RT @drakefjustin: If I understand correctly the PETH holders currently take on tail risk for DAI, not MKR holders. The stability fee should be reduced to 0%, or someone should fork away MKR (similar to 0x and the ZRX token). https://t.co/d29L4bnQol
If I understand correctly the PETH holders currently take on tail risk for DAI, not MKR holders. The stability fee should be reduced to 0%, or someone should fork away MKR (similar to 0x and the ZRX token). https://t.co/d29L4bnQol
alex van de sande (4 character handle ? me : bot) - @avsa6 months ago
So wait, the vote is open until it surpasses the previous stability fee vote count? There is not time limit?
Also, if I want to vote no for a stability fee decrease, do I do that by simply not voting for it?
No time limit. It could take 5 minutes or 5 weeks. I don’t think there is an expiration date.
As soon as the number of votes for 0.5 is greater than the number of votes for 2.5, someone will be able to “cast the spell”, ie. send a tx that will push the change to the contract holding the CDPs.
If you are against the proposal, the best would be to put your votes for 2.5 to raise the threshold required to activate 0.5
In times of growth; expected, realized or both, the currency should be lowered to artificially low levels to encourage borrowing, this is how the fed causes inflation.. which is what dai needs right now. Before the US market goes low, looks like we need an expansion of money supply.
How? In the decentralized way.. we spread dai to the masses.
I am a new poster to this website, but am a successful marketing entrepreneur for fortune 500 companies. I'm here because of this incredible economic system that we have the opportunity and responsibility to nurture and sacredly protect.
This feels very inappropriately timed for (even feigned) distributed governance. Calling for a vote 3 days after the proposal is submitted and neglecting the 1-month 'protection mechanism' for some reason?
There is zero scientific basis provided for this change
It is not possible to accurately predict what interest rates should be at before the fact, especially not at the current low aggregate size of the system - changes can only be made gradually and refined based on real observations in the market.
The 1 month delay last time was provided to CDP users, not to MKR holders.
I agree that the given justification isn't really up to par and I'd expect more data.
DAI price has seemed to hold a premium, though, so a decrease seems in order. I just would have liked to see some basis for picking 0.5 %.
I am all for decreasing the stability fee, though I do not think it will make much difference. It seems to me that the rise in the price of DAI alone would be more of an incentive to CDP creation. E.g. borrow 100 DAI with the value of $105 hoping the system corrects and you only have to pay back $100 worth or less of DAI. So maybe use the $105 worth of DAI to buy a leveraged short ETH position (like dydx) to balance potential losses of your locked CDP ETH, then wait for the price of DAI to drop below $1 to sell the leveraged position for DAI and maybe some ETH to pay off the CDP.
What you just described is not something an average user would try to do and, therefore, it would only be wishful thinking that this approach would bring the price of Dai back in line. Also, have you tried doing this? It is not as straightforward as it might seem. Is dydx even available yet?
I guess I am not talking average users; I am talking market makers. It is more than wishful thinking that draws DAI back in line. It is the underlying value of DAI = $1 of ETH enforceable under global settlement. No, I have not tried doing this; but I am thinking about how it could be done. Maybe there is too much friction in the market to actually work. Yes, dydx is available, other derivatives too.
I hope so. Fees and MKR burn aren't impacting the value of MKR much right now since things are so speculative. But offering 0.5% interest would be really popular for marketing and getting people to use CDPs.
cause everyone would like to pay less interest hence no need to give them period of warning
when you increase the interest though, people should know well in advance so they can pay back their debt if they are not happy with the new interest rate
The 1 month warning period was given so people had enough time to react in case they were not satisfied with a paying a higher fee. This is not needed for a rate decrease as people will pay less so should be happy with a decrease.
That seems presumptuous to me 🤔.
Changes to the stability fee affect makerDAO user decisions and a warning period allows users additional time to consider the new parameters and adjust accordingly.
*Assuming* that parameter changes in one direction require less consideration than the other is a judgment call. The way you phrased it: "People [...] *should be happy* with the decrease".
I suppose what I'm asking is what the arguments (and counter-arguments) are for this assumption. Said another way, is there a reason that any user of the MakerDAO system would be **unsatisfied** with a lower stability fee? If so, are there reasons they should not also have a warning period to react to changes in the system?
Let's look at the four classes of users of MakerDAO.
1. DAI holders. They want to see DAI stay at $1 and what the stability fee is does not affect them as long as it serves its purpose.
2. CDP users. Stability fee is a cost to them and seems clear to me that their costs going down without a warning period is not a problem.
3. MKR token holders. They're the ones doing the voting. If you buy a governance token, you're also supposed to pay attention to the system.
4. Keepers. Stability fee does not really affect them. If we wanted to reduce the liquidation penalty, people doing the liquidations should be able to react to that, though.
So at least I don't see who would have a problem with the decision but no voice to take part in it.
What is Maker's risk team analysis of liquidity risk of this move? 1.5% of ETH supply is already locked in Maker's contract. The debt ceiling exists to protect against liquidity risk, but the current debt ceiling was set when ETH market cap was much higher.
What percentage of ETH supply are you comfortable having in SCD under current liquidity conditions?
The debt ceiling was originally set quite conservatively, so even with today's low 45 day VWAP for ETH for the current period, the debt ceiling is still applicable. A more concise demonstration of how a debt ceiling calculation is computed will be published in the next few weeks.
I strongly caution trying to keep interest rates artificially low in #Defi markets. To account for all the risk factors, rates of return need to be above risk- adjusted cost of capital, which is tricky to estimate. Interest rates in crypto should be closer to emerging market countries rather than LIBOR.
Returning the Maker stability fee to 0.5% makes me excited about Ethereum again.
To understand my point of view, you must accept the notion that in the right context, numbers have an aesthetic and psychological component, and that price is narrative.
While stable tokens are getting a lot of coverage, and while Dai is a true innovation, the CDP mechanism is the most transformative tool for wealth management that I've ever encountered. There are a lot of caveats, and difficult hurdles to clear in order to maximize ones appreciation of how CDPs work. The biggest hurdles are 1) belief in the underlying assets and 2) Acquiring the over-capitalization for your loan. But if you can satisfy those two conditions, then MakerDao will provide a pathway for your family, your institutions, and your businesses to route around the traditional banking system, save you untold sums in interest, and even preserve wealth between generations while still being able to put that wealth to work.
First, my use case.
This year I paid off a big chunk of my home mortgage with a CDP. My interest rate from the bank was 4%. But as we all know, 4% on a mortgage is not really 4% in the classical sense because you are paying 30 years of interest UP FRONT. This is the reason why I FUCKING HATE MORTGAGES. But I live in the rational universe and because I did not have enough cash to buy a house outright, I got a mortgage. Then CDPs went live last year, and I realized how lucky I was. I had a significant sum of ETH I could use as collateral. (This was, in a sense, my free pass over hurdle #2 above. Without winning the Eth lottery I would never have understood what Rune and the team have created.) I took as much Dai as I could safely borrow, converted it to dollars, and paid it to the bank as principle on my mortgage. In that transaction I traded bank debt at 4%, for CDP debt at 0.5%. Perhaps in a universe where people were seeing thousand percent gains, this did not seem like a sexy trade. But for the way I see wealth, this was a life changing transaction. It makes my heart race thinking about the implications.
This is where I will mix numbers with narrative. The narrative of MakerDao for me, is that with the right assets, and the right amount of starting capital, you can literally borrow from yourself. You even get to keep the assets you put up as collateral. As lender to yourself, you can pay off your loan as fast or slow as you like. You could even pass the debt on to your kids by handing them the keys to a CDP. I can definitely imagine some cases where I would advise this, because unlocking the underlying assets could represent a substantial gain. Regardless, the narrative of using your own wealth for leverage in a way that does not put your wealth in the hands of others has never been possible in the financial universe. Until CDPs. That is the narrative that makes me really excited about Maker.
When the stability fee went up to 2.5%, this all changed for me, because as I stated at the top, numbers have an aesthetic quality, and price is narrative. 2.5% is definitely a low rate, but 2.5% is still within the collective memory of what banks were offering after the sub-prime crisis. For anyone who shopped for a house between 2009 and 2012, you could get 2.5% from Any Bank, USA. 2.5% just doesn't tell the story that I want to tell for Maker, because when the rate gets above a certain threshold, I think the borrower has to wonder, "Someone out there is profiting from my interest...who is getting my 2.5%?" Whereas 0.5% just feels like a great deal, and one can easily write this off as a necessary fee you pay into the system to keep all the software running. As time goes on it I think rates in the 2.x% might become more and more attractive. From a narrative sense, as commercial rates rise, I do think there is room to raise the stability fee again and still maintain the Maker narrative. But for the moment, I think 0.5% fits much better into the psychology of a person who is trying to be their own bank, who does not want to feel as though there's any chance they are enriching someone else by borrowing from themselves.
CDP's at 2.5% feel like they are part of a financial services agreement. CDP's at 0.5% do not.
This bear market has been clarifying for me. I've had to be super hard nosed about what projects I believe in. What I came to in the last year is that I am only excited about Bitcoin and Maker. While I appreciate Ethereum, I can't quite get excited about it like I can about Maker. And by the way, this is how it was always supposed to be. It's as if a glimmer of Ethereum's original intent is now shining through, because ETH was never supposed to be money, or an asset unto itself. Ethereum is only a substrate. Without transformational projects like Maker, Ethereum is just potential.
A word on marketing. I've drifted deep into the Bitcoin Maximalists camp this year, and there is a growing awareness of "crypto loans" among some of the hardcore bitcoiners because BlockFi has engaged with that community. I think that what BlockFi is doing is cool, but Maker is much more interesting to me. I don't quite know how to do this, but I want people out there in the bitcoin world to understand the decentralized, "you control your own keys", advantages of MakerDao. If the stability fee goes back down to 0.5%, the message becomes a lot clearer in my mind. That's just an aesthetic judgement.
At this moment in time that's a very tough call. As you probably know, your debt in Dai will be liquidated when your collateralization level falls below 150 percent. For my mortgage payoff I started off collateralized at 300 percent. This was back in Feb of 2018, right when the market started to really tank. As Eth started to fall precipitously, I decided to bite the bullet and pay off the CDP as quickly as possible because my percentage eventually got down to about 180%. There as one hair raising night after work when I sat in my office, furiously doing transactions on Metamask/Oasisdex, and competing with everyone else trying to get Eth transactions through.
Tip: Wiping Dai debt is a much faster way to bring your collateralization percentage up than adding collateral.
But to answer your question, in keeping with my experience, I wouldn't borrow more than one third of my principle. And I would make sure I had some extra capital on hand to pay it back Dai in an emergency if asset prices continue to fall.
That was a captivating comment. Thank you for that.
Aesthetics certainly make user experience the system in various lights. 0.5% is very attractive, and that is what it's meant to be. However, it's important to really stress that these changes are not arbitrary. Finance and Economics are powerful forces. Interest rates are often obfuscated in their meanings when offered by the traditional financial services space. In MakerDAO I argue that there's something wonderfully special about the Stability Fee. We know each component, and we know why it needs to be changed and for what reasons—with no undue trust involved.
Great comment u/De_lonte I love reading about real user experiences like yours. Helps me marvel at what MakerDAO really is.
I totally appreciate that adjusting the stability fee is not arbitrary. And Maker has always been really transparent with their process.
Also I acknowledge that creating a good narrative around Maker isn't at all a reason on its own to change the stability fee. But now that it's happening I'm thrilled. However we got here it's great.
I am going to shameless place @caw34769/makerdao-governance-stability-fee-a-case-for-vir-variable-fee-rate-a9734e3e17a8">https://medium.com/@caw34769/makerdao-governance-stability-fee-a-case-for-vir-variable-fee-rate-a9734e3e17a8 , the case for VFR being a strong solution still applies in this scenario. Having a system wide static stability fee rate is quite simply incapable of having the flexibility to constantly adjust for swings in supply and demand (albeit it will work over extended periods of time, and is a solid solution, but isn't as optimized as it could be). There needs to be work towards a more permanent long term solution (which I understand that there is, but it probably should be communicated to the community better).
The stability fee is a Variable rate that is meant to change.
In MCD there will be a mechanism to semi-automate this process based on some verified data sources. As Rune mentioned in a comment on this thread, one of those data sources will be inventories of current market makers, along with information about the spot price of Dai.
When I create dai my concern is less about the interest rate and more about how much I can afford ETH to decline before I get liquidated. I think lowering the collateral cushion would do more to support demand for dai but I understand that also creates risks for the platform.
Also this is hard for me to wrap my head around because I don't understand why there is so much demand for DAI. And what is the demand that is driving the 7% interest on DAI at compound finance?
I think that the Dai demand on Compound is driven by only a few, yet large, borrowers. I saw a write-up outlining a theory [here](https://medium.com/@hassen_naas/whats-going-with-dai-on-compound-finance-3b175faee89d)
Lowering the collateralization ratio is very risky since it would take less of a severe market decline to turn the system insolvent. 150% is there to make sure that even on days where the price crashes extremely hard, that the system can always cover the debt via collateral sale. In the end, lowering the ratio may give users a slightly lower Liquidation Price, but it will also heighten the risk of under-capitalization for individual CDPs.
It’s mentioned multiple times that there is a high demand for DAI. What stat or reference gives us that reasoning? How do we know there is a high demand for DAI? I guess I assumed it would be the dai marketcap, but that seems to be going down (which makes me feel like there is less demand). Or is Compounds APR for lending the key stat?
There are two main indicators that are really important. One is the price of Dai. If the price is consistently above 1 USD, then it means demand is too high and supply too low, and if the price is consistently below 1 USD it means demand is too low/supply too high. When Dai is consistently trading around the peg, the other key indicator to look at is inventory held by market makers. If market makers hold a lot of Dai, that means demand is too low, and if they hold little Dai, it means demand is too high. Currently, the foundation has data showing that market makers are running very low on Dai, which means that soon they may not be able to sell around the peg any longer, and the peg could break upwards.
With the Savings Rate in Multi-Collateral Dai, the plan is that special trusted market makers will be chosen by MKR governance to act as oracles reporting how much Dai they're holding. Normally market makers never want to give up information about their positions, but in this situation we expect they will be willing to do so, because it will help them regulate the Maker system in a way that's beneficial for them. If you have a lot of Dai, you're obviously happy to see the savings rate going up since you'll earn more on your holdings and can sell the Dai to new buyers at a spread. And the other way, if you have a huge CDP, you're happy to see the stability fee falling since that will give you cheaper costs on your debt and a chance to buy back Dai to pay down your debt.
One important aspect of the savings rate adjustment process in MCD is that the data reported by the trusted market makers is checked for fraud, or there is a risk that the market makers could abuse the trust given them to create harmful fluctuations in the rates (a bit like the LIBOR scandal of a few years back). This is why we are aiming to make it a weekly process initially, so there is time for the community to double check the data and make an informed decision before allowing specific savings rate adjustments to go through, rather than having it as a fully automatic process like the TRFM was originally envisioned to be.
The Dai that goes into the savings Dai contract is not used for anything. If you decide to lock it, it will be there and readily available for withdrawal at any time. It is meant to serve as a decentralized interest bearing savings account.
The rate will be discussed and voted on in the near future.
Except it is... your link even supports what I said "Uniswap uses a variant they call the “Constant Product Market Maker Model.” And it would be a less trust-dependent oracle. You could say it's not currently viable because it requires significant lockup on the market makers part. But Uniswap is a smart contract market maker.
p.s. happy cake day!
> If the price is consistently above 1 USD, then it means demand is too high and supply too low,
No, it means that, in a bear market, there are a group of stakeholders willing to buy for more than $1, i.e. distressed CDP holders. Nothing to do with stability fees. Look beyond high school economics.
Also, You admit that you don't know what you are doing in setting these rates, so why don't you have confidence in your investors and regularly offer a range of values to vote on (including an increase)?
Your DAO has a very small d.
If there are people involved, it would be impossible to verify that they weren’t being fraudulent as they could be hedging or shorting in other markets. I would suggest that if you intent to collect data that way that you provide a large amount of liquidity to uniswap.exchange and monitor the activity there to understand demand for Dai. That could be done in a more trustless way
While I agree with the rate reduction, I’m not optimistic that it will create a huge increase in supply. I think most CDP owners are locking up about as much as they are comfortable locking up with the way prices are tanking. I’m actually concerned now about whether or not we will be able to create enough supply to meet the demand. Right now, borrowing on Compound is shut down but it will be up again soon, maybe within a week. Just think about what the demand for Dai will be if the rate being paid for Dai goes back to double digits. I was getting paid close to 19% at one point. What is the plan for Dai if demand really surges during this brutal bear market?
Right, in that I don't think we will have this problem once MCD is launched. However, a lot can happen between now and then. The Maker team is being rather mum about when MCD will be launched, which I understand. For all we know, we are months away. A lot can happen between now and then. I think we are somewhat vulnerable in the meantime. I guess this is where the big investors (Polychain, Pantera, Horowitz, et al.) step in and provide some liquidity. Of course, the Maker team will not say that.
It is the largest movement currently possible. Great question. Think of this like a science experiment. 2% change is GF is not that big, and it can be raised in the future, so we try to turn the knobs to see what reaction is achieved. Great question!
\[I Am Not Maker Team\]
Not really, there is a floor at 0.5% because that is the flat rate of "profit" that MKR holders get when users repay their debts. 0.5% is the APR paid back in MKR which is burned. So the actual range of interest rates is between 0.5% and up.
I've never heard of this floor. Single-collateral DAI doesn't seem to recognize it: https://github.com/makerdao/sai/blob/56eed66bb42a485ff0819f4ca227f615b1eb5320/src/mom.sol#L56
It just ensures that it is larger or equal to RAY (one as a multiplier), which corresponds to 0 % and smaller than 10 % per day (according to comment, I didn't doublecheck that math).
All of the fee is also used to burn MKR. In the future Savings Rate would mean that part goes to people holding DAI in savings mode. But both savings rate and the fees will fluctuate in order to keep DAI stable.
No, you are right. I was more thinking that if it went to 0% this would be very disrespectful to Mkr holders who would no longer make any profit from Mkr burns. 0.5% burned APR in Maker token is the promise that Mkr holders buy into.
Yeah, but of course it could go to 0.4 % or something. If it would be necessary to achieve balance during high usage growth but little appetite for taking loans, I think it might still make sense for MKR holders with a longer term perspective. Let the system grow in adoption and enjoy much bigger burns once the market turns and people are more willing to go long on the available collateral.
Not a bad intuition, although there is a problem in the model if the steady state of the system is when borrowing money against collateral encurs 0 costs. I think the 0.5% floor (btw in mcd I think that anything above 0.5% is paid to DSR) is a good one to have.
The change of 2% was chosen because we believe it is significant enough that it should cause actual change in behaviour, so we can easily evaluate a short period after it has been executed if further changes are needed. When we did the increase from 0.5% to 2.5%, we were lucky that it was quite accurate and no further changes were needed from that point, but this time it could easily be the case that 0.5% isn't the right rate for the current conditions and further change is needed, either to a lower or higher stability fee - but we'll only know this after observing the outcome of the current proposed adjustment.
It is not possible to accurately predict what interest rates should be at before the fact, especially not at the current low aggregate size of the system - changes can only be made gradually and refined based on real observations in the market. This is why I'm really excited for the Savings Rate adjustment process that will exist in MCD, where we can do much smaller and more precise changes automatically every week, rather than large changes every couple of months. So the governance community as a whole will be able to continuously make small adjustments to the market, and monitor the data to see what effect those adjustments have, and also monitor to see when/if market conditions change in real time so the savings rate and stability fees can be smoothly adjusted to accommodate such changes.
Couldn't simulations be run so as to tweak out the most accurate rate beforehand? Seems to me that this should be quite straight forward to do. I recall programming simulations in Excel 28 years ago. How many variables would possibly need to be 'toggled'?
The problem with simulating economics is that you don’t know all the variables in the real market. Also, you can’t control for all the independent buyers and sellers of Dai so you can’t reliably see how the peg will perform in a simulation.
Economists use simulation techniques to conduct professional research. Many models taught in upper-division ECON courses can be structured as simulation models.
The Maker/Dai ecosystem hasn't existed for that long and there have only been a handful of players. During this time the team has data within the 0.5% and 2.5% stability fee rate parameters. This historical data can easily be input into a general simulation to start. As you mention, other simulation variables will become more complex over time as more historical data becomes available. The ecosystem could become exponentially complex; at that point perhaps simulation is no longer viable. But I'm not sure about this.
Hmm, you make an interesting point. In any case I think adjusting the real rate, and seeing the outcome is not a bad course of action--even if they were to do a simulation first. The system has not been online for _that long_ only about a year. In any case, I'm sure 0.5% will incentivize Dai creation and it will be interesting to see just how much.
The maker team is fortunate to have insights into some of the larger market maker inventories, so this is a very good source to gauge the effect of these rate changes.
Would love to see a simulation come out though. I know we hired a AI and Quantitative Analysis Manager recently. I'm certain she will be on the risk team, helping with the data modeling and crunching.
So if I understand correctly: Let's say I create a CDP now and I borrow 100 Dai for 100 days with 2.5% stability fee. If after 50 days the stability fee is lowered to 0.5%, I will end up paying 50 days of 2.5% and 50 days of 0.5%, averaging at 1.75%?
I agree with Rune here. My concern right now is that the cost to produce Dai is not very high (2.5% APR) and the potential reward for holding Dai is 8% on [Compound.finance](https://Compound.finance). The issue is ETH has not given investors a lot of confidence on the idea of going long, and users may want to simply buy Dai with their ETH (short ETH) and then put their DAI in compound SC for steady interest.
Furthermore, there is also the incentive for folks who are long on ETH to make interest on that ETH in the form of funding short contracts on DyDx, so this means that there is a high demand for ETH there as well, and high demand for Dai.
I worry that the decrease to 0.5% may not have a substantial impact, but rather, MCD will be the thing that pushes Dai to new volumes. Right now, people are willing to pay 18% APR to borrow Dai on compound, but with MCD, they would actually be printing it instead, and for much cheaper.
So for the first time in a while, I think the math is better for just holding Dai and holding ETH rather than holding a CDP and printing ETH. MCD will change this but until then 0.5% GF is a good place to start...
Edit: Thanks u/Davidutro for corrections
You can send fiat to Wyre and get Dai back. That is the most direct way but there is a fee and might just be for US citizens. Gatecoin has a USD to Dai pair although I've never used them. The easiest and cheapest way that I use is to simply buy ETH on Coinbase and immediately convert that to Dai using Oasis.Direct.