something else, the forum is the place to go.
As I have mentioned, if you want to see emergency action, there needs to be a signal thread requesting that specifically.
Thank you again, and see you all soon.
MCD: The Multi-Collateral Dai system
CR: Collateralization Ratio
DC: Debt Ceiling
ES: Emergency Shutdown
EV: Executive Vote
GF: Governance Facilitator
GP: Governance Poll
SF: Stability Fee
DSR: Dai Savings Rate
MIP: Maker Improvement Proposal
Artem Gordon produced this summary.
David Utrobin produced this summary.
Gala Guillen produced this summary.
Juan Guillen produced this summary.
Tim Black produced this summary.
Everyone who spoke and presented on the call (listed in the headers.)