Governance and Risk Meeting: Ep. 38 (June 6 - 2019)¶
Video | Audio | Discussion
| References | Person | Text |
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| # / 00:00:00 | Richard Brown | Did it start already? I guess so. All right, no delay. Nice. |
| # / 00:00:08 | Richard Brown | Hello, everyone and welcome to the June 6th edition of the Scientific Governance and Risk meeting. We have a more interesting ... we're shaking things up a bit; I shouldn't say more interesting because they're always interesting. But we're doing something a little different today. |
| # / 00:00:20 | Richard Brown | We've been talking, in the last few calls about the need to start transitioning away from focusing exclusively on the peg. Even before that, we talked about how these calls will have different themes based on what the subject matter is. Previously, they've been focused exclusively on supply and demand and balance. It's too early to say that we're out of the woods in that area, but I think that we're past the point where it requires a full hours meeting every week in order to manage. We'll still be touching on it, but there's a lot that needs to be discussed in these calls. |
| # / 00:00:59 | Richard Brown | We're going to be improving governance; the way that governance works in the next couple weeks or months. We need to start discussing what that might look like. And of course, we have multi-collateral DAI coming at us soon, trademark, and we need to get prepared for that, and that means we need to talk about collateral risk and happily, we have a series of experts on the call today which are going to start setting the stage for us. I'll hand that off to Cyrus in a second. |
| # / 00:01:27 | Richard Brown | Before we get too deep in the weeds though, I want to repeat the same preamble that I do every week. We have a lot to go over in these calls, far too much for us to handle with a back and forth, or with a few moderators speaking. So, I'm going to post a link into the Zoom group chat, which is a link to our r/mkrgov subreddit. In that subreddit every week, we have a thread; in that thread, there is an agenda for the call that we're having right now. There is also a summary of the call that gets posted there in a couple hours after we're finished, and that's where I would like people to continue the discussion and continue the debate, dig into issues, surface some more, and then keep the conversation going. Because there isn't enough time today to do all of the things we need to do. If you have questions that didn't get addressed in the call, please add them to that thread. Next week, if you feel that there's things that you would like us to address in the calls, and you see the agenda thread come up on Reddit, please feel free to pre populate, let's front-load some questions into these things so we have things to address or we know, or we know what's on people's radars when we come into these calls. |
| # / 00:02:51 | Richard Brown | The other part of my preamble is that we are very, very, very interested in having people in this call join into the discussion and that means that we want people to ask questions, offer their comments, offer their insights. So if you have something you'd like to say, and you have a microphone, please just jump in immediately and start saying it, or ask the question. If you don't have a microphone, type your question into the group chat and one of the moderators will be keeping an eye on those things and we will ask your questions. |
| # / 00:03:19 | Richard Brown | We also have some additional functionality with our transition to Zoom today, where people are able to raise their hands. There's some other functionality that we'll be introducing soon with breakout rooms and light voting and signaling and stuff like that. But until then, let's take it step by step. So, if you have a question, you can attempt to raise your hand in the participants window, and possibly we'll see it. Otherwise, you can just, like I said, put your question in the chat and we'll read it out. |
| # / 00:03:51 | Richard Brown | That's probably it for the preamble today. I am going to talk briefly about governance and then I'll hand it off to Cyrus for a significant amount of things that he needs to get us familiar with this week. |
| # / 00:04:02 | Richard Brown | The theme for my chat today, is brevity, number one. Secondarily, it's securing the DAO. And this is something that I would like to keep on reinforcing because we've been talking about some issues around governance, and the issues that we're having around governance are not crypto-issues and they're not MakerDAO issues. They are human nature issues. We have a voting system that we need people to participate in. We need people to feel like they're engaged in that process. We need people to feel like they understand how it is they can best contribute to this. And we need them to [inaudible 00:04:40]. |
| # / 00:04:43 | Richard Brown | We need them to feel like they can make a difference. Like I said, these are things that are common to every single voting system that's ever been created in the history of humanity. As far as I'm aware, the solutions to these problems are just communication and outreach and putting the right tooling in front of people. There's no magic bullets here. Potentially, crypto will save us at some point, I'm not sure what that's going to look like or how it's going to work; perhaps somebody will come up with an un-gameable incentivization mechanism. Maybe that's what everybody was waiting for. I'm not holding my breath. Maybe we move to a delegation system. There's all kinds of solutions down the pipe. |
| # / 00:05:25 | Richard Brown | But in the short term, the solution to the problems that we have are fairly well established. I want to talk ... actually, I'm just going to list them out and leave it at an exercise for the listener because we are very interested in getting as much feedback as we can about how to improve the system. We saw some great interaction with the thread recently in the Maker Gov subreddit, offering some feedback about how we can improve things. |
| # / 00:05:52 | Richard Brown | But we need to get not only more voters out to vote, we need to get more Maker out staked, because we're in a situation right now where the system is not as secure as it should be. One of those examples, as a live example right now, if you look in the polling system, you can see that 8,000 Maker was staked on 12.5% stability fee. And perhaps, I shouldn't be too hasty; perhaps that person is a financial genius and just sees something that nobody else sees, and that's the stability fee that we should all be using right now. |
| # / 00:06:31 | Richard Brown | The general consensus in these calls and in the chats and in the graphs seems to be that that's absolutely not the case. And so, the question becomes, "Why did this happen?" Well, actually, there's two questions: why did this happen, and how do we secure the system against being moved by people that are wacky in their opinions, possibly? We'll get to the answer to the first question in a second. The answer to the second one is that, if the peg is stable, that doesn't mean that Maker should be coming out of the governance portal, or that your incentive to vote hasn't gone away, that the requirement of having an active voting community has stopped. |
| # / 00:07:17 | Richard Brown | Voting requires diligence, and if we turn our back on the system and if we ignore it for a couple weeks, we might find that people with outlying opinions might be able to move the system in ways that the centrists are not expecting. So we need to keep an eye on that. Happily, in the last ... or, I shouldn't say happily because I'm expressing my opinion. I literally have no idea what the stability fee should be. I listen to what the risk people say but my assumption is that behavior ... |
| # / 00:07:49 | Richard Brown | If you're not speaking, can you make sure that you're muted, please? Somebody just coughed for us. Oh, [inaudible 00:07:58]. |
| # / 00:07:59 | Richard Brown | What was I saying? If you ... can anybody, Cyrus, what was I just saying? I forgot. Oh, you weren't listening in? |
| # / 00:08:08 | Cyrus Younessi | Talking about you don't know what the right stability fee is. |
| # / 00:08:11 | Richard Brown | Oh, yeah. You're right. Yeah, I'm not a financial wiz, I don't know what the right stability fee is. But in the last day or so, a larger amount of Maker came out with a centrist position, which feels like the more rational option. But we cannot allow ourselves to assume that other people are going to be driving this bus. Everybody has to assume that they're the ones that are driving the bus and we can all drive it together. The analogy fell apart at the end, but you know what I'm talking about. |
| # / 00:08:37 | Richard Brown | So there's ... securing the system is key for all of us. Please get your Maker in there. Please keep track of what's going on. The first problem that I alluded to, and I skipped over, is how do we solve some of the issues that we have in a governance system that's been plaguing humanity for all of time. And here's a rapid fire list of the things that we're already doing. If we've missed something, if there's something the community [inaudible 00:09:03], people have ideas, please let us know. And I'm going to start hitting some themes that I've talked on in many, many other calls. This discussion we have right now is a very small, small window with a very small demographic. We cannot fall into the trap of relying on this one hour, one hour and a half time period as being a place where decisions get made and information gets dispersed. This is the first of many places where information gets dispersed and people have to base. The decision making process happens over time, through debates and texts and chats, and then ultimately happens in the governance portal. |
| # / 00:09:46 | Richard Brown | But we need more globally distributed calls and that's something that we're working on right now. We're building a solution for the world, and we cannot have debates in the most convenient time for North American viewers. We need to have calls in the APAC Region, we need to have calls in Latin American, we need to have calls in friendlier timezones, in Europe, and those are going to be popping up in the next few months, I think. Month of two, let's call it that. It's going to take a lot of work and a lot of coordination. We need to figure out how these individual calls sync up and how they stay on the same page and continues their correct narratives. |
| # / 00:10:26 | Richard Brown | We are continuing to ... we're providing summaries of these calls for people that don't have the luxury of devoting an hour and a half a week to MakerDAO. Those summaries are recaps of the discussions around governance, around risk, with handy links into the YouTube videos for people that actually want to see what was discussed. Those have turned out to be very popular. I think that the next step is to begin translating those into the top five, ten languages of our stakeholders. And begin having our community members rebroadcast those out so we can get a global reach. So at least people know what's happening, or what was discussed in these calls. |
| # / 00:11:06 | Richard Brown | We have the voting dashboard version 1.5, which we've been calling it internally, is coming out soon which will provide us more flexibility when it comes to additional polls. So we can pull from more than just a signal and stability fee, we can pull for a new cadence on the votes, we can pull for a new stepping of the rates that we're pondering for the new stability fees, which is going to be very important. We are constantly iterating on our analytics, which I think is one of the key pieces of this puzzle. We need to be in a position where voters have very clearly understood and readily accessible resources that allow them to say to themselves, "Well, it's time for me to vote. I need to go to this page and figure out what the state of the system is, make up my mind, and then vote." There needs to be a very clear path for informing voters and then allowing them to exercise their will. That's something that we're working towards. |
| # / 00:12:10 | Richard Brown | We have a set of tools that are coming out that allow people with custodial solutions to engage in the voting system as well, which we're very excited about, and I'm sure that people have read some blog posts about that. Coinbase will be the first one. |
| # / 00:12:23 | Richard Brown | So, that's the ... that's what I'm going to leave people with that voting is tough, governance is tough, the solution to making these things successful is work. It's not magical algorithms- |
| # / 00:12:35 | Cyrus Younessi | What was the Coinbase thing you said? |
| # / 00:12:38 | Richard Brown | Coinbase custody. There's some blog posts about that, that people can enjoy on the Internets, that explain some of what that's going to look like. But it's part of the solution to allow larger holders the ability to more easily interact with the voting system. |
| # / 00:12:55 | Cyrus Younessi | Right. |
| # / 00:12:56 | Richard Brown | So yeah, governance is hard. The solution to a hard problem is hard work. That's not what people like to hear, but that's just the way things go. We're going to make it easier for people to do that work by providing better tooling and greater visibility into what's happening. These are things that are all rolling out soon. |
| # / 00:13:12 | Richard Brown | There's some hiccups I think right now with the way that we're doing governance, but as always, I am encouraged by the fact that we iterate so rapidly and even the governance system that we have right now is radically improved than what we had a month ago. So, I can only imagine how awesome it's going to be in six months, which is me leaving things on a high note. I like to do that because it scares people sometimes. |
| # / 00:13:35 | Richard Brown | All right, Cyrus, I'm going to hand things off to you at this point because I know that you have a tremendous amount to go over today. |
| # / 00:13:41 | Cyrus Younessi | Yeah. Really quickly though, about governance. I think one interesting aspect is that us having the really high cadence with polling helps mitigate any mistakes or ... not mistakes, but any undesirable outcomes with the governance process, right? Because if some crazy vote goes through, we can potentially undo it within a week or so. |
| # / 00:14:09 | Richard Brown | Yeah, I agree. And I think that ultimately, the situation we have here is that we don't have a polling or a push solution that allows us to communicate with voters, which is tricky. This is something ... a larger thread that we need to sort of untangle here, but we need to be able to be in a position to alert people; everybody who is holding Maker that, "Hey, something weird happened. You need to vote on this thing," or, "Nothing weird is happening," or, "We're not having a vote this week." What that looks like, I don't know yet, but without ... the regular cadence gives us an opportunity to create this expectation, people need to check in every seven days, they know that [inaudible 00:14:48] to deal with things. If we moved it to, "Let's only vote when things are important," how do we bring people back when something important happens? |
| # / 00:14:56 | Richard Brown | These are the questions that we need to start figuring out- |
| # / 00:14:58 | Cyrus Younessi | Yeah, I think it's pretty off topic, but maybe not that much. But assuming we slow down the cadence to once every month or once every quarter, or whatever, it'd be interesting to see if we could create some sort of emergency disaster response situation where how quickly can we corral enough MKR voters to pass through something that- |
| # / 00:15:22 | Richard Brown | Have a fire alarm? |
| # / 00:15:24 | Cyrus Younessi | Exactly. And potentially running even fire drills to see how that would work. |
| # / 00:15:31 | Richard Brown | Vote or be slashed. Yeah, it's something to think about. |
| # / 00:15:37 | Richard Brown | All right, so, thanks Cyrus, I hadn't assumed that anybody would have a question for me. If anybody does have a question about governance, plans for the future, what we're thinking about, please let me know. Ask now. Type it in the chat. Add it to the Reddit thread. |
| # / 00:15:53 | Richard Brown | Otherwise, Cyrus, I'm going to let you take it away. |
| # / 00:15:56 | Cyrus Younessi | Okay. Let's jump into the monetary policy and DAI price analysis. Vishesh, are you on the line? |
| # / 00:16:10 | Vishesh Choudhry | Yes. So, Zoom is the new tool [inaudible 00:16:16]- |
| # / 00:16:21 | Richard Brown | Vishesh, have you found the live annotation feature yet? |
| # / 00:16:26 | Vishesh Choudhry | I'll be honest, I have not used Zoom very much, so I'm still a little unfamiliar. |
| # / 00:16:31 | Richard Brown | I'm expecting technical difficulties for this call, but it's going to be fun. I'm going to start writing on your graphs while you're talking with them. |
| # / 00:16:39 | Vishesh Choudhry | That's my fear. Okay. So, in terms of what's been going on with DAI price. So, Coinbase is a new component to this breakdown, which is great. The spread is kind of ... it's drifted below a bit recently. So, I think that's something to watch. For the past week or two, there'd been kind of a large spike centered on a dollar, and then kind of a little bit more normal distribution. So this is kind of skewed a little bit now, which has been the case for the past few days. I think that's definitely something to watch. |
| # / 00:17:28 | Vishesh Choudhry | Uniswap, there was an interesting discussion about slippage on DAI price. So, Uniswap, for example, you'll tend to see this more rectangular distribution across different price points. Whereas, Oasis, you'll tend to see a huge centralization around a dollar, or whatever the median price is. And then, some of these smaller exchanges, you'll see more of the outlier prices. |
| # / 00:17:54 | Vishesh Choudhry | I think it's interesting to see some of these trends emerge. And then, Coinbase is kind of chunked around the middle as well. It's interesting to see sort of with people constructing a lot of cross exchange trades and dYdX playing more of a roll and stuff like that, I think it's going to be interesting to note just how people are trading DAI and where, and what kind of patterns start to emerge for what prices you can get on different platforms. |
| # / 00:18:23 | Vishesh Choudhry | So let me head over to the main [inaudible 00:18:30]. Okay. I'm always fearful of live updating data as we talk. Something could break. Yeah, so the DAI price has been doing pretty well. There's been some variation dipping below in the past week or so, but for the broader one month timescale, it's been fairly steady, basically around a dollar. |
| # / 00:18:56 | Vishesh Choudhry | Now, it's going to be interesting to see as the stability fee drops, what I think was the first, most noticeable thing was just more variation in price, which really isn't shown here, because this is more of just that daily volume-weighted average. You do see some of it dipping below a dollar clearly, but it just really doesn't show the variation as much, which is something that I can add as an additional layer for next time. |
| # / 00:19:23 | Vishesh Choudhry | But, through kind of repetitive observations of the spread on here, I did observe that there was a wider distribution below a dollar than there had been before. So I think that's ... maybe one of these leading indicators that will start to emerge is when the stability fee is lowered, when there's more leveraging behavior. I think whereas in the past, DAI would just immediately start trading below a dollar and stay below a dollar. |
| # / 00:19:53 | Vishesh Choudhry | The economics have changed a little bit, and I want to talk about some of the psychology of this. But I think the situation has changed a bit now, where when DAI dips below a dollar, there is an increased likelihood that people will actually take that as an arbitrage opportunity and actually buy up DAI. It's very hard to say that for sure, but I think given increased variability of prices below a dollar, but still volume weighted, remaining close to a dollar, I think is a data point that evidences that case. So, that's maybe something to watch though as a leading indicator of potential drifting from the peg, is just more of that variability in price below a dollar. |
| # / 00:20:39 | Vishesh Choudhry | So, stability fee was just changed. It's going to be entirely too soon to see any effects from the most recent change. And I know a lot of people will claim otherwise, but I think an important note with the governance process and the timing of all this is just to kind of take things slowly and with a grain of salt because I think if we try to draw too many conclusions off of short timescale movements, we're going to be chasing our tails in terms of just following noise rather than signals. And I know that was a big discussion topic on the rocket chat this week. |
| # / 00:21:15 | Richard Brown | Yeah, Vishesh, were you going to go into [crosstalk 00:21:17] detail later on, or should we talk about that now? |
| # / 00:21:24 | Vishesh Choudhry | I will go into that closer toward the end. |
| # / 00:21:26 | Cyrus Younessi | Okay. |
| # / 00:21:28 | Vishesh Choudhry | So, just want to get through a couple of the price things first. In terms of DAI price and ETH price, I think this trend is reversed as we talked about over the past month or so, where it's not necessarily the case that when ETH price is rising, DAI price is falling. Whereas in the past, that relationship had been stronger. |
| # / 00:21:52 | Vishesh Choudhry | There are a lot of reasons to unpack and I know there were times when there were significant price movements in ETH and large quantity of people unwinding leverage and selling ETH for DAI. So, in the past, that was an easy explanation. As that unwinding should have winded down, theoretically, that kind of over arching effect would decrease. I don't think we can really use that as a justification anymore. So now, it's really interesting to start to examine why DAI and ETH have actually tracked fairly well. And I think that now really starts to get to more of a discussion about derivatives and lending, because I think that's a huge part of what's going on. |
| # / 00:22:47 | Vishesh Choudhry | So just to give you your classic update on supply ... so, the supply had ticked up a little bit in the past few days, most recent was around 82 million. There were a few days where there were some significant draws. There were also some significant wipes on those same days. But the draws had kind of outweighed the wipes, which is very interesting to note. I do think, and we can talk about the loan origination. I do think a lot of the refinancing has slowed down actually to where there are fewer people that are moving their loans from Maker to the secondary platforms. Partly, it makes sense since the stability fee has come down in the past few weeks, but it also, I think, was a big initial burst, especially with Compound v2 being recent released, dYdX starting to pick up some steam. |
| # / 00:23:49 | Vishesh Choudhry | Inherently, I think those things would have driven an initial spike in refinancing. But that would naturally have slowed down. So, that makes sense. And then, obviously, the rate changes make things a little bit more attractive to just stay on Maker. |
| # / 00:24:06 | Vishesh Choudhry | There's a lot of complex discussion that we're not having, I think because it would have just been too much noise again, around the differences in collateral requirements and the differences in liquidation penalties between different platforms, and how we should reason about that in terms of changing our expectations of what a rate means on a given platform. And it's a really complex question to consider, how do we discount a 17% rate on Compound versus dYdX, and really start to think about those kind of non ... I don't want to say financial, but non-rate differences. |
| # / 00:24:52 | Vishesh Choudhry | So, the circulation of debt has just kind of consistently followed this trend. The rate of change has definitely slowed down. So, you know, more old debt had been cleared out, more new debt had been drawn. That seems to have just kind of held steady, and I think, is leveling out to like a fairly equilibrium point. But what's interesting is that equilibrium point is sitting with the age, the average age of debt that is open, lower than the average age of debt that I closed. So, open debt is younger than closed debt, which means consistently, we're sort of eating into that backlog at a fairly steady state rate. Which is really interesting. Just loading the last graph ... |
| # / 00:25:46 | Vishesh Choudhry | But yeah, sorry, actually, Rich, since this is loading, that might be a good time to touch back on your question. |
| # / 00:25:54 | Richard Brown | Well, yeah, I have three questions for you today. One of them, I guess, is kind of an unanswerable question. And that is, how long does it take for us to see cause and effect in this system. So, we've changed the stability fee, what's a reasonable amount of time we should be waiting based on the graphs we've seen before we change it again, I guess? That's a million dollar question, right? |
| # / 00:26:18 | Vishesh Choudhry | Yeah. I think that was my quote. Yeah, it's a million dollar question and there's been a lot of back and forth about this on the rocket chat in the past week or so. My short answer, which I think is maybe me copping out a little bit, because it's an easy answer, is that there's no defined time period. I do think there is like a certain, minimum level of resolution that we'll never be able to act faster than in the way things are currently structured, and that's probably like a three to five day timescale. I don't think if you change the stability fee, you can reasonably expect to have seen stabilized effects of that change faster than three days, and I think probably more reasonable, is not faster than five days. |
| # / 00:27:14 | Vishesh Choudhry | There's a huge, huge element of guesswork that goes into picking that date range. Now, the bigger thing I think is not what's that minimum timescale, because as long as we're agreed to wait like three days before making a conclusion, the bigger thing is actually, and I don't think that's super contemptuous. The weird thing I think is when you make a change, and then there's a subsequent change going on in the environment, how do you decide to reset that timescale. And that's a much harder question, right? |
| # / 00:27:50 | Vishesh Choudhry | Because if we make a stability fee change, and then tomorrow ETH drops by 10%, that significantly changes the economics of the situation and could potentially overwrite any signal that we're seeing from that stability fee change. And yet, people might, at the simplest level think, "Oh, we dropped the stability fee, the price stayed the same. Let's drop it further." Or they might think, "We dropped the stability fee, price dropped. Let's increase it again." But it might have nothing to do with the stability fee because there's a more significant signal going on. |
| # / 00:28:20 | Richard Brown | That raises two interesting points. One of them, it might be ... and this might be an idea for us to explore in another form or at length, but perhaps the cadence that we're actually searching for is dependent on the deviation from the peg. Instead of the deviation is 5%, then we vote weekly. If the deviation is 2%, then we vote biweekly. If it's 1%, we don't vote, right? |
| # / 00:28:43 | Richard Brown | That's an interesting thing to explore. |
| # / 00:28:46 | Vishesh Choudhry | Yeah, that's one way of thinking about it. What I would actually suggest is think about what are the overriding signals, right? So what are the big bullies in the room that push around the DAI |
| # / 00:29:00 | Vishesh Choudhry | DAI price, and that's primary the ETH price. So when there is significant movements in ETH price, we know this. There is significant changes in transaction volume on DAI. We know that tends to correlate with movements in DAI price. [crosstalk 00:29:14] Kinds of things that ... Well, if not a leading indicator, right? Because leading indicators are very difficult, because we know it has an effect. Do we know whether that effect is positive or negative at any give point in time is actually not as predictable. There are different use cases and different reasons why it might switch from a positive to a negative correlation, which is really a bit like there's an underlying behavior that's correlated. That underlying behavior manifests in the price, but is not an easy one to one mathematical, linear relationship. |
| # / 00:29:50 | Vishesh Choudhry | What I'm saying is, if there's a significant amount of movement in ETH price, if there's a significant amount of volatility, then you should have a decreased degree of confidence in the correlation between your change in the stability fee and whatever the impact on DAI supply and DAI price. That's what I think it's about. It's about discounting your level of confidence in the effects of the changes you've made. |
| # / 00:30:16 | Richard Brown | That's another good point too, because we need to keep in the back of our minds that the price that DAI is trading at is half the picture. We still need to understand inventory levels, because they could be accumulating or decreasing at rates that are not entirely visible to us, so it might look like everything's fine, but people could be accumulating large inventories behind the scenes, and becoming increasingly unhappy. |
| # / 00:30:41 | Vishesh Choudhry | Yeah, and so this is actually, I think, where we get back to, it's good to stay in touch with what's going on in the market maker world. It is also an important data point to look at the amount of DAI that trades above and below a dollar. That's why I've started to show this spread more often is because I think it's important to highlight the difference between the averages just kind of came out to a dollar, versus more DAI was trade below a dollar. |
| # / 00:31:13 | Vishesh Choudhry | I think, when more DAI is traded below a dollar, it's generally because people need access to that DAI, or want to dump that DAI in a move of relative desperation. What that indicates is that there is some underlying movement going on, some changes in the ecosystem. I think we tend to lose sight of that when we just look at the average sometimes. |
| # / 00:31:37 | Vishesh Choudhry | The other thing to note is collateralization ratio. I just want to make sure we touch on this. This has come down fairly significantly in the past ... Well, we keep redefining our definition of significant has ... It went from 370, 360 to 540. But it has now come down from 540 to 460, which is interesting. I think this lines up, at least in one way of looking at it, with what's been going on with the DAI price, what's been going on with supply, right? The DAI supply has come up a bit. There were some significant mints, and the DAI price peg has, I would say, gotten a little bit looser, although still centered around a similar level. |
| # / 00:32:29 | Vishesh Choudhry | What that says to me is that there has been some uptick, again, in leverage. This was expected. It took a lot longer than expected. But I think as ETH prices come down, to some extent, people have seen that as attractive again in terms of levering back up on ETH, and using DAI as a method of doing that. It is interesting to note that this time, unlike before, it didn't completely floor the DAI price. |
| # / 00:32:58 | Vishesh Choudhry | It may be happening in smaller volumes than before, or it may be that DAI is actually a bit more stable now from a psychological mechanic, and it's very hard to sift out the the difference of the two, because we don't necessarily know how much leverage people are actually getting from selling DAI, because it's hard to tell who is buying and selling which amounts of DAI. But I think the takeaway here is decreased collateralization ratio, and increased supply. People are comfortable taking a little bit more risk at the current ETH price levels, and at the current stability fee. The combination of those two things, just naturally, you would expect a little bit more leverage seeking behavior. |
| # / 00:33:47 | Richard Brown | [crosstalk 00:33:47]- |
| # / 00:33:47 | Vishesh Choudhry | I will pause there. Yeah. |
| # / 00:33:51 | Richard Brown | Sorry, I have one final tricky question here. Can we assume that, all things being equal, if the peg appears to be stable, should we be lowering the stability fee as a best practice in order to see how close to destabilization we can get? It sounds like a bit of a leading question, but I'm wondering if that might be some of the behavior we're seeing in the voting, the maker, voter, holders, are voting, is that they're attempting to make the rate as competitive as it possibly can without destabilizing the peg again. Is that possibly what the behavior we're seeing? |
| # / 00:34:33 | Vishesh Choudhry | It is sometimes difficult to guess as to the reasoning that voters have. But I do think that naturally, I would expect people to vote down the stability fee when they see the DAI price peg is stable, because ultimately, they don't want to be paying that higher cost to use Maker, if they don't have to. So I think it's a first order level of thinking, but it's not necessarily wrong, in that it is better for the system to be cheaper, as long as the system is functioning properly. [crosstalk 00:35:13] |
| # / 00:35:13 | Vishesh Choudhry | I think that has always ... Yeah, sorry? |
| # / 00:35:17 | Richard Brown | Sorry, it's always hard to guess what people are doing. I tend to ask you unanswerable questions, so I'm mostly looking for your opinion, I think. Matteo, you have your finger on this kind of pulse with your DIPOR, right? I think there's some overlap here, because, in my opinion, and I'm willing to be corrected, that MakerDAO is essentially setting the upper bound for the DIPOR right now. Is that what you're seeing Matteo? And do you think that, perhaps, voters are lowering these stability fees for potentially self-interested reasons, but also in order to increase competitiveness across the other lending platforms? |
| # / 00:35:59 | Matteo Leibowitz | I haven't personally come to any conclusions there. I think it would be quite interesting to look at the overlap between MKR holders and DAI holders, because if there is significant overlap, then I guess you'd expect MKR holders to be voting for a lower stability fee. But if there isn't, then that line of thinking doesn't quite add up. |
| # / 00:36:33 | Vishesh Choudhry | Matteo, I do want to ... one of your questions or comments, actually. So that supply has basically stayed flat, but collateral drop is due to a drop in ETH value. Well, mathematically, the collateral ratio will drop when ETH price drops, but what we've seen is that, at least within a four or five day time scale, after ETH makes a significant price movement, people tend to move the collateral ratio back to what they're comfortable with. |
| # / 00:37:06 | Vishesh Choudhry | They do realize the nominal value of their ETH. They do adjust that accordingly. What I think is interesting is that it has continued to come down even though ETH price has now stopped dropping. That was my point. |
| # / 00:37:22 | Matthew Rabinowitz | I have a question for you Vishesh, is that Ether that's locked into Maker? Or Ether that's locked in general, as collateral? |
| # / 00:37:33 | Vishesh Choudhry | I might be missing the difference in your question. But it's ETH [crosstalk 00:37:36] that's locked as collateral in CDPs. |
| # / 00:37:41 | Matteo Leibowitz | You can lock ETHER in, let's say, a non-formally verified contract with Compound, for example, to borrow DAI, right? But we wouldn't be tracking that metric? |
| # / 00:37:52 | Vishesh Choudhry | Yeah, no. It's Maker CDPs. What I've started to do actually, is to pull in more information on what's going on on those other platforms. I can start to compile. There are some graphs on this existing, but compile the total collateral between Maker and the other lending platforms. It's potentially something to look at. |
| # / 00:38:17 | Vishesh Choudhry | That brings me to a good point. I will share back my screen again just for a second. I'm sure Matteo will enjoy this. What I had started to look at was one of the secondary lending rates. I pulled in some new dYdX and Compound information. Are you able to see my screen? Yeah. So this was Compound for example. |
| # / 00:39:06 | Vishesh Choudhry | I had the second graph here on DYDX, my screens. But here, what we've seen is the DYDX rate is even slightly lower than that. It actually came down to around 9%, but was floating around 12 to 13%, which is, again, a slight discount off of the compound rate. |
| # / 00:39:36 | Vishesh Choudhry | The volume, so again, Compound v2, because of the switch over from v1, and dYdX, just from its natural increase in popularity, the volumes on these have come up pretty significantly in the past two weeks. Even with the stability fee coming down, that growth has sustained at a semi-linear level, which is interesting, because you would expect ... it is slowed down a little bit, but you would expect, essentially, as Maker becomes cheaper, fewer people take loans out on secondary platforms, because more people would want to get it from Maker. |
| # / 00:40:17 | Vishesh Choudhry | Now, that's a very simplistic assumption. I can hear Matteo groaning, but that is assuming the rates remain a constant. This is a complex discussion we've been having over the course of a couple months is, what is the nature of the relationship between the Maker stability fee, and the borrow rates on these secondary platforms. |
| # / 00:40:40 | Vishesh Choudhry | My hypothesis on this, which I think is fairly well-supported, is that there is this natural buffer of three to four points that exist between those secondary lending rates and the stability fee. They fall into this position of being naturally lower. Some folks have raised a concern of, should it be lower? Do we expect that this is a stressed state? And in the long run, will it come out to its secondary lending rates are higher? That was a question that we raised. I gave a lot of reasons why I don't think that's the case, and why I think this is the natural trend. But it's an important component of the overall picture as well. |
| # / 00:41:24 | Cyrus Younessi | I think one thing to note there, or maybe more of a question is, to the extent that the introduction of the introduction of the DSR will help lower the Maker stability fees. It will then have an impact on what the secondary lending rates are. Right now, these secondary lenders are operating in a bit of a vacuum. I think one thing to definitely watch out for is how that evolves when DSR comes along. |
| # / 00:41:57 | Vishesh Choudhry | I would actually take it one step further. You're saying that it would effect the stability fee, and thus effect the activity on the secondary lending platforms. I think it would inherently effect the activity on the secondary lending platforms, even if there was no change in the stability fee, because those secondary lending platforms are effectively functioning like a makeshift DSR pulling supply out of circulation. |
| # / 00:42:20 | Vishesh Choudhry | I say that, and I know that there are people that are going to disagree and say that it's not pulling supply out of circulation. What I mean is, it's marginal supply that's not being created. Effectively, it's like reducing [crosstalk 00:42:30]- |
| # / 00:42:30 | Cyrus Younessi | But would DSR effect ... without a Maker stability fee change, would it affect the borrow and supply rates, symmetrically? I feel like it would much more effect the [crosstalk 00:42:44]- |
| # / 00:42:43 | Vishesh Choudhry | Not necessarily. |
| # / 00:42:43 | Cyrus Younessi | The lending rate versus ... A high DSR wouldn't necessarily affect the borrow rate from Compound [crosstalk 00:42:52]- |
| # / 00:42:51 | Vishesh Choudhry | No, it would not. |
| # / 00:42:53 | Cyrus Younessi | Right. |
| # / 00:42:54 | Vishesh Choudhry | Right, but what I am saying is, it wouldn't necessarily affect volume. |
| # / 00:42:58 | Cyrus Younessi | Yeah, yeah. Of course. Sure. Yeah. That makes sense. |
| # / 00:43:05 | Matthew Rabinowitz | At the end of the day, I take a contrarian position to what you just said, Vishesh, two comments ago. To me, this is an iterative process. If we take the moment aside of a formerly verified smart contract. Just ignore the contract for a moment. Issuing DAI from a CDP, or borrowing DAI via somebody else's contract, if you were to exclude the formal verification risk, they're just substitutes, so it's just turning it into an efficient market where they compete with each other to try and, in effect, allow somebody who has debt to refinance their debt for a cheaper interest rate. |
| # / 00:43:42 | Matthew Rabinowitz | Now, it's not, per se, a threat, because until somebody creates another version of DAI, and creates an entire ecosystem and has two years and a functioning system behind it, it's not really a competitor. It's just a competing market force. It'll compete with itself until they, in effect, put themselves out of business. |
| # / 00:44:02 | Matthew Rabinowitz | Now, when you're talking about the fact of this iterative action of where somebody had, pick a number, a million dollars worth of debt that was at 19%, but now you can use another competing solution, lock equivalent collateral in a contract and borrow at a cheaper rate, you should pay down your more expensive debt. The question is, why hasn't it happened faster? It's the same reason, and I don't know if you know this, but on Netflix, if you subscribe in Netflix in Turkey, even using an American credit card, if you VPN there, it's $9 a year. It's $20 a year, versus $20 a month. It's just a substitute. |
| # / 00:44:41 | Matthew Rabinowitz | At the end of the day, even if you're in the US, or some other country, you get the same service, but it's where you subscribed. It's a substitution. It's a dislocation in awareness right now. |
| # / 00:44:50 | Matthew Rabinowitz | The DSR, I think, when it comes out, will be more of a, in terms of a sharper tool, because it won't be a scenario where you need to have somebody who wants to refinance their debt, and be aware of it, know how to do it, and actually execute it. Rather, it will anybody who wants to buy DAI and just lock it in a contract, thus removing the similar supply. To me, they're just substitutes, is my point. |
| # / 00:45:16 | Vishesh Choudhry | I don't think I'm necessarily contradicting you. What I do want to stress is, I agree with these secondary lending platforms are primarily a destruction of inefficiency. There's this oversupply that exists and is basically, what we talked about prior. Let's say organic demand is the 70 million DAI. But the actual supply floating out there is 80 million. The amount that gets refinanced to secondary lending platforms is ... should economically just be eating into that 10 million. It's just a marginal, makeshift efficiency lever. |
| # / 00:46:04 | Matthew Rabinowitz | Agreed. Agreed. |
| # / 00:46:07 | Vishesh Choudhry | Okay, that was the extent of the data that I had for show. I know that was a little long. |
| # / 00:46:12 | Cyrus Younessi | Shall we move on then? I think next on the agenda is Matthew. Matthew, are you going to give me thoughts today? |
| # / 00:46:35 | Matthew Rabinowitz | Yeah, we were just going through most of them right now. There's not really much else to go through, other than the iteration of this, and the PID work that's been continuing in the background by Alex and Vishesh. Alex, I don't know if you want to mention any of the work you did, but definitely keep going on it. And I don't know if you have a microphone. |
| # / 00:46:57 | Matthew Rabinowitz | Yeah, no, it's mostly related to keeping forth on the PID, when you're in a single collateral mode, single collateral DAI. The real question ... really it's more of a punch back to you, Cyrus, about you manage the risk, and how you manage a PID when you start putting things in a multi-collateral DAI structure. |
| # / 00:47:15 | Matthew Rabinowitz | When we have multiple aspects, I don't know ... It's basically, if you think about it logically, as being a snowflake with the very center core being single-collateral DAI. The moment we start branching out little pieces of that snowflake being a component of, let's just say, commercial real estate is one, or mortgage lines are another, or rep, or some other token being another aspect off of a branch of that snowflake. The question becomes, from a risk management, how do we manage the PID? How do we manage the algorithms to track that? |
| # / 00:47:52 | Matthew Rabinowitz | Single collateral DAI is more or less a known quantifiable thing to do with PID. It just takes time. How we do that, risk management wise, for multiple collateral types, yeah, Cyrus, that's all yours. |
| # / 00:48:07 | Cyrus Younessi | Thanks. Okay, well maybe we'll use that as a bridge towards the next section of the call, to do the collateral risk portion today. Okay. Today, I'm going to be talking about a few different things. If we don't get to all of it, then we can just ... I mean, this is a running agenda for however many weeks it takes. |
| # / 00:48:38 | Cyrus Younessi | In general, I will say that a lot of these discussions take place on the rocket chat, on Reddit, in various forms. I think it's going to be difficult to give a full overview of everything related to collateral risk as well as discussions in these governance calls, especially given how they run as long as they do already, but we can try. |
| # / 00:49:09 | Cyrus Younessi | Today, I want to give a little overview on various aspects of risk. I definitely want to get to talking about community involvement and what you guys can contribute, and what we can hope to expect from the community. Then, if we get to it, we can talk a little bit about challenges for some of these risk models. But as I said, these are just vague topics to discuss in the coming weeks. As always, any questions anybody has, please interrupt and ask. This is fairly unstructured. I think it's ... one thing I've realized is that it's difficult to build a natural sequential process to describing collateral risk. It's very holistic and a lot of interdependent and moving parts, so things can often seem confusing at times. |
| # / 00:50:16 | Cyrus Younessi | Okay, so the first high level topic is what are we even solving for? What are we concerned about? I think a good place to start is CDPs. CDPs are the building blocks of the MakerDAO protocol. I think, understanding exactly how CDPs can be modeled is probably the most crucial aspect to the entirety of collateral risk. Essentially ... so CDPs are what? Loans that users issue to themselves based off of their collateral, using the MakerDAO protocol, right? |
| # / 00:51:06 | Cyrus Younessi | There's obviously some risk attached to these CDPs, namely the liquidation risk. I think the first step is defining exposures, who is exposed to what kind of risks? And what do they have to be concerned about? In this case, the exposure risk of the CDP comes down to this notion of solvency and liquidation risk of the CDPs. What we want to note is, one, what is the probability that this CDP is liquidated or gets paid back on time. |
| # / 00:51:55 | Cyrus Younessi | Additionally, if the CDP gets liquidated, how bad is the loss associated with it? This is important why? Because when we are assessing the risk of a giant portfolio of CDPs, we want to have an overview of what these losses could potentially be, how bad they can get. That will play a factor in determining how much total exposure MakerDAO can facilitate. Essentially, the two topics are, what is the likelihood of CDP default or CDP liquidation? And given that number, what's the upper bound on exposure or debt ceiling we can facilitate? |
| # / 00:53:00 | Guilherme Remor | Cyrus, just your question, because you're talking about probability and amounts of the exposure. Does it mean that we do have some sort of tracking of exposure of default or loss given default of some [crosstalk 00:53:18] some ratio like that that we are tracking at the moment? |
| # / 00:53:21 | Cyrus Younessi | Yeah, exactly. Great question. In a sense, theoretically, that is what we would like to do. In practice, we're going to explore a number of different approaches and basically we will find out that we're going to need to come up with some pretty clever pragmatic approaches to how we handle that. But yeah, essentially CDPs have some sort of credit exposure in the sense that CDPs can be liquidated. How to determine what those exposures look like is basically the crux of this. |
| # / 00:54:03 | Cyrus Younessi | When you talk about a CDP as a loan, it's that those probabilities converge down to the underlying asset, which is the collateral. A CDP is liquidated if the collateral price hits a certain threshold, what we call the liquidation ratio, right? |
| # / 00:54:26 | Cyrus Younessi | From there, we can intuitively understand that some model, regardless of how we actually implement it or calculate it, we want to have some notion of the probability that ETH will ... first, that the collateral of a particular CDP will hit this given threshold, right? Then, furthermore, we're also interested in the distribution of the events where the collateral hits this threshold. For example, if a CDP is liquidated, is it likely because it's just dipped a few bucks below its liquidation price, or there's been some sort of massive catastrophe, and the ETH price has cratered entirely. |
| # / 00:55:19 | Cyrus Younessi | Given that this risk is the singular credit risk to the CDP, we can say that the stability fee that we are attaching to the CDP has to compensate for this exposure. Right? Stability fees in this context, I'm talking about credit spread or credit premium for this risk. Typically, our stability fees have been more on the monetary policy side of things, essentially. What has been the minimum rate needed to keep DAI stable, right? That's what we've been dealing with the last three months. |
| # / 00:56:05 | Cyrus Younessi | Unfortunately, we have not factored in any notion of additional risks associated with ETH, that we're going to have to start talking about, right? The way I look at it is the stability fee so far has been a charge on the CDP holders for expanding the DAI supply. CDP holders, they issue DAI. They need to pay a cost in order to help DAI remain stable as it permeates the Dfi economy. But additionally, there is a collateral specific component to the CDP being liquidated. |
| # / 00:56:56 | Cyrus Younessi | The entity or the DAO that is exposed to that credit risk also needs to be compensated. Long story short, the stability has to reflect what our expectation of these liquidations are, the frequency and the severity. How we go about doing that is a couple different approaches. This is really where things get a little bit difficult. We can start with academic frameworks, and then work our way down to the pragmatic solutions. |
| # / 00:57:49 | Cyrus Younessi | Again, this is probably a lot, so if anybody has any questions, please slow me down and ask away. |
| # / 00:58:05 | Vishesh Choudhry | This is not a question per se, but it may be just helpful context for folks, could you just outline how your reasoning about the risk premium in terms of what is its purpose, and what factors do you need to take into account when deciding what it should be? |
| # / 00:58:26 | Cyrus Younessi | The risk premium is compensation for this risk of CDP liquidations. As we all know, the bad CDP liquidations end up incurring bad debt for the MakerDAO protocol, and there are some various mechanisms to clean up that bad debt. That comes at the expense of MKR holders through the dilution. It MKR holders are bearing that risk, then you can think of that risk premium on the collateral as a break even point where that compensates for a dilution risk. Essentially, the notion of CDP liquidations is concerned with dilution risk, and that dilution occurs when you have really bad price movements in the collateral assets. |
| # / 00:59:35 | Matthew Rabinowitz | It's basically the equivalent in a synthetic credit default swap? |
| # / 00:59:38 | Cyrus Younessi | Yeah. It'd be a default swap if ... that depends on the underlying asset. |
| # / 00:59:47 | Matthew Rabinowitz | I know, but the equivalent of one. The intent is that it's basically ... the equivalent value of insurance to be made whole. |
| # / 00:59:55 | Cyrus Younessi | Exactly. |
| # / 00:59:57 | Vishesh Choudhry | I would say a difference there, though, is that credit default swap is primarily about counter party risk. But this is more insuring against market risk, right? |
| # / 01:00:06 | Cyrus Younessi | Right. This is why it depends on the underlying collateral. If it's a hard asset like ether, or if it could be some sort of ... you could envision other reputational based collateral assets that essentially is equivalent to a counter party risk. |
| # / 01:00:30 | Vishesh Choudhry | Like Tether or something? |
| # / 01:00:31 | Cyrus Younessi | Like Tether, or even some sort of ... if you had to ... in theory, you could have [inaudible 01:00:40] unsecured loan that is paid back based on the credit quality of the CDP owner. |
| # / 01:00:50 | Guilherme Remor | But the [crosstalk 01:00:51]- |
| # / 01:00:51 | Cyrus Younessi | The insurance aspect makes sense, yeah. |
| # / 01:00:55 | Guilherme Remor | Yeah, so if you're talking about that debt, does it mean that actually ... at what extent [inaudible 01:01:05] actually increases the minimum, the collateral based on the fact that you have a lot of bad debt in a system? How actually is that dynamic working? |
| # / 01:01:15 | Cyrus Younessi | The collateralization ratio, I like to think about separately. Right now, we can look at previous CDPs and see that every CDP that's been liquidated thus far has not incurred any bad debt. Every CDP has been an orderly liquidation process, and there hasn't been any dilution to PETH holders thus far. This is part of the challenge, because if you were to just look at historical performance of these CDPs, one might look at these at the current collateralization ratio and say, " This is great. We're totally safe from everything. We've had, I don't know, a couple hundred liquidations and they've all been great." In fact, the collateralization cold be argued to be too high. But in reality, we know that that's not the case, and we can foresee potential risks that don't manifest themselves in the historical trading markets. |
| # / 01:02:28 | Cyrus Younessi | Again, the clearest example of this is Tether. You could look at Tether over the past seven years and say, "This is the safest collateral in the market today." But intuitively, we know that there is some looming risk where it crashes down to zero. If you were to look at the distribution of CDP liquidations related to Tether, you'd really see not very many liquidations until just a massive surge of them where they all lost everything, assuming that there's something bad with Tether. Probably shouldn't single them out, but you guys get the point. Yeah, how can we reason about these risks that don't necessarily manifest themselves in the trading history, or in the market's profile, a collateral asset? This is a big part of the qualitative assessment of these collateral assets. |
| # / 01:03:42 | Cyrus Younessi | Quick side point, intuitively, if you could do a full risk analysis on a collateral asset just by looking at its price history, then you could just input that dataset into MakerDAO and it could just spit out risk parameters on its own, and comically there wouldn't actually be much need for governance, because everything could just run fully autonomously. I like to think of our role as governance facilitators here as stepping into do the analysis that MakerDAO as this abstract pseudo autonomous protocol cannot do on its own. Primarily what MakerDAO cannot do on its own is the qualitative assessment of collateral types, which is one of our primary functions as risk managers and here on this governance call. |
| # / 01:04:49 | Cyrus Younessi | This is really also a great place to talk about community involvement and how they can help out. Essentially, what we're going to see is a carefully laid out process on how we think is a good way to evaluate collateral assets that looks at them from the correct lens, and helps us evaluate some of these risk characteristics, essentially these analyses will work their way into the credit risk premium. Any questions so far before I get into qualitative assessments? Is this too fast? Should I slow down? |
| # / 01:05:40 | Vishesh Choudhry | No, that seems good. I think there was a question, maybe wasn't in the [inaudible 01:05:49] here, but it was asked, about how we reason about collateralization ratios versus risk premiums and what's the importance of one versus another, and how does that [inaudible 01:06:06] with monetary policy in the future? |
| # / 01:06:09 | Cyrus Younessi | Okay. A lot of questions about collateralization ratio, which is actually ironically somewhat unrelated to the concept of risk premium, at least under my context. |
| # / 01:06:24 | David Utrobin | Can I quickly ask a question before ... Well actually, no sorry- |
| # / 01:06:27 | Cyrus Younessi | Sure. |
| # / 01:06:29 | David Utrobin | ... go for it. All right. I was going to say, doesn't it matter, because it all matters about bad CDP liquidations and the collateralization ratio directly impacts that? |
| # / 01:06:38 | Cyrus Younessi | Right. Let's assume for a second that regardless of how quickly an asset moved up or down, how volatile it was, that you could liquidate the entire collateral at spot with no slippage. Doesn't matter what the asset is. As soon as it hits the liquidation price, you can just dump all of it. In that case, no matter how risky the asset is, you could just set 100% collateralization ratio, because you could just dump it as soon as it hits the threshold. The only remaining risk is this jump risk where it just shoots over that threshold where you actually can't dump it. It essentially just goes straight to zero. That's the extreme edge case. But what we care about for the credit risk and a stability fee is that jump risk where it literally just blows through your thresholds. |
| # / 01:07:54 | Cyrus Younessi | The collateralization ratio is just walking back that edge case a bit and saying, "Well, there are these intermediary ..." there is a cost associated to liquidations, so let's say for selling a batch of collateral, you incurred 33% slippage. Every time you tried to sell 1000, you'd take that much slippage. Then you might want to, I don't know, put a collateralization ratio that is at 150%, so as soon as it hits the liquidation price, by the time you're finished signing the collateral, you've just broken even. The collateralization ratio, I like to think of it as this metric of expected slippage, or expected liquidation amount during the auctions. It's slightly unrelated to the default risk or the liquidation risk of the CDP as a whole. |
| # / 01:09:09 | Cyrus Younessi | The risk premium is more concerned about what is the likelihood of the CDP being repaid and to what extent? Collateralization ratio is more concerned with the mechanics of the actual liquidation auction. |
| # / 01:09:31 | Vishesh Choudhry | That is a good answer, I think. It was very helpful for me to just move things through. |
| # / 01:09:37 | David Utrobin | Sorry, go for it. |
| # / 01:09:39 | Vishesh Choudhry | My question was just asking to reiterate something you said around the liquidations rate. Consider slippage and things like that, [inaudible 01:09:52] with all liquidations, not just the [inaudible 01:09:58]. In that case, market risk does translate into [inaudible 01:10:05] asset, but how would collateralization of that asset overall responds to those market risks matters? Because if you consider ETH today, versus even four or five months ago, there's a completely different risk profile on Maker, because Maker holders, even though DAI supply has come up, have continued to increase the margin and hold more collateral per DAI. It's almost like the fundamental behaviors have changed. People have gotten maybe more risk averse, or maybe they've learned. It's hard to say why this has happened, but the fundamental risk profile is methodically different now, because if ETH dropped 30% today, you'd be far less likely to result in any bad debt than you would have four or five months ago. |
| # / 01:11:03 | Cyrus Younessi | Right. This concept of changing risk profiles to MakerDAO is going to be another key aspect here, is that different asset price environments for our collateral portfolio leads to a different distribution of the way CDPs look. You can define a CDP through the amount of debt it has, through its collateralization ratio, and etc. Different market environments lead to different CDP distributions, which will necessarily require different primaries and risk approaches, depending on what we're trying to achieve. That's going to be a governance issue, I think, though. In theory we can know how we would want to handle different risk profiles. Actually, executing it through governance is going to be a different question entirely. |
| # / 01:12:13 | Cyrus Younessi | Let's talk a little bit about the qualitative assessments, and potentially a good jumping off point for the community to get started on contributing to some of the risk work we're doing. Essentially, when we are considering a new collateral type, well, the first consideration is how does that collateral type even appear on our doorstep? I think we have to come to consensus on some sort of generally agreed upon onboarding approach. I think it's probably not a good idea to just have any one person or one entity just come and submit a bunch of collateral types for you and say, "Here, this is what you should even look at." That presents some interesting challenges, too, in a same sense that, along with the governance polls, in terms of trying to come to consensus of how to even run certain aspects of the polls, we could run into certain situations here. |
| # / 01:13:39 | Cyrus Younessi | But essentially, the first step is how do we even bring collateral types to the plate for review? I don't think there's a great answer for that today, given that we haven't gone through that process yet. But let's assume we have a few different collateral types to evaluate. I think there needs to be some sort of a prioritization methodology for how we order them and decide to discuss them. I think this can be weighted by the perceived safety of the collateral, just at a high level, probably want to filter out the more unsavory collateral types. I think there should also be some weighting given to the potential of DAI being generated from the collateral type. Obviously, we want to go after high value collateral first. Then potentially, also some determination of how uncorrelated it is with the rest of our portfolio. |
| # / 01:14:50 | Matthew Rabinowitz | Is it [inaudible 01:14:51] to have a more short term DAI outstanding with a [inaudible 01:14:56], or DAI if it's outstanding with a long time horizon, or intentional- |
| # / 01:15:01 | Cyrus Younessi | That's a great question. There is no intention. That's not something that can be formally defined. But I would say maybe given equivalent levels of perceived safety, I think some sort of potential, I guess, stability fee generation could be a way to determine that. Anyways, this is all at a very high level. This is under the situation where we could all of a sudden have 200 collateral types in the queue. Unfortunately, the governance call does not afford enough time to go through all that, at least not in its current iteration. Of course, I think we'd all like to see as many collateral types being supported as possible. But for the short term, I think we can have some sort of quick order. |
| # / 01:16:08 | Cyrus Younessi | Okay. Let's assume we've done that and we want to just work our way down the list. I think the okay process for evaluating collateral types starts with a three step process, first step being classification of the collateral, second step being a due diligence, and third step being a risk analysis. I'm going to just quickly run through these three steps. One of the most important determinations is are these collateral assets ... they are bearer assets or not? I think that's the primary aspect we're concerned with when it comes to classification. I think ... actually, does everybody know what bearer assets are in this context? |
| # / 01:17:24 | David Utrobin | It's basically the asset itself, in your custody. If you have something like Digix that represents a goal that's held in some Singaporean custodian, that's not a bearer asset, right? Is that what you mean? |
| # / 01:17:40 | Cyrus Younessi | Right. Bearer assets are essentially if you owning the asset comes without any counter party risk, such as owning physical gold or Bitcoin or Ether. This is important in this context of liquidations and trying to sell off the collateral asset. Currently, with the way Ether works, it gets purchased by the keepers and the liquidation aspect is done and we all move on. But potentially with security tokens or any sort of non-bearer asset, we have to keep in mind what the recourse process behind that looks like if we're to expect this orderly and efficient liquidation process. I think first step, really, with collateral asset is just classifying it. What kind of asset is it? Furthermore, bearer assets can be subdivided into the different crypto asset models that we're all familiar with, governance tokens, work tokens, utility tokens, all that kind of stuff. Then registered assets or security tokens, they can be whatever, equity tokens, bond tokens, and so forth. Next step would be to do a due diligence. Due diligence requires just a careful examination of the collateral asset and everything that's associated with it, looking at the team, looking at the technology, looking at the business line behind it, looking at the token, style, [inaudible 01:20:00], so forth, all the nitty gritty [crosstalk 01:20:02]. All the nitty gritty things that go into doing a due diligence report on a collateral asset. |
| # / 01:20:20 | Cyrus Younessi | Then finally would be a risk analysis, where we try to examine factors that can lead to adverse market conditions. This goes aligned with the due diligence. But essentially, our goal here is to uncover anything that might cause a sudden crash in collateral asset value, simple example being a protocol risk or bug exploits and so forth. For example, due diligence report covers shoddy code or shoddy coding practices, then you might obviously assign a larger risk to this collateral asset. |
| # / 01:21:12 | Cyrus Younessi | Other examples of due diligence revealing certain risk factors is valuation frameworks for various token models. This is something I hope to discuss in a call in the weeks to come. But there are various valuation models behind the token frameworks, such as utility tokens and do they have value or do they not have value, all that kind of stuff. I think these all play a pretty significant part in determining the perceived safety of these collateral types. |
| # / 01:21:55 | Cyrus Younessi | I'm going to stop there, because that was a lot. The overview is we've got to do deep dives into these collateral assets from a number of different approaches. That qualitative assessment will work its way into the risk premium by virtue of trying to determine the likelihood of repayment of these CDPs. |
| # / 01:22:27 | David Utrobin | Cyrus, do you think that a good first step for anybody participating in the community would be to try to put forth a suggestion for a priority list of how to do that initial collateral decision, like which one get judged first or which one gets considered first? |
| # / 01:22:49 | Cyrus Younessi | Yeah, absolutely. We're already at the half hour, so I'm going to spend the rest of the time trying to flesh out community involvement a bit. We've definitely discussed, I think, a broad range of topics so far. I think first step for anyone looking to get involved is identify which factors are most interesting to them, because there's a significant amount of work to do both on the qualitative side of things and on the quantitative side. Just naturally, people have expertise in various areas. If you're looking to get involved in the quantitative side of things, anything with risk modeling and evaluating market trading history and all that stuff, is definitely a lot to do there. Then on the qualitative side of things, I think first step is definitely just working on onboarding collateral types, how we plan on bringing them to our attention and how we start talking about them. Then eventually, I think hoping to see just analyses written up and presented to the community on the Rocket Chat or on a subreddit, and we can share those on the governance call and discuss them. |
| # / 01:24:29 | Cyrus Younessi | There's a significant amount of documentation coming along with all this. I know I keep saying that. But unfortunately, documentation takes longer than the research and just talking about it on the governance call. We're trying to get a jump start on the discussions, because the documentation itself is not quite ready. But I'll try to release a few high level outlines of the process on the Rocket Chat maybe later today or tomorrow. Any questions? |
| # / 01:25:11 | Richard Brown | Sorry, I have to jump out soon, but thanks to the powers of Zoom, I'm reasonably sure I can promote you to a host and you can keep it going if you're interested. Did you have more you wanted to go over, or do you want to wrap it up? |
| # / 01:25:21 | Cyrus Younessi | I'm not going to go over any more, but I'm going to stick around and chat with people. |
| # / 01:25:26 | Richard Brown | Do you want to keep the recording going? |
| # / 01:25:28 | Cyrus Younessi | It's up to you. |
| # / 01:25:30 | Richard Brown | No. No, it's up to you. |
| # / 01:25:32 | David Utrobin | You guys are so cute. You can cut it off. |
| # / 01:25:35 | Richard Brown | All right, cool. All right. Thank you, everyone. Great discussions. I'm glad to see that we started into the weighting into the collateral risk area, so thanks for that, Cyrus. Thanks, Vishesh, for your graphs as usual, and thank you everyone else, Matthew, Matteo, and everyone else who jumped in for discussions. Please continue the chat in our subreddit. Lots to go over. Lots to discuss. We can keep the thread going till next week. All right. Thanks, everyone. |