Ep. 33 May 02 - 2019¶
Video | Audio | Discussion
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| # / 00:00:02 | Richard Brown | Hello, everyone. Welcome to the May 2nd edition of the scientific governance and risk meeting with Maker Dao. We have a surprisingly relaxed, I'm predicting call today because I think we've reached a point in the governance process and our manipulating of the risk parameters where it might be time to have sort of a more of a free flowing chat in this call, more of a focus on Q&A and less on interesting and or dramatic recent events so I'm not going to do much speechifying today. I will do the same reminder I do every single time, I will never stop and nobody can make me stop. We are very, very interested in getting feedback from the people on this call so lots of smart people, lots of strong opinions, lots of analysis in people's back pockets. We want to see as much of that as possible so even if we're speechifying and rambling and looking at graphs, if you come up with questions or you have comments or there's things that you want to say, please do not be shy. |
| # / 00:01:08 | Richard Brown | We want to hear from everybody so either type it in the chat at the side, if you don't have access to a microphone and somebody will hopefully come along and read up that question for you. If they don't, type it again, because we might have missed it, things can get hectic in here. If you have access to a microphone, jump on it and start talking. Don't wait for an opening if you don't want to, though it would be nice if you let people finish their sentences before you jump in with a rebuttal. We're also super keen about continuing this discussion. This is a very tiny window of opportunity for people to engage with the governance process. It's not designed to be the place where decisions are made or governance happens. This is where we talk about major themes and come up with plans and debate them in other areas. |
| # / 00:01:58 | Richard Brown | I'm posting a link in the chat right now. This is a link to our subreddit, the r/mkrgov subreddit. There's a post there that right now is advertising the meeting after the meeting's over that turns into the discussion thread for the meeting so if you have a question, I would also dearly love it if you would paste those questions into the subreddit because that lives on for a week or more, and it gives us plenty of opportunity for people to respond and provide input. The chat here, we only have about 15 minutes to get somebody's interest, so Reddit is better. |
| # / 00:02:38 | Richard Brown | I think that's going to be it. I always forget something and then I halfway remember then I cut Steven up and maybe I won't do it this time so Steven, I'm going to hand this off to you for your thoughts of the week and then we'll talk risk and then I'll talk a bit about the poll so Steven Sawyer. |
| # / 00:02:52 | Steven Becker | Okay. Thank you very much, Rich. Firstly, hello again, everyone and welcome. Really appreciate you taking your time and obviously committing resources towards exploring and facing these challenges of scientific governance as community. It's quite impressive to see the number of folks that turnout week after week. We can take on these challenges for the system as a whole but the one thing that I'd like to bring up and in light of recent events is just to recap quickly on some of the strengths and weaknesses of a decentralized stablecoin and I'm going to start off with what is always seen as an apparent weakness and that is a decentralized stablecoin seems to be at the foibles of the underlying DeFi environment, the underlying ecosystem and is always representative of what that system looks like. |
| # / 00:03:52 | Steven Becker | Right now with DAI sitting below $1 is this constant idea that it needs to go back to its peg of $1, but the reason we see that, it's discount, is because of the underlying risks that are so clear to everybody. Everybody understands where the supply is coming from. Everyone has the ability to see and analyze where the supply is going to. The stakeholders to the system are transparent. The very idea of a decentralized stablecoin being transparent is firstly, its weakness because all the risks are exposed but at the same time, that's where its strength is. There's nothing opaque. There's nothing left outside of the users view. Everybody can see very clearly what is involved in the system, what the supply is of the system and the effects of it, and this is really where we can get to a forum like this and discuss clearly the underlying dynamics behind those risks. |
| # / 00:04:56 | Steven Becker | The reason we can actually talk about those dynamics is because the risks are very clear and for me, at the end of the day, it's weakness but at the same time, a very important strength of a decentralized stable coin, especially of Dai. On that point, looking at some of the wins we've had, there's obviously a lot of debates around the use of certain levers in trying to restore the peg. To that point, the idea is also, what does it mean to restore the peg? What does successes look like? We've used the stability fee and to my mind, and I'm just a single data point in this, I feel that progress has been made. We are getting to a point. Now the argument could be made that maybe it wasn't the stability fee, maybe it's the onsets of a range bound ETH collateral that is contributing towards the restoration. Well, I don't know. The point being is that this is the forum to actually discuss it. |
| # / 00:06:00 | Steven Becker | The next thing is also to consider the fact of the peg being stable. A lot of folks have asked me, do you think the peg is broken? I think, well, no, it's not. It actually is kind of stable. It's just not at the value that we intended so I don't mean to make it farcical but the idea is that the stability of the value is there, it's just generally at a discount and that discount is more reflective of the regime that we're in and what I foresee is that as soon as Multi Collateral DAI comes out and as soon as we start getting the right kind of collateral into that portfolio, and then the next caveat is that the portfolio gets to a certain critical mass, we will find the diversification effect working on our behalf, making the collateral portfolio stable and that stability gets transferred into the price of DAI and also and interestingly enough, the volatility of the stability fee as well and with the hope that the stability fee comes down and represents accordingly a more competitive rate. |
| # / 00:07:10 | Steven Becker | That's my little intro for the week but once again, I just want to remind everyone that the three themes we try and cover in this call are the demand and supply imbalance, the collateral types, the portfolio and the premise and adjustments to the collateral types in the portfolio and then obviously, exogenous risks that we need to consider as well. Again, keep in mind that decentralized scientific governance ultimately is considered and facilitated by the foundation in this hour, in order to help MKR governance make decisions, that is really important and at the same time, this is a continuous function so please be involved as much as possible. That's me on the back of that. Let me kick back over to Rich. |
| # / 00:07:58 | Richard Brown | All right. Thank you, Steven. That was a great reminder. I'm going to try and keep my segment small or as lightweight as possible today so I'm not going to get into some big speeches. I am going to do something that I find is useful in a quickly evolving space that like the one that we're in right now and that is to point out some of the obvious things that we've been discovering in the last few calls. Crypto space, one year in crypto is five years in the normal world. We're constantly looking ahead and trying to predict what the world will look like and we're always wrong. We're more often looking six months back and trying to figure out what happened and that's fine I think, but it's important that everybody or the community as a whole sort of gathers around these paradigms that are reflective about what actually did happen and I think that we're kind of in that process right now at MakerDAO or at least I am. Maybe I'm just slower on the uptake than a lot of people in this room. |
| # / 00:09:00 | Richard Brown | I want to reiterate some of the things that we're beginning to discover. We assume these things were true in the past. I think that now we're reaching a stage whether unarguably the case and one of those things is shaped or sort of falls into this bucket of product market fit. That's often used term in this space and I think that one of the things that we've discovered over the course of the last year since we launched is that MakerDAO has found a product market fit, found a great one. The market loves it. The interesting thing is that in these situations, the market determines what that fit is, that we don't determine what the fit is. Over the course of the last year, we've become certain, I'm using the word we here and obviously open to being debated on this product, on this topic, but CDPs are a tool for people that are seeking leverage. It's as simple as that. |
| # / 00:10:01 | Richard Brown | We have other use cases in play, but the engine is driven by people that are looking for leverage and that means that the market has told us that that's what the fit is and that fit places us into a different world than one that we might have predicted at the outset of just simply unlocking liquidity and opening up the door to a wide range of options for people to do. The system has to follow the behavior of its users and that behavior is leverage and so we're in a world where the fees associated to incentivize or disincentivize that behavior need to mimic the fees that are already very well understood in the space, our space in the traditional finance world of what kind of premium you attach to that risk that people are willing to take on and I think that that sort of brings the stability fee process that we're in right now searching for that equilibrium into crystal clarity. It's just simply the world we're living in. |
| # / 00:10:59 | Richard Brown | That's my five minutes spent on pointing out the blindingly obvious, but I think there's some utility in it. I want to talk very quickly about the results of the poll, because I tend to forget to do that and that's the whole reason we're here and one of the reasons we're here, but we're seeing this interesting trend over the course of the last two poll and governance polls where there's no longer a clear rush to one extreme or the other. People aren't overwhelmingly voting for the 4% option. We're seeing the rise of a moderate faction possibly or a trend in the community. |
| # / 00:11:35 | Richard Brown | Last week or the week before we saw, sorry was it last week? It was the week before, okay, we saw this sort of a deviation or a neck and neck race between 2% and 3% and we saw the same thing again this week, which I think is a very interesting trend so we had a photo finish between the 2% and 3% raise options. 3% won out, 32K staked as opposed to 27K staked at 2% so on Friday, we'll have an executive vote for a 3% raise to the stability to bring us to what I believe is 19.5. |
| # / 00:12:17 | Richard Brown | That's where I'm going to leave it actually. I will spare everyone the rest of my ramblings for today so Cyrus, I'm going to hand this off to you to talk about risk. |
| # / 00:12:27 | Cyrus Younessi | Okay, thanks, Rich. I think today after we hear from Vishesh with the state of the peg, I think we're just going to open it up to just general conversation. I think we have a few topics lined up that could be interesting to discuss, such as how to determine when the peg has been fixed, what kind of indicators are we looking for? It seems like right now, we're at least headed in the right direction so it might be a good time to start thinking about these kinds of things and I think we might hear from Matthew as well, with some of his concerns, thoughts on that as well but yeah, in general, I think it's just going to be somewhat of an open ended conversation and yeah, so Vishesh if you're ready. |
| # / 00:13:19 | Vishesh Choudhry | Yeah. Let me share my screen here. I had a couple of things to show this week. I did kind of want to add a little bit of context this time so I think there's been a lot of discussion about what are the use cases for CDPs, what are the right use cases for CDPs, and how is that affecting the DAI price? |
| # / 00:13:58 | Vishesh Choudhry | I mean, by and large, my view yes, leverage is an extremely important use case. I think there's a spectrum effectively of sort of bullishness and bearishness in the sense of primarily on ETH price right now, because that's the big collateral type but essentially, as people are more bullish, they're seeking leverage and so they're drawing more debt out of CDPs and then when people are more bearish, they would potentially buy up Dai, as a shelter or just really look to delever their positions as they get less bullish on these and so I think like that underlying bullish/bearishness behavior is what's driving a lot of what's going on and I think we'll try to add more insights kind of week over week to better illuminate how that's going so we can fine tune what needs to happen or doesn't need to happen with the stability fee on kind of a week over week cadence. |
| # / 00:15:00 | Vishesh Choudhry | Basically the reason I bring that up is because in the last week or so, what we've really seen is the DAI price actually started to stabilize a little bit. I know there's been some kind of natural rollercoaster behavior up and down in between and I think Lev's chart in terms of the dot plot shows this a little bit better but essentially, even though on average, the prices actually held relatively steady in the sort of 97 to 98 range over the past couple weeks, there were a few spikes, stuff that was going on with Tether, things like that but those tend to stabilize, I think and so what we've really seen is that as we've increased the stability fee over the past few weeks, I think the DAI price has actually stabilized a bit. |
| # / 00:15:52 | Vishesh Choudhry | There has been a lot going on, like I said with ETH, with Tether, so as always, take everything with a grain of salt but I think that is a positive indicator that what we're doing actually has an impact. This is still the relationship between DAI and ETH price, holds at least visually fairly strong so I think this kind of speaks to the importance again of just the degree of bullish and bearish sentiment on ETH being a big driver for the sort of fluctuations in DAI price although it is a good sign that even though this did kind of ramp up a bit and ramp back down, the magnitude I think of those fluctuations and their impact on DAI price has gone down and I think that's what we'll tend to see as DAI supply decreases, particularly as oversupply decreases. I think just the degree of variation and as we increase the stability fee, which I'll talk about in a second, I think we'll see the degree of fluctuation in DAI price based on what's going on with ETH price decrease and so it may not actually necessarily come all the way back up to one but I think a little bit more stability, even if it is a little bit below $1 peg is a positive indicator. |
| # / 00:17:11 | Vishesh Choudhry | In terms of what's been going on with DAI supply, it has been coming down pretty consistently over the past few weeks. We've seen some big kind of wipes and burns, but not necessarily a bunch of big new CDP positions that have been taken out so I think this is just again an indicator that what we're doing has a legitimate impact on the DAI supply. |
| # / 00:17:39 | Vishesh Choudhry | Transaction volume, I'll skip over for a second. In terms of what's been going on with Compound, I think all quiet on the western front there. Things have been relatively stable, even with the increase in the stability fee on the 28th so I mean there's a slight increase which is to be expected but it is interesting that the Maker stability fee has been able to keep its lead on the Compound rate. I think, and then if we go to volume for a sec, that has also held relatively stable so I think again, what this says is that places like Compound are falling into a more natural sort of secondary lending position in relation to Maker, which I think has not been the case in the past. In the past, there's been either some arbitrage opportunity or people pulling DAI out just to lend it but now. I think we're starting to see more of the use case of people will actually look to Compound or Dharma or things like that as an alternative to drawing DAI from CDPs as opposed to in the past where it's been super cheap to draw from CDPs. |
| # / 00:18:50 | Vishesh Choudhry | I think this is a good healthy relationship between Maker and secondary lending platforms. I know there's a lot of discussions that have been going on in terms of how much do these secondary lending platforms contribute to demand versus just kind of being an alternative pathway but still having the same ultimate effect on supply and demand for Dai, and I'm sure plenty of people will have extensive discussion about that. In terms of just numerically what's been going on, I do kind of want to skip over a little bit to something else that I've been putting together. Apologies, it's not in the website just yet but I had kind of pulled the data and gotten a chance to graph it just before the call. |
| # / 00:19:32 | Vishesh Choudhry | Essentially, two of the things that I was looking at was one, the collateralization ratio, so what's interesting is collateralization ratio, along with the decrease in DAI supply, has been coming down recently. I think what this means is that what we've been doing with the stability fee has reduced the overall profitability of going hyper levered and so what we've seen is people actually kind of delevering their positions a little bit. I think we've also seen a little bit more stability in what's been going on with ETH price and so people have kind of both from less of a desire for levering up, although that's very hard to measure from a data perspective in terms of how much people are actually levering up, what you can measure is kind of a theoretical leverage based on the collateralization ratios and I'll show that in just a second but in terms of the actual amount of leverage that people are getting, it's hard to track but my suspicion is this is a result of a decreased appetite for leverage, and I will show the calculations on that in just a second. |
| # / 00:20:41 | Vishesh Choudhry | The other thing was, I had started to look at age so I brought this up a few times. I think the circulation of debt in the system is an important metric because large quantities of unpaid fees are a systemic risk, I believe and so one of the topics that I think is worthy of bringing up on a call like this is kind of what's going to happen in the Single Collateral to Multi Collateral shutdown. From my understanding, the current state is that unpaid fees would not get, they would essentially be forgiven on shutdown and switch over from an SCD to MCD. Now, right now, the governance process has the optionality of instituting a tax or a penalty on any outstanding debt and fees at the time of the switchover and I think it's going to be really important for us to kind of lock that down because in the absence of that, the incentives are just kind of screwy, where people could sit with a bunch of outstanding debt and not have to worry about it and I think there was some tweet about some large holders that were kind of thinking this way and so I just want to make sure that that's a topic that this group kind of nails down soon and there was some chat on the Rocket chat about this as well. |
| # / 00:22:00 | Alex Evans | Sorry, so you're saying that potentially as we transition to multi collateral Dai, there currently is an expectation from some CDP holders that their debt will be forgiven? Do we have confirmation of that? Because obviously, if that's true, then we could explain why certain CDP people just weren't running their CDPs when we were increasing the stability fees. |
| # / 00:22:23 | Cyrus Younessi | Yeah. I don't think, I think that that's not the right framing because one, there is a tax as Vishesh mentioned, to penalize those CDPs and two, I just don't think that- |
| # / 00:22:41 | Alex Evans | Are there other details on that tax somewhere? I'm totally new to this. I have no idea this was a discussion really until very recently. |
| # / 00:22:49 | Cyrus Younessi | Yeah, I believe there are details somewhere. I don't have them off hand. |
| # / 00:22:54 | Vishesh Choudhry | I just wanted to clarify my comment. I don't want to sort of create any unnecessary doubt or uncertainty but essentially, there is a specification for a tax that exists in the governance framework as I understand it. I just was bringing up, I think it's important to lock that down, figure out what that's going to be and make sure that gets implemented. I don't think it's a super likely scenario or rational behavior that people are expecting that a tax does not get implemented but just, you never know what people are thinking and it's very hard to quantify that so I think just from a good housekeeping and communication perspective, it would probably be a good idea to lock those down and communicate them. |
| # / 00:23:38 | Alex Evans | Got it? That makes sense. |
| # / 00:23:39 | Richard Brown | Yeah, I can speak to that very briefly so I spoke earlier about the risks of predicting what the crypto space looks like in the future and that applies equally to what the technical implementation of the Maker our system looks like six months from now. I think that it would be extremely risky to count on this as some kind of secret backdoor to avoid fees when we switch over to the new system. There will be additional details coming up but people are still writing contracts at this point so we don't have anything we can publish right now. |
| # / 00:24:10 | Vishesh Choudhry | Okay. Sorry. Yeah, I'll just wrap up and I'm sure people want to discuss some of these topics so just to that point, I was looking at how old the debt is and how much it's been circulating through the system. I'm pleased to report that since the sort of increases, I would say significantly starting in March, you did kind of see but a little bit earlier on in February as well, you did start to see the trend kind of reversing itself so this is just the shorter snapshot of February to now but if I expanded the scale, you would essentially see that the age of the debt here has been increasing over time but since around February, March, that trend has kind of started to reverse itself where the open debt is not as old anymore and what we've seen is the age of the debt that is being bitten or voluntarily closed out has been increasing. |
| # / 00:25:08 | Vishesh Choudhry | What that means is, effectively, there is less old debt outstanding, and people have been more willing to pay back old debt recently and so to me, that's a positive indicator, because I've been sort of interested in kind of a bunch of stale outstanding debt being a risk for the system and so I think it's a really good positive indicator that there's been more circulation recently given the stability fee increases. Now the last thing I just wanted to briefly mention, and I'm happy to share any of this stuff for anyone to poke holes at later, essentially I did some rough calculations on kind of how bullish you have to be on ETH for it to be profitable for you to just go max levered or levered up to a recent, like whatever the latest collateralization ratio was so essentially, if people are familiar with the leverage calculation, I'll skip over this part but essentially, given a certain collateralization ratio, there's a maximum threshold of leverage you can reach and the theoretical maximum leverage point is 300%. |
| # / 00:26:15 | Vishesh Choudhry | Now, given a leverage amount, there's effectively a profitability calculation based on an expected increase in ETH price over the period of, let's say one year, given the stability fee, given a 6% cost of capital, how profitable, would it be profitable or not for me to just lever up on ETH and hold it? Essentially, the point was when I looked into this, I saw that you don't have to be that bullish on ETH for it to be profitable for you to just go levered up, ignore the stability fees and hold on for dear life. I think what this means is based on how high, the stability fee is not actually that high. It's effectively I think a point, so based on what the stability has been in the past in particular, but even still now, I think there's an equilibrium that exists and the fulcrum point is a function of the stability fee. |
| # / 00:27:14 | Vishesh Choudhry | The equilibrium has been sitting pretty heavily in kind of the bull category where you don't have to be that bullish for it to be profitable and so as we continue to increase the stability fee, we're just sort of moving that fulcrum point of the kind of bull/bear equilibrium and I think it has an impact we've seen clearly on supply but then ultimately an impact on DAI price, because effectively as ETH price fluctuates, where that equilibrium point sits changes what the DAI price is, and so happy to sort of later go into any details, answer questions, share data, have people poke holes, I just wanted to kind of share this as the topics that I've been looking into and trying to start to measure. |
| # / 00:27:59 | Matthew Rabinowitz | I have a quick question for you. That's across all CDPs but do you have any metrics that are like CDPs that have an outstanding debt of let's say, greater than $100,000, folks that are actually actively levering, not folks that have $5 outstanding in a CDP, because that's going to screw with the metrics if you include 500 folks that actually don't have really any money and don't care if it gets bit. |
| # / 00:28:26 | Vishesh Choudhry | In terms of the theoretical profitability calculation or which metric are you referring to filtering down to large CDPs? |
| # / 00:28:33 | Matthew Rabinowitz | No, I mean, just basically the sensitivity of every time we're increasing the stability fee, how much Dai's being reduced? Because I mean, kind of to your point, the folks that have lots and lots of DAI outstanding, they're using it as you're more than likely related to leverage transactions so the question I'm trying to get at is the ones that have the many, let's say greater than $100,000 are ones that are probably active in that type of space, folks that have a CDP of less, it helps us bring granularity and focus into folks to identify the sensitivity to where a given CDP owner decides this is just too expensive, I need to back down, where some folks if you have it blended across all of them, the guys who've got a $2, excuse me 2 DAI outstanding, at some point, they just don't even care if it gets bitten. |
| # / 00:29:25 | Vishesh Choudhry | Yeah, I agree with that, that we will see different behaviors for larger CDPs and I think that the larger CDP''s tend to drive the overall behaviors in the system so I completely agree with kind of, in principle, focusing on large CDPs where possible and really kind of segmenting things so we can see what they're doing differently. In terms of the stats that I've shown here, like for example, the collateralization ratio is sort of total debt weighted across the whole system, but I could look at the collateralization ratios of the larger CDPs and then calculate the max leverage for those CDPs and then what we can essentially assume and I think it's not unreasonable is that people who are taking out big CDP positions are probably pursuing close to what their maximum leverage is given their actual collateralization ratios and so I think it is not unreasonable to say hey, whatever the max leverage is for those large CDPs is probably close to the leverage that they're actually pursuing and so we could look at that as an update to this is kind of segmented out for those larger CDPs. |
| # / 00:30:35 | Vishesh Choudhry | The other point was on the age of the debt, that is, so I initially did the calculation based on DAI days so essentially based on size of debt and age of debt, and then adjusting, dividing by the total supply so that particular metric is definitely weighted towards what, like it would be more representative of sort of the top 10% or 20% of CDPs, which as Primoz has shown, constitute a large portion of the overall debt so certain metrics like that are debt weighted and I think are probably more representative of those larger CDPs but I totally agree with the principle of segmenting some of these metrics where possible to those larger CDPs. |
| # / 00:31:20 | Alex Evans | Can I ask another question on the age of the debt calculation? |
| # / 00:31:27 | Vishesh Choudhry | Yes. |
| # / 00:31:31 | Alex Evans | There were two lines in there if I recall. One was current debt, the age of current debt outstanding in a system and the other one was closed debt. Is that right? Yeah. |
| # / 00:31:40 | Richard Brown | Can we look at the graphs while we're talking about? Okay, thanks. |
| # / 00:31:44 | Alex Evans | That's helpful. Thank you. |
| # / 00:31:46 | Vishesh Choudhry | Essentially, the two lines, I just wanted to break out. CDPs, in particular debt tranches, so I had to do this at the individual kind of draw level. DAI that is outstanding, how old is that DAI is the blue line. The red line is essentially DAI that has been bitten or wiped that was created so essentially, for a particular date, essentially DAI that was created before that date and was closed by that date. |
| # / 00:32:25 | Alex Evans | This is really interesting so let me ask you this then, on the red line, so if you're doing it at the draw level, let's say I do three draws, draw 100 Dai, 100 Dai, 100 DAI and I pay back 150. Are you doing FIFO or LIFO? Are you going back to that first draw and wiping that or are you going to the last draw that I did and wiping that and then some of the second draw that I did? |
| # / 00:32:48 | Vishesh Choudhry | This is what I understand, like in practice, the system would be calculating fees and things like that, for example. I am effectively clearing out the older debt first so it's first in, first out. |
| # / 00:33:02 | Alex Evans | That's how the system is calculating fees, so that's how you're justifying that? |
| # / 00:33:06 | Vishesh Choudhry | That is my understanding, yes. |
| # / 00:33:07 | Alex Evans | Okay perfect. Thank you. |
| # / 00:33:08 | Lev Livnev | Vishesh, I wanted to comment on your kind of cost benefit analysis of CDP with respect to interest rate. There's an interesting thing that you could do there. For example, you might be familiar with in modern portfolio theory, where you've got this parabola of investible universe and you compute the efficient frontier and then you have this tangency line which is called the tangency portfolio or something and then, if you remember, you pick a portfolio on the tangency line using some utility function, which basically says how risk averse the investor is and then there's also another way of deriving similar results, but I think in a more principled way if you go through ergodic theory and try to maximize time average growth rates of a geometric Brownian motion as a stochastic process, but the point is that this calculation, it gives you another perspective of doing this cost benefit analysis that is more risk sensitive. It's not just looking at expected return and in fact, it lets you derive an optimal amount of leverage without any assumption on an investor's risk appetite, and if you apply this analysis here, this would be like an alternative way of constructing this table so, maybe if you want to talk afterwards about calculating something like that, I think it would be interesting. I had the thought of doing this a couple of months ago, but I never followed through with it. |
| # / 00:35:06 | Vishesh Choudhry | I would love to have that discussion, I was actually kind of manually just doing that a little bit playing around with these numbers to see what is the max leverage given, first I did just theoretical maximum leverage then I decided, well, that's not really realistic because not everyone's going right, they're not moving the needle right to the red line and so, based on what the actual collateralization ratio is, what is that theoretical max leverage, and then from there, kind of varying it out and just changing the numbers to see what would the yields be at different expectations and as you're kind of alluding to, which I'm familiar with, we did do a little bit of portfolio optimization work before, effectively max leverage is not necessarily max yield and so there is a whole science as you're mentioning to sort of maximizing yield at either different leverage points or sort of based on expected value analysis of different price point movements over time plus the other thing to factor in here is risk of liquidation so just given actual volatility of ETH price, what's the chance that you get knocked out of the game before you can realize your yield is another confounding variable. |
| # / 00:36:32 | Lev Livnev | Yep, in short what I'm suggesting is like how to do this kind of analysis but in a risk conscious way and that's where it might turn out that you don't want to get max leverage that doesn't actually maximize your expected return but let's talk about that later. |
| # / 00:36:49 | Alex Evans | Yeah, my only concern there would be how would you observe those risk preferences from the users of the system and then what their implied expectations about future volatility are. It's a little bit easier to reason about potential return versus the stability fee because they're just static numbers that you can plug into Excel but here might be a little bit trickier because one, you have to think about what your risk preferences are and you can observe those from real market prices, you can't synthesize a portfolio. |
| # / 00:37:19 | Alex Evans | Then secondly, what the volatility expectations are or the sigma. |
| # / 00:37:25 | Vishesh Choudhry | Alex, I agree with that and I was also having an interesting discussion with Primoz this week. Some of you, you could potentially approximate some of that bullish sentiment so to speak, based on sort of derivative rates on other platforms, like what are the costs for leverage long positions and how much are people taking them on Bitfinex or something like that. There are ways that you could potentially approximate it. I would be really interested in hearing if people have other ideas of ways we could measure that but that was one thing that pretty much I suggested. |
| # / 00:38:09 | Lev Livnev | Well, it sounds to me like we could get an estimate of it just simply by looking at the, because what we're ultimately trying to figure out is the sensitivity to the stability fee but what we can use is the current snapshot of the system as a way of reverse engineering the risk appetite of the aggregate CDP user. |
| # / 00:38:45 | Alex Evans | Yeah, I think that's a good idea. We should probably take this offline before people start dropping like flies from this call. |
| # / 00:38:53 | Lev Livnev | Okay. |
| # / 00:38:55 | Richard Brown | It was super valuable though so if you're ever tempted to get this nerdy again in the future, please do. That was excellent. Cyrus, did you want to pick it back up? |
| # / 00:39:07 | Cyrus Younessi | Sure. All right, so I guess moving on, I mean, this is really kind of open to the floor, but if nobody wants to jump in, one thing I thought we could discuss was gaging when the peg has been fixed, some ideas that, some indicators that I'm looking at are one is healthy two way flow around $1 so trading back and forth basically, not just looking at how much volume is cleared at $1 by itself but making sure that the supply overhang is taken care of, and we see some good back and forth between 99 and 101 or some tighter spread. |
| # / 00:40:00 | Cyrus Younessi | Another is inventory levels from various market makers and I think it might be a good time to start ramping up those discussions again, and maybe having certain market makers talk about maybe just instead of absolute numbers, maybe relative declines or percentage declines in their inventories, maybe what kind of targets there or how much supply they're targeting for their books. Another indication could be timeframe, the amount of time we're comfortable observing DAI being traded at $1 before we're satisfied that it's kind of found the right spot, having it trade there for one day is much different than having it be there for a week or two weeks or a month so these are some of the ideas we've been brainstorming internally but we'd love to hear thoughts from the community as well. |
| # / 00:41:06 | Richard Brown | Mateo came up with an interesting question. It's interesting to me because I don't know what it means but Mateo, do you have access to a mic or would you like me to read that for you? I will read it out unless you interrupt me so Mateo asks, "potentially we could approximate with options analysis, no?" in order to quantify bullishness, I don't know what options analysis is. Cyrus? |
| # / 00:41:36 | Richard Brown | Go ahead, Alex. What was that? |
| # / 00:41:39 | Alex Evans | It is a little bit like what Lev was saying with with the Brownian motion right where you have some drift and some volatility and then you estimate what different holders of their different CDP owners would expect to gain or lose in those situations, except you can get knocked out if the thing drops below to Vishesh's point so. |
| # / 00:41:57 | Richard Brown | Okay, Lev- |
| # / 00:41:58 | Lev Livnev | I think what Mateo's asking is you can either look at an options market and if you have some model of options pricing, maybe it's black shoals, then you can look at the prices of options on a market and then use that to reverse engineer what the implied volatility is, which is a nice way of it's like if you ever heard of the VIX or something for equities, that's like an index of volatility, and that's derived, reverse engineered from looking at an options market. My only concern there is that you need a good, efficient and liquid options market in order to be able to refer to this. |
| # / 00:42:36 | Lev Livnev | I would, it would be really cool if there was one for crypto. I'm not aware of anything. I know that they exist. I don't know if there's like an industry standard one that people trust. |
| # / 00:42:48 | Cyrus Younessi | Sorry, is this related to the current conversation or the previous one we were just having? |
| # / 00:42:54 | David Utrobin | The previous one. |
| # / 00:42:55 | Cyrus Younessi | The previous one, got it. Deribit does support ETH right now actually, Mateo and I think there's just very mediocre liquidity, from what I've heard. |
| # / 00:43:07 | Richard Brown | Okay, maybe I have a question about some of those things that you listed off Cyrus and one of the ones that I'm particularly hung up on, or at least most interested in is the inventory level problem, and how we can acquire those numbers in a way that's trustworthy without jeopardizing people's business positions and doing it in a way that benefits the group as opposed to, like I said, releasing business intelligence so do we have a plan or are there ideas about how we can approach different market makers and get those numbers and have them report them or is it going to be sort of on a voluntary basis? |
| # / 00:43:55 | Cyrus Younessi | Yeah, there's- |
| # / 00:43:57 | Lev Livnev | Sorry, sorry. |
| # / 00:43:57 | Cyrus Younessi | No, go ahead. Go ahead, Lev. |
| # / 00:43:59 | Lev Livnev | I don't know if it's already been brought up in this call. Rich, I know that I shared this idea with you and Cyrus, I've talked to you about it as well but if we go into this crypto economic limit, where technology allows us to do really cool things, then it's possible for a bunch of market makers on this call to provide zero knowledge proofs about certain pieces of information about their inventories, without saying that that's my address, or this is exactly how much I have, and so on and I actually have, this is more than a pipe dream so I've spoken to some researchers on this who believe that not only is this something that is possible with the zero knowledge primitives that have been implemented on Ethereum, but moreover, even from a UX point of view, this is something that might actually be not so far off so I'm just floating this as like, if there's sufficient interest for someone to want to take the lead on this kind of thing, it's something that we could that I think would really kind of benefit this governance discussion in the long run. |
| # / 00:45:03 | Lev Livnev | I think a lot of people would be disinhibited when talking about this thing, if they had a way of putting their money where their mouths are, but without just going on to this public call, and it's just potentially not worth it for many, so that's why I was proposing that. |
| # / 00:45:22 | Richard Brown | Yeah, I agree and I think that this is something that maybe MakerDAO would be happy to put into the comments so we can sweeten the pot here. We have a granting program. There's a long tail of utility, excuse me on the type of mechanisms that would allow that to happen for the rest of the ecosystem as well, so if anybody is listening and/or Lev, if you have connections, continue to pursue them, please. Let them know that there are resources available to help make that happen. |
| # / 00:45:50 | Lev Livnev | Sure. |
| # / 00:45:50 | Cyrus Younessi | I mean, Lev how would you trade off that idea against just using chain analysis to identify balances, but not reveal identities? Because in that sense, you could even target balances from people that I mean, it's just an idea but you could just basically try to get all the market makers whether or not they opt into this zero knowledge proof and potentially get a more accurate estimate of what the inventory levels are. |
| # / 00:46:23 | Lev Livnev | Yeah, I think you can absolutely look, try to look on chain just without anyone's permission just to look on chain and decide that oh, this looks like it's a market maker and their inventory is such, and therefore, whatever. That's a good, that's like a kind of parallel thing that you could do. I'm sure at some point, someone's going to come to this call with some kind of bunch of like addresses and some crazy theory about what that means. I certainly speculated about that kind of stuff. |
| # / 00:46:48 | Lev Livnev | I'm just talking about like a different thing, which kind of has a different meaning and governance, which is like, oh look, I found some stuff somewhere and it looks like this is an exchange wallet, and it's got loads of DAI and that means that was something something retail users blah, blah, blah, or list looks like a market maker because of the number of transactions that's coming out of their account and whatever. I'm kind of talking about a different thing, which may be less or more valuable, I don't know but it's like someone being able to back up what they're saying with their legal proof that they're honest, which I think has a different role, I don't know, to be honest. I think it would be a good start probably to start with something that doesn't require any opt in, like you said. If someone wanted to work on that, from that perspective, I think that that should be encouraged but in some cases, I think that's not going to give you enough information like obviously, you can get so much more detail from someone telling you about what they have and then also providing a cryptographic proof of it. |
| # / 00:47:47 | Lev Livnev | Then for example, how much, what kind of serious governance decisions could we really make based on some speculation about some dates and paper trail on the blockchain that you don't actually, you could have just been completely wrong like you could have completely misjudged it. |
| # / 00:48:07 | Cyrus Younessi | Yeah, I mean, at the same time that there's also, yeah, there's concerns I guess on all sides because in the other scheme, you could have market makers deliberately underreporting what they have for whatever reason, if they had some incentive to do so, right? |
| # / 00:48:24 | Lev Livnev | Absolutely, so any proof like that, you would interpret it as I have at least as much rather than I have exactly that much or not that much. |
| # / 00:48:33 | Cyrus Younessi | Do you think we should explore both options and potentially others as well, if there are other things we can come up with? |
| # / 00:48:43 | Lev Livnev | Yeah, that's what I'm saying. I think they're just, these are kind of different things but it would just be kind of neat, because there might be a bunch of market makers that are sitting here and they're like, I would really like to be able to attest to this fact, but I don't really want to go on to YouTube and and say it but if they teamed up, they can basically get a substantial anonymity set between them and then share the stuff that they want the proof. |
| # / 00:49:05 | Cyrus Younessi | Okay, cool. Let's discuss this offline again. |
| # / 00:49:09 | Matthew Light | You can get a real good sense of where the market makers are by looking at things like the GDAX, USDC, DAI market. You can see there's been over a million sitting at $1 for months now, and we haven't hit that yet. We haven't eaten any of that yet but we are starting to see some larger bids in the 96 cent area, which is good, which we haven't seen until the last couple weeks so just looking at the markets themselves will tell you something about whether things are going in the right direction and they are going in the right direction right now fortunately. |
| # / 00:49:57 | Cyrus Younessi | Yeah, I've noticed the improved buy side liquidity on Coinbase as well, a lot more bids stacked up. Incidentally, that is something that we can start to capture and monitor, although I think that's a little bit less of a priority compared to some of the other things we're trying to do right now. |
| # / 00:50:24 | Lev Livnev | On the subjects of the Dai/USDC market on Coinbase, I think that Coinbase's users need to complain that Coinbase needs to have a separate pricing scheme for Stablecoin to fiat markets because I just think it doesn't make sense to have the same conditions. I think that's seriously hamstrung this market. |
| # / 00:50:52 | Richard Brown | All right, well, we're getting close to the top of the hour. We've had some good luck previously with continuing the call afterwards so if anybody's interested in hanging out and just getting nerdy with money, please do so. Steven, did you want to wrap things up for us and so we can let you go? |
| # / 00:51:14 | Steven Becker | Yeah, I don't know what I can add to this discussion today because it actually has stepped up in quality. Thank you very much for all those that have contributed and really taking this to the next level where we can start talking about very practical solutions to the challenges but other than that, I can put nothing further to add, just a sign of appreciation and thanks once again for joining us on this call. That's it. |
| # / 00:51:43 | Richard Brown | Yeah, I agree completely. This is the picture of, this is my dream for what governance calls would be all about so thank you, everybody, for making my dreams come true. Thanks for all the questions. Thanks for all the graphs. If people need to leave, and you still have questions, please continue to ask those questions and link to the discussion thread on Reddit. I will be posting the videos, the audio and the transcripts to that thread. We'll also be continuing the discussion over the course of the next week so if there's any questions or things that still need to be talked about, please do it there. Otherwise, I'm willing to hang out for the next half hour and just take some random questions if it turns out that there's enough interest. If not, we'll put this thing to bed. All right. Thanks, Steven. Thanks, everyone, for coming. |
| # / 00:52:34 | David Utrobin | Thank you, everybody. |
| # / 00:52:34 | Richard Brown | All right, well, that does sort of wrecked a little bit. It also lets people with hard stops get out of the call in a way that makes sense so [inaudible 00:52:47], if you are still around, and in a position to use your microphone, you had an interesting question a while ago that sort of got buried about fixed term and variable term loans. If you want to ask that, it might be an interesting question to talk about. Is he still on the call? |
| # / 00:53:08 | Richard Brown | Oh no, we lost him so maybe I'll ask it. It's something that we've talked about a few times, more than a few times in the past, but every once in a while, it's good to revisit some old territory so, [inaudible 00:53:19] asked us a general question, what was the intuition behind not giving DAI loans pre determined expiration rates? Is the case for most other derivatives, most arguments around why DAI should be around $1 rely on arbitrage arguments wherein CDP holders can arb against the system? If the DAI had expiration terms of like six months, this will open up arb to everyone so Cyrus, maybe can you comment on, this is probably long before your time, but maybe you can comment on some of the thinking behind variable and fixed term loans. |
| # / 00:53:55 | Cyrus Younessi | I mean, I don't know what the intuition was, but just thinking about it right now, I mean, the no-term CDPs definitely offer much greater flexibility. I think you could kind of implement the fixed term loans as kind of a subset so it's something that could be built on top through some other service, for example. I'm not sure it makes sense. [inaudible 00:54:30] If you have a fixed term, couldn't you just when your term is up, you just pay off your loan and then just immediately open it back up again? I know it just kind of causes this unnecessary friction for the end user without a real, lasting benefit to MakerDAO. |
| # / 00:54:46 | Josh Wisniewski | Can I just jump in? Doing fixed term, the idea would be you get a fixed stability rate so you get a fixed stability rate for your terms. |
| # / 00:54:57 | Cyrus Younessi | Right, yeah. |
| # / 00:54:59 | Josh Wisniewski | You close, you open up a new one, you're at the new market rate. |
| # / 00:55:02 | Richard Brown | yeah, we're moving into fee swaps at that point though. |
| # / 00:55:07 | Cyrus Younessi | I don't think that was my interpretation of the original question. |
| # / 00:55:11 | Lev Livnev | I think to answer this question, you need to actually first figure out what exactly it would entail, because as Cyrus pointed out, if the fee is still floating, then it's just a weird friction. If the fee is fixed, then it is economically different and if you think about it for a little bit, you realize that well, I can't say whether it's good or bad, but it does make the system quite complicated because you then have this stickiness in the yield curve, you get this additional complexity from the fact that the CDPs are not fungible anymore because it depends like when they were created, and when they expire so then you have a market for these CDPs because if rates go up, I don't want to hold the CDP anymore. I might actually want to, they become kind of like bonds, so there's this whole zoo of different CDPs because the CDP that I opened today isn't going to be the same as the CDP that I buy from someone who opened it six months ago. |
| # / 00:56:05 | Lev Livnev | You have to imagine that this becomes like a more definitely, in my opinion, a more complicated system, even though it might be good. As Rich alluded, there are ways that you could build this on top of a floating fee system with swaps and kinds of derivatives. |
| # / 00:56:27 | Cyrus Younessi | Right. Is a variable, no term loan, kind of the most generalized form of loan that you could have? Then anything else is just a subset? |
| # / 00:56:40 | Lev Livnev | Yeah, that's what I think. I think that seems like somehow it should be possible to build that as a special case on top of that. |
| # / 00:56:53 | Richard Brown | Andrew, you had an interesting question. Do you have access to a microphone to ask that or do you want us to read it? |
| # / 00:56:59 | Andrew Redden | Yeah, no, I definitely got a mic. Multi Dollateral DAI is on the horizon and it seems that a natural progression there is that since you don't get to put multiple collateral types into a single CDP, I would open up a number of collateral, oh sorry, a number of CDPs across my collateral types, and then I'm pretty diversified in terms of my risk across the board but if I sent all those CDPs to a single point of ownership, like a set protocol token or something or an actual basket of CDPs, then I'm kind of creating an index and so if this becomes a more popular way to hold and manage your CDPs, you can start in theory funneling into an application that consistently refunds or your CDPs across your different hedge positions to maintain your index at a certain thing. If this becomes a more popular thing or an indication of where the market would go, will this become a first party offering through Maker? |
| # / 00:57:56 | Cyrus Younessi | Is the question that if there's a popular index like S&P basket, could that token represents the basket via collateral time? |
| # / 00:58:11 | Andrew Redden | Yeah, in one regard, but perhaps the idea of building an index CDP natively inside the platform, rather than me as a user personally collecting my CDPs together and then bundling them, the idea of bundling into an index CDP as a part of the platform itself. The S&P is a really good example so if you had an S&P token, and that became a collateral type for an actual CDP, could you take out leverage against these underlying synthetic assets and then just the concept of bundling CDPs. If I have a number of different CDP, I've taken out, and so ETH is a good example, if you got different collateral types or collateral ratios you could look at, even though I have all ETH from my collateral types, I'm going to have three different types of CDPs open, maybe one that's got a safer buffer on it than other ones and how can I like better manage and maintain those, because I can imagine if I get into the realm of like 10 to 20 CDPs, it's going to be quite cumbersome to manage outside of things. |
| # / 00:59:16 | Cyrus Younessi | Is an end user really going to be leveraging off of 10 to 20 different assets? |
| # / 00:59:22 | David Utrobin | There's another thing also to consider Cyrus is that even if they are like the CDP dashboard that's for Maker, it's constantly going to be iterated so you might not actually need to bundle them. They could be bundled in the interface. I mean, if your wallet owns all the CDPs, you might just have a really comfortable interface to work with so you don't necessarily have to do it on the on chain level. That's my kind of intuition. |
| # / 00:59:48 | Cyrus Younessi | Yeah, could just be a UX abstraction. |
| # / 00:59:52 | Lev Livnev | Andrew, so I think I get where you're coming from. Actually, there's been this notion floating around for a while that the fact that an MCD CDP only contains one asset and when setting risk parameters, the governance can't discount for diversification. In the real world, this is super practical because if you went to your broker and you bought one stock, like I'll say you wanted to get leveraged on Tesla, they would extend margin to you but their liquidation ratio, well that's not what they call it but the equivalent would be pretty high so you wouldn't be able to get more than, I think probably something like 2X or well, 2X to 3X to maybe 5X leverage on a single stock if you were lucky but if you came to a broker with a portfolio of stocks, let's say 20 stocks, 20 names from different industries, you wouldn't have trouble getting 20X, 30X leverage on a portfolio margin basis and that's because, if you have 20 stocks from different sectors, there's just no way that that portfolio could drop like 20% of that et cetera. |
| # / 01:01:17 | Lev Livnev | That really affects how people get margin because almost everyone is getting margin on a book, almost everyone getting margin on a portfolio basis, because single line margin like a CDP is actually just too constraining. I mean, I guess maybe futures traders work differently actually, so that's an interesting comparison there but the point is, there's definitely value to what you're saying and it wouldn't need to happen probably at the smart contract level because you need to give governance a way of expressing this view that they are willing to discount for diversification there. If we had hopefully one day, 20 different collateral assets which weren't super correlated, you would actually want to say that liquidation ratio on this should be really, really low and the stability fee should be pretty low, and so on. I think what you're saying is really reasonable and I do think actually that for some of these use cases you need, you need this to be at the contract level. |
| # / 01:02:14 | Andrew Redden | Cool, thanks.. Yeah, I see a lot of, I guess my side of things is, I don't have a deep financial background in terms of traditional assets, but as a programmer, I start collecting and playing with these things, like the management side of things, being able to bundle them and then be able to treat things as a bundle, you can see that like, it would allow you to heavily diversify risk in terms of getting liquidated and managing that side of things and then in terms of repaying debt, you can start looking at repaying some sections of what your collateral types debt are to offset your overall risk preference that you have against your CDP or your outstanding debt, rather than being forced into potentially giving up an asset that you need the utility or the value on or the liquidity of today, but I have a basket of other assets I can pull from the overall manage debt risk level. |
| # / 01:02:59 | Richard Brown | There's another question here that I think is kind of interesting and it's not as cool or as complex as Lev's observations but what if Set protocol, some kind of bundling token was considered as an asset class? Is that conceivable, Cyrus from your framework? |
| # / 01:03:14 | Cyrus Younessi | I think so. |
| # / 01:03:15 | Richard Brown | Are there risks associated with it? |
| # / 01:03:17 | Cyrus Younessi | Yeah, I mean, as long as you can break it down into what the underlying individual assets are and so for example, if you have Apple stock, and then you have S&P token that has some Apple stock in it, so long as you kind of are careful to not double count and increase your exposure. |
| # / 01:03:38 | Richard Brown | Set an example because that just lets you arbitrarily collect shitcoins together. |
| # / 01:03:44 | Cyrus Younessi | I don't think that would be possible because it's just way too much governance overhead so if there's like a super popular kind of few of them that makes sense so maybe like a general crypto basket that's kind of agreed on, it could be cool. |
| # / 01:04:03 | Richard Brown | Like the 20 or something. |
| # / 01:04:03 | Cyrus Younessi | Yeah, something like that, then I think that might make sense. |
| # / 01:04:07 | Richard Brown | Interesting. |
| # / 01:04:08 | Andrew Redden | Yeah, that's where I kind of got the idea of Coinbase does this index and that groundhog were about reoccurring payments and so as we expand our different offerings that we have for reoccurring payment supported assets, we focus heavily on ETH and DAI right now. We'll have Bitcoins once good price feeds for it come out but as we start to take transactions, we'll start to get a better understanding of where commerce is happening on our platform of where ultimately that those tokens are going and that itself kind of creates a signal like a commerce index and so in theory, if you wanted to just hold an index or hold a basket of tokens that are heavily valued in a commerce space, that gives you kind of like, almost like a bottom floor hedge against potential market movements and so I could just, that's where the thought kind of came around bundling assets and how you could use that in a CDP. |
| # / 01:05:05 | David Utrobin | I imagine that some Set protocol tokens, there might be like standards that a lot of people like to use so you'll see a natural emergence of the most comfortable sort of sets. |
| # / 01:05:19 | Cyrus Younessi | Yeah, I think so. |
| # / 01:05:26 | Lev Livnev | I wanted to point something out that was mentioned at the beginning of the call about how great it is that there's people been saying recently that it's really great that there's stuff like Compound and Dharma, the secondary lending markets. There's a more formal way to look at the symbiosis between Maker and these secondary lending markets, which is the comparing kind of in the real economy. Lending is done by a bank and then lending that's done kind of by the market, like when a company issues a bond for example or borrows in some other way. |
| # / 01:06:03 | Lev Livnev | I think that this is a worthwhile analogy, because when a bank makes, a company gets a loan from a bank, then when they get that loan, essentially M1, like the broad money supply, is expanded. Presumably, there's some level of M1, which is kind of the right amount for a certain economy, which is the amount of cash, not cash, the amount of money that you have in circulation, and some lending expands M1, and some lending doesn't expand M1 and central banks and bank regulators try to exert some influence on this but presumably, you could compare this to our situation with the weak Dai, which is that if DAI is below our target, then it means that M1 has gotten too big and we need to try to do more lending without expanding M1 and that is precisely people lending DAI through Dharma or Compound instead of printing it in Maker and us adjusting the stability fee or other risk parameters is like a central bank doing monetary policy or enacting some regulation on deposit or reserve requirements and this kind of thing to affect M1. |
| # / 01:07:24 | Lev Livnev | It's kind of turning the question on its head because it's not, I don't think it's really how central bankers think but it's just interesting to make this comparison that some lending increases the money supply and some doesn't. They're qualitatively different. |
| # / 01:07:36 | Richard Brown | That's some meme we been trying to extinguish for a while. Lev, do you have any observations about why people aren't simply converting their fiat to DAI and then taking advantage of some of the interest rates that we're seeing in the secondary lending market? |
| # / 01:07:54 | Lev Livnev | Sorry, what's the meme that you're trying to extinguish? I didn't follow. |
| # / 01:07:58 | Richard Brown | Sorry, I might have been too slow on unmuting myself. I was thanking you for talking about the distinction between these, the lock up on DAI through the secondary markets and whether that actually impacts the demand or the supply that we have lying around. The second question that I have for you though, is, and I always caution that I'm a financial neophyte, so maybe I'm missing something, but we have places like Compound and Lever and Nuo and this whole host of the secondary lending platforms that are very interested in lending DAI and from my uneducated perspective, it seems like the average person will go, well I'm just going to buy a bunch of, convert my fiat to DAI and collect 10% off of Lever or whatever, what have you. Do you have any insight into why that hasn't been a more attractive option for the open market arena? |
| # / 01:08:55 | Lev Livnev | I guess that's the $100 billion question. Basically, I don't know, the market needs to decide what the appropriate rate is. Well, who's to say that the rate that we have now or we had a month ago was the perfect one. You can get very detailed with the answers here, I think certainly like, perceived risk, how people imagine global settlement going and this kind of thing all should factor into it, or it should, if you're in the position of having to make this decision but yeah. |
| # / 01:09:28 | Richard Brown | True. I'm just looking for guesses. |
| # / 01:09:33 | Vishesh Choudhry | Rich, can I just take a stab at that question? |
| # / 01:09:36 | Richard Brown | Sure. |
| # / 01:09:38 | Vishesh Choudhry | Essentially, and I think there's a couple of things going on. One, people, there's a subset of people who are familiar with crypto, understand Dai, understand these systems, can get access to these assets so we're already filtering down a fair amount and I think one big effect is once you filter down to that set of people, I think a big portion of those people are spending their capital on actually buying ETH and Bitcoin and going effectively long on these assets leveraged or otherwise. |
| # / 01:10:04 | Richard Brown | That's a smaller Venn diagram as we get into it. |
| # / 01:10:08 | Vishesh Choudhry | Yeah, and the other effect, I think it's a 5%-ish spread right now for me to lend on Compound. It used to be higher. It also used to be lower, it's variable and I've tried lending on Dharma too. You get some smaller loans that people will take, but a significant volume for me to go and take $1,000, $2,000, buy the DAI and go lend it on Dharma. It's a lot of friction and transaction costs, as has been mentioned on here to get access to that yield if people are willing to take me up on that. |
| # / 01:10:48 | Vishesh Choudhry | I think one of those frictions of those transaction costs to the kind of capital opportunity costs are what people want to do, what crypto people want to do with their money, and then three, I think it's a very real concern. There is the spectrum, as I mentioned, of kind of bullish and bearishness in the middle of that spectrum, like there's a very fine line of people who are neutral and would, like I would personally be the type of person that would buy DAI and then lend it out because I'm kind of neutral, but I still want to get some yield but there is in addition to those transaction costs, this uncertainty or this volatility of like, okay, well, DAI price could drop, so I could take a haircut once I'm done lending and then I go to clear my DAI out, or the potential just uncertainty of that yield might not make it worth it to kind of go through all those steps. If we're just a 5% or maybe let's say, my personal cost of capital, which varies based on my risk tolerance is more than 5% and maybe there's something else that I could be doing for a higher yield with dollars, which, in fact, there is, and so |
| # / 01:12:02 | Vishesh Choudhry | I think the combination of those kind of three tiers of filtering down is what results in not enough people taking advantage of that arbitrage opportunity to just buy up the cheap DAI and then go lend it out. |
| # / 01:12:16 | Richard Brown | That's good insight, cool thanks. |
| # / 01:12:19 | Josh Wisniewski | Does that suggest anything for what will happen when the DSR is live? Will there be enough demand to actually do lockups? |
| # / 01:12:28 | Vishesh Choudhry | I think the DSR is different from secondary lending and I'm sure we'll have full jump on that point too but I think it's a different type of yield and different type of lockup and it has different effects on supply and demand. I know a lot of people have been talking about secondary lending in the DSR differently, but my general sentiment is that the DSR will be an important kind of leg to the system and will legitimately improve both the DAI price and kind of the opportunities for yield. |
| # / 01:13:01 | Lev Livnev | Yeah, predictably. Yeah, I agree. I agree. I do think they're different so like the secondary lending actually is, is very significant economically and then the DSR is going to be useful policy tool, but that's not satisfying anyone's need for credit because you're not actually lending to anyone. It's comparable to the interest rate that the Federal Reserve pays on deposits, which is like, it's kind of made up because you're not actually lending to anyone or financing any useful activity. It's just a lever that they have that they can coax things into doing what they want and for us, it's the same. Somehow, it's much more interesting to think about secondary lending than DSR actually because when you think about it, DSR is kind of just imaginary. How economically significant could it be that that the smart contract is just minting DAI without actually financing any productive activity. |
| # / 01:14:00 | Vishesh Choudhry | The other thing to note about secondary lending is that if there's a yield to be chased and there's people locking up, I don't know, 3 million, whatever in DAI in Compound to try to get that yield but if the borrow amount is significantly lower, and not all those people are being taken up on those loans, then that's actually just kind of locked up capital that's effectively just pulling DAI out of circulation and I think that's another interesting effect to look at for some of these lending platforms, particularly kind of like the pooled lending like Compound and a little bit Uniswap, where it's effectively just DAI that's sitting out of circulation. Now it's really hard to say how long it would sit out of the circulation for but if it's not being borrowed and then sold back onto the market, it is effectively being pulled out of circulation and I think helping to pull up the DAI price. |
| # / 01:15:00 | Josh Wisniewski | This is one of the reasons that I was sort of thinking that fixed term and fixed rate CDPs would be interesting is that stability fee could be set at whatever, 10% or something like that but if Compound's lending out at 13%, then you get that. You could draw from you CDP, put it in Compound and because you have a fixed rate, you get that secondary lending market. Would that sort of simulate something like the DSR or is it again totally different? |
| # / 01:15:48 | Richard Brown | All right, who wants to pick this one up because I'm not capable of doing it. Cyrus, you're up? |
| # / 01:15:52 | Cyrus Younessi | Sorry, can you repeat the question? I got lost for a second. |
| # / 01:15:56 | Josh Wisniewski | Sorry, so we were talking about fixed rate and fixed term CDPs earlier just as a theory, or what the different behaviors would be, so to encourage a secondary market, so if you have a fixed rate of, say, 10% in this case, and you're going to get that for a year, it means you can take that DAI and lend it out at any higher rate that you find in the secondary market at 13%, 14%, 15%. That can also help suck up demand potentially kind of like a DSR, does it have a similar behavior to the DSR? |
| # / 01:16:35 | Lev Livnev | To be clear, what you're talking about is taking DAI out of a CDP and then lending it? |
| # / 01:16:41 | Cyrus Younessi | Yeah, I think that's what he's saying. |
| # / 01:16:43 | Josh Wisniewski | Yeah, that's exactly what it is. Not obviously, not in the system that we have today but if fixed term and fixed rate CDPs ever exist. |
| # / 01:16:58 | Lev Livnev | Yes, because you can be sitting with this very big rates exposure, maybe you could have a way of insuring against that. I don't have any other answer other than that's an interesting universe to think about. |
| # / 01:17:13 | Josh Wisniewski | You're talking about your M1 type money supply where a central bank would have a certain rate, but they typically keep those rates quite low because what they're encouraging is a secondary market everywhere else. The central bank doesn't need to make profit, right? MKR holders are interested in making profit so we're a little different in that respect. |
| # / 01:17:41 | Lev Livnev | Sorry, I didn't follow. Which rate are you comparing MKR holders setting to the central bank setting explicitly? |
| # / 01:17:49 | Josh Wisniewski | MKR holders are, I don't think they're quite the same as a central bank. Central bank can print money whenever it wants. DAI has to be collateralized back all the time so Maker MKR holders are not really this, they don't have quite the same incentives, they are seeking a profit on their capital, MKR holders. |
| # / 01:18:12 | Lev Livnev | Oh, yeah. I wasn't trying to say that they're the same in every way. It was more but I think there's some interesting analogies and how some of these policy instruments work but yeah, sure. |
| # / 01:18:24 | Cyrus Younessi | Lev, I have a question for you. If the DSR was live today, how would you determine whether the DAI weakness needs to be solved by increasing risk premium on the collateral due to the demand of leveraging off that collateral versus some sort of general weakness that needs to be fixed to the DSR? Because discussing these last few days, if you have 10 collateral assets, it doesn't make sense to unfairly punish other collateral types that are appropriately risk managed appropriate supply demand and then one collateral type all of a sudden shoots off, right? |
| # / 01:19:06 | Lev Livnev | Yeah, I'm glad you asked. Actually, I'm not sure if Primoz is here. |
| # / 01:19:10 | Cyrus Younessi | He's not. |
| # / 01:19:11 | Lev Livnev | A discussion that we had a couple of weeks ago kind of changed my mind on this question, or rather now I'm more confused about it but he brought to my attention that you can't just view basically, we were trying to compartmentalize things by saying that when we're talking about the DAI price, we're talking about monetary policy and stability and when we're talking about collateral risk premium, we're just talking about collateral risk assessment and these things, we can kind of treat these two separate parts but as he pointed out to me, it's really not the case because there's one perspective on what's going on with credit demand, which is, firstly is idiosyncratic to a collateral type so it's not like credit demand across the whole portfolio will be moving in tandem, and secondly, there's a way that you can think of this question as being actually nothing to do with like, not from the perspective of monetary policy, but you can think about it from the perspective of risk premia and if the market is like pricing and more higher risk and higher return for an asset, that means that people will want to leverage it. People will be comfortable paying a higher rate for credit against this, but that also means that the flip side of the coin is that governance has to charge a higher stability fee for it because they're taking more risk. |
| # / 01:20:35 | Lev Livnev | If the return on this has just gone up, then presumably the affected risk of this asset has also gone up and this part, it gets a little bit sketchy because you have to think about what specifically MKR holders are, what risk they're taking, because they're not just taking a symmetric bet with the borrower on the asset because they're only really on the hook if you have liquidations that don't recover and that's like a tail. That's very much a tail risk. I mean, to this day, there has never been a liquidation in the system that hasn't recovered the full value of the debt so this is like the black swan of black swans for us because the day that we see that, we're going to forever, it's going to forever change our understanding of the world. |
| # / 01:21:24 | Lev Livnev | From that point of view, it actually becomes a little bit hard to say what is the, if you take some basic model of an asset's risk and return having increased and therefore people tolerating a high stability fee, what is the effect of that on the tail risk that MKR holders carry? That's almost impossible to formally calculate because you certainly don't want to just take some, you don't want to take some normal distribution or something for tail risk, because then you're clearly a kind of black swan foolish, so basically the answer is I don't know, but it's like, it just turns out this is actually a really serious problem. |
| # / 01:22:01 | Cyrus Younessi | Right, so the way I was thinking about it was I don't think that it's the expected return of the asset that they're buying with the DAI that's necessarily the factor here because for all we know, they would be doing the exact same thing if it was Bitcoin, right? They would lather up on ETH like crazy to buy Bitcoin if it was easily purchased through DEX's or whatever, but if you have, so there's a risk premium for the risk of the asset failing or whatever kind of the standard collateral risk, but then it appears that there needs to be a debt ceiling related adjustment like a debt ceiling related DSR specific to the collateral as well, because as a lot of credit or leverage is built off of one collateral, it's not that the market cannot just arbitrarily facilitate this extra demand for credit and there needs to be an adjustment made based on the debt ceiling is how I'm seeing it. |
| # / 01:23:08 | Lev Livnev | You're saying basically apportioning the DSR deltas across the different collateral types not equally as we do now but like the one that has the higher pricing gets more of it. |
| # / 01:23:17 | Cyrus Younessi | Well, I was actually thinking maybe like two, like a general one for because I was thinking even if you factor in that collateral specific DSR adjustment, you might still, there could still be a scenario where you're not, even if everything is perfect, you're not quite at equilibrium due to the compositional differences between DAI and USD, just whatever innate factors that make them separate needs to maybe have, there may be a gap that exists that needs to be filled by a system wide DSR, but then also these many individual DSRs as well. |
| # / 01:23:55 | Lev Livnev | Yeah, well, I mean, I guess what I'm saying is maybe it shouldn't be viewed as the DSR at all, so somehow maybe the credit risk premium need to be also very carefully following this conversation and you need to check to what extent is the expanding credit demand happening due to the fact that they've mispriced stability fee, but from a credit risk point of view. Do you see what I'm saying? |
| # / 01:24:27 | Cyrus Younessi | Yeah, but it doesn't make sense because a user would have like a surge of demand for leverage off of ETH, not because they think ETH is going to go up because as I said, they could take that DAI and buy Bitcoin with it, but rather the surge of leverage comes from the expectation that ETH won't suddenly crash to a liquidation point. It's like basically safe to lever off of without getting liquidated because they perceive ETH to be in a rising market. |
| # / 01:24:58 | Lev Livnev | I agree with you but would you agree that also there, especially in like a multi collateral world, there's a correlation between the assets that people are buying with their credit, and than the assets that are going into the collateral portfolio because it's pretty natural that if I want to buy some whatever Bitcoins with my credit, then I should really also be using those as collateral so I think that there's probably, I take your point, which is why I find this whole question kind of confusing, because it could be completely the case that people are levering ETH so they can buy U.S. Treasuries or something, so completely regulated. You can do a thought experiment, which is like suppose you're in a market where supposedly, basically what happens, so DAI was stable with the stability fee of 50 basis points, and then later DAI is somehow still struggling to keep up with the stability fee of like, 20% or something. Something has changed in that world and wouldn't you agree that there's at least some chance that the thing that's changed is the risk premium associated with the collateral. |
| # / 01:26:02 | Lev Livnev | I'm not saying that it's the only thing. I don't think it's like a simple model where one thing just drives the other but like it could be that this is an indicator that- |
| # / 01:26:10 | Cyrus Younessi | Wouldn't the risk premium, wouldn't the risk premium diminish as ETH perceived to be healthier and less chance of failure versus think about MakerDAO offering loans on ETH in December, when it looked like it was going to crash to zero any second. There's significantly more tail risk there and the stability fee was half a percent. Now there's [inaudible 01:26:33]. |
| # / 01:26:32 | Lev Livnev | I'm assuming this like efficient markets thing, which is that ETH should always have the same sharp ratio, which isn't really just you see this is where I'm coming from, which is that you shouldn't have well, in some sense, you shouldn't have that, if people think that ETH is going to go up, then that should be reflected in the markets expectation of the risk reward so if they think that it's, if they think the risk is lower, then the return should be lower. It's kind of weird if at two different points in time you had it was very low return but high risk and another time it was high, high return low risk because then there's some kind of dislocation. |
| # / 01:27:11 | Cyrus Younessi | Right, wait, so what explains that dislocation? |
| # / 01:27:20 | Lev Livnev | Well, maybe that there isn't one. Maybe ETH is kind of risk and return move in tandem to some extent is I guess what I'm saying. |
| # / 01:27:31 | Cyrus Younessi | Okay, but the risk of ETH to an investor, but see that risk reward, that risk reward to an investor is just like, if they have full upside/downside exposure, the risk to MakerDAO does not follow that sharp because we don't have that upside exposure. |
| # / 01:27:45 | Lev Livnev | Clearly, so that's what makes us kind of secure is because you have to see how this from an investor perspective risk, return gets reflected on Maker's risk assessment which is all about tail risk, which isn't trivial to decide how it plays. |
| # / 01:28:01 | Cyrus Younessi | Actually, it seems to me that- |
| # / 01:28:08 | Lev Livnev | I think it maybe it would be interesting to bring Primoz into this discussion because he had a strong, strong opinion about this risk being coupled thing, and he kind of opened my eyes to this being a possibility. |
| # / 01:28:19 | Cyrus Younessi | Sure, yeah, maybe we can talk about this next week on a call. |
| # / 01:28:24 | Richard Brown | Yeah, I was going to say this feels like a great topic so let's make sure we don't lose this conversation. |
| # / 01:28:29 | David Utrobin | Well, it's recorded. |
| # / 01:28:34 | Josh Wisniewski | The other quirk about having multiple savings rates is where do those savings rates end up going? Do you get like colored coin Dai, one per collateral type that gets a different DSR so you lock up what got inflated or is oversupplied or is it just going to any Dai? |
| # / 01:29:00 | Cyrus Younessi | Yeah, I think that the standard DSR is just a general Dai. I mean the collateral specific adjustment I was talking about was not actually a way for people to put their DAI somewhere but rather what kind of additional premium needs to be charged on it. collateral that's causing the peg to drift. |
| # / 01:29:23 | Richard Brown | Yeah, we should be clear here that DAI has to remain fungible and so any DSR would end up being a blended DSR after taking all the individual collateral types into account, right? |
| # / 01:29:34 | Josh Wisniewski | Right, but then the point of the DSR is if you have a 5% rate on, because Dai's always one to one, always printed and loaned out at a finite number. You never have more people taking CDPs than you have DAI in existence so if you take a 5% rate from CDP owners, that gets paid 5% to DAI owners. |
| # / 01:30:06 | David Utrobin | Yeah, but that's only DAI owners who have it locked in the contract. Not all DAI holders get the DSR. |
| # / 01:30:14 | Josh Wisniewski | Oh, okay. I didn't know that. |
| # / 01:30:16 | David Utrobin | Yes. |
| # / 01:30:16 | Josh Wisniewski | I thought it was all DAI holders. |
| # / 01:30:18 | David Utrobin | Yeah, no, the equation is just the DAI holders who lock it in that contract. |
| # / 01:30:29 | Richard Brown | All right, we're at the hour and a half mark and this was a good conversation, but I'm concerned about the likelihood of anybody watching a two hour governance call. If there's other super pressing questions or conversations to be had, let's go to the chat. It looks like there's going to be a lot of people's breaking off into individual discussions, which I'm super happy about. If there are questions that didn't get addressed in the call, please, I'm begging you at this point, go to Reddit and continue the discussion in the mkrgov thread, but I have a hard stop so I need to bounce out and that means I need to stop recording so thanks, everyone for joining. Thanks, Lev for your deep insights. That was hyper valuable. Let me know what your rates are because I want you back in the next call as well so thanks everyone. |
| # / 01:31:17 | David Utrobin | Yeah, great call. |
| # / 01:31:17 | Richard Brown | Bye. |