Governance and Risk Meeting: Ep. 45 (July 25 - 2019)¶
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| # / 00:00:00 | Richard Brown | Hello everyone, welcome to the July 25th edition of the Scientific Governance and Risk meeting with MakerDAO, my name is Richard Brown, I'm the head of community development at MakerDAO. In these calls we talk about risk, we talk about risk parameters as well. We talk about new collateral types that might be coming in and out of the system. We talk about governance issues. |
| # / 00:00:25 | Richard Brown | Over a time the weight of which issues we focus on is shifts back and forth depending on what's cooking at MakerDAO and what's cooking in the community. That's my way of pointing out that we're not always going to be talking about risk, the way that we have in the past. And in the next couple weeks we're going to be shifting gears slightly to everybody's favorite topic, which is governance. |
| # / 00:00:49 | Richard Brown | There's lots of things we need to figure out in the governance world. Going to come as no surprise to this group that governance is not a solved problem. MakerDAO, again, is sort of on the leading edge of a lot of issues in the crypto space, one of them is how do we organize lots of people around the world? And how do we organize them when the stakes are high? I guess is an interesting way of putting it. |
| # / 00:01:15 | Richard Brown | What we do here is kind of important and so we need to take governance seriously. What those mechanisms look like, what the processes look like, what the debates look like. How signals get surfaced, how they get ratified. These are all important questions that we need to figure out. And we're going to start doing that in earnest. |
| # / 00:01:33 | Richard Brown | The reason why we're going to start doing that in earnest is because multi collateral DAI is a real thing and it's coming. I touched on this briefly in our last call, but when multi collateral DAI launches is depending on two different factors. Basically you can put it into two different buckets. One is the mechanics, the code, the audits, our partners, all these things need to align. So it's what pieces of puzzle we can put in place in the foundation. |
| # / 00:02:07 | Richard Brown | But there's the other bucket, the other side of this coin, whatever analogy you want to mix together there, and that's governance and the community. When MCD launches is largely dependent on what happens in the forums, what happens in these calls, what happens in various discussions, and what ultimately happens in the voting portal. There's a lot of work that we all need to do together in order to make that happen. Lots of risk analysts, lots of governance fans, if that's even a thing. I guess it is a thing, we can find them all over our forums. |
| # / 00:02:40 | Richard Brown | We need to align and we need to get to work, and we need to establish processes and policies and principles, and we need to optimize this process as much as we possibly can in such a way that we maintain agility but we also gain some more velocity. And that's a lot of buzz words, and it's a lot of theoretical analogies, but these things are all going to start kicking off in the next week's call, and the week after that we're going to wrap things up. And the week after that we're going to continue to do it. |
| # / 00:03:16 | Richard Brown | There'll be some proposals and some clarification of some of the things that I'm talking about that'll show up in the forum soon. And we can start a large conversation, a long tailed conversation about how that impacts the organization, how that impacts governance and how everybody feels about it. There is a lot of things coming up, but that a lot of things coming speech that I just gave is sort of my way of compensating for the fact that I have very little to talk about today. Because there's furious levels of planning and infrastructure work and documentation being written. |
| # / 00:03:50 | Richard Brown | It's all coming to a head in the next week or two, and as soon as that happens the next step is we're going to take all of these docs and all of these plans and we're going to put them in front of the community in the forums and we're going to talk about them in these calls, and we're going to get as much feedback from all of our stakeholders as we possibly can. |
| # / 00:04:09 | Richard Brown | But until that happens, we're going to continue focusing on risk and then we're going to begin figuring out who we shift those gears and how we allocate time to each one of these large pieces of the puzzle, governance and risk and the foundation. It's not going to happen today though. So I'm going to jump into my preamble, and then we're going to hand it off to David utrobin, who now has a guest slot on these calls, he's going to give us a recap of what's happening in the forums. |
| # / 00:04:43 | Richard Brown | And this is a great idea, I'm not sure whose idea it was, probably mine. Or maybe ... okay it wasn't, it was David's. All right, so it was a great idea. So the reason why this is important is because this is the theme that we've been talking about for months and months and months. But governance decision making does not happen in these calls, it's the venue is far too temporary, the audience is far too small, the language is English, the timezone is North American, and there's all kinds of reasons why this is not the committee where decisions get made. |
| # / 00:05:20 | Richard Brown | Where those decisions get made, I'm hoping will be the forum itself, that's where the debate can happen. That's where conversations can surface. That's where deep discussions and manifestos can be posted. And it's turning out to be the case, and I'm very excited about that. The flip side of that is we can't lose sight of what's happening in that forum, and we need to create a bridge between those forum discussions and the discussions we have here. And so David is going to do a recap of what we shouldn't be calling but we are, governance at a glance. Which was an amazing idea that we totally did not steal from LongForWisdom in the forums. |
| # / 00:06:07 | Richard Brown | It's more of an homage than straight up theft. I think. |
| # / 00:06:11 | David Utrobin | I mean. Just to clarify, my review of what's going on in the forums is actually based on LongForWisdom's governance at a glance. I mean, [crosstalk 00:06:19]. Yeah, it's straight up plagiarism. |
| # / 00:06:22 | Richard Brown | Let's just own it then. |
| # / 00:06:25 | David Utrobin | I mean, what's good though is that we're seeing with the new forum that a lot more deep discussions are actually happening compared to when we were just relying on r/mkrgov, so I think that starting to do these kinds of reviews of what's going on in the forum, even if their brief, 10, 15 minutes is really important because not everybody reads the forum, and a lot of people are siloed into this call to get all their information on governance. And so it's good to ... |
| # / 00:06:57 | David Utrobin | So yeah, do you want me to launch into it Rich? |
| # / 00:06:59 | Richard Brown | No, I still have to finish my preamble. |
| # / 00:07:01 | David Utrobin | Yeah, all right. That's what I figured. |
| # / 00:07:03 | Richard Brown | You look like you need to adjust your mic couple inches upwards. There you go. So here's the preamble. We are extremely interested in getting as much feedback from this group as we possibly can, so please if you have any kind of question at all, type it into the chat window. If you have access to a microphone feel free to interrupt and just jump into the conversation, whatever you like. |
| # / 00:07:25 | Richard Brown | We're going to ... speaking of forums we're going to continue these discussions in the forum, that's where the long tail discussion happens. I will post a link, excuse me, into the chat right now. If you have a question that you think requires a deep dive, or doesn't need to be addressed in this call, or you just want to take notes or whatever you like, post it into that forum thread and then we'll continue things for the rest of the week. |
| # / 00:07:50 | Richard Brown | All right, that is me. I think. So I will hand it off to you now, David. |
| # / 00:07:54 | David Utrobin | All right, cool. Thanks. So I'm going to post in the chat really quick the governance at a glance thread that LongForWisdom is putting together. So this is a thread that's actually constantly updated, so you could look at this link and you'll see even new conversations that are relevant and interesting. So it's a good place to see what's going on. |
| # / 00:08:17 | David Utrobin | The three different sections, we'll there's actually four sections in the thread. There's seeking consensus, help wanted, ongoing initiatives, and on the horizon. So I'm going to skip over the help wanted because it's kind of peripheral, but just starting with the seeking consensus type threads, there have been a number of them, so the meta is that the community is wanting to use the forums to do some soft consensus before we actually launch into having a robust enough governance polling system to do multiple polls at the same time. |
| # / 00:08:51 | David Utrobin | So at the moment, about a month ago the first signal request thread was launched and, yeah, just outlines that. And I think most people, not that I think, but in the thread it was a majority vote that this was a good conceptual idea, just to establish consensus through forum polls. But again, there's concerns around that, there's concerns about people that don't hold Maker coming in and affecting this consensus. There's no real verification that you're a Maker holder if you're voting in these, so it's not a perfect solution. But hopefully a better solution will be coming with the 1.5 governance portal soon. |
| # / 00:09:36 | David Utrobin | The next thread is the, should we modify the stability fee voting cadence and stepping? Actually hold on, give me one second. Actually, Rich, if anybody in the chat ... can you just stop me if their question is relevant to the thread that I'm talking about? Because I don't want to pause and read through. |
| # / 00:09:58 | Richard Brown | Sure. Yeah, each one of these threads could probably diverge into an entire governance call, so there's commentary that could be made on all of them. The sentiment analysis, or sorry, the ... what was the ... signal requests. |
| # / 00:10:16 | David Utrobin | Yeah, meta governance signal requests. But [crosstalk 00:10:18]- |
| # / 00:10:18 | Richard Brown | That's a great thread and I'd encourage people to actually dig into that one because here's the reason why we have a forum, here's the reason why we have a call, excuse me, and a polling system is that the polling system is a way to surface signals, figure out where the alignment is in the community. And then that is the stepping stone to move something into an executive poll. If it actually changes the mechanism of how MakerDAO works, or else if it's more of a principle or a policy type thing then that's enough for it to consider consensus being reached. |
| # / 00:10:53 | Richard Brown | We have this chicken and egg issue that the community has been wrestling with for months, and that question is, how do we aggregate signals for this to answer into this signaling mechanism? So how do things get into the poll? In the forum we have some emergent processes happening here. And one of those emergent processes, I anxiously encourage people to look at his forum thread. The question is, how do we determine that signal or consensus has been reached in the forums? And one of the things we talked about in there is the- |
| # / 00:11:28 | David Utrobin | The polls, yeah. |
| # / 00:11:29 | Richard Brown | The difference between what a community member is and what a Maker holder is. And sorry, I'm not going to derail the whole thing, so the reason why I find that so interesting, smirk when I say I'm not going to derail the whole thing. The reason why I find that thing so interesting, that thread so interesting is because it helps us as a group understand the difference between community and governance. I think that governance, Maker token voters who participate in the polling system have a bunch of alignments they need to think about enough, a bunch of incentives, but there's also sort of their responsibility in some ways to act as representatives for the wider community as well. |
| # / 00:12:12 | Richard Brown | Or at least internalize some of the arguments that come from non-Maker token holders. And so that's where there's this Venn diagram where this overlap of community and governance and I think that at least personally polling in the forums should be open to absolutely anybody. And that can inform why there's sentiment, that the Maker token holders can sort of internalize when they come into the voting portal. |
| # / 00:12:37 | David Utrobin | Right. |
| # / 00:12:41 | Richard Brown | So you can stop smirking now, I'm done now. |
| # / 00:12:43 | David Utrobin | Okay. Yeah, I mean polling is really really important, just as data points and just things that guide our decisions because we're trying to do this is a decentralized fashion, and it's kind of hard to do things in a decentralized fashion. You need somebody to make the decision, and what are you basing that decision off of basically? |
| # / 00:13:01 | David Utrobin | So all right, so for the rest of the review of this governance at a glance, I'm going to just give like two sentences on each thread so we don't spend too much time on this. And then afterwards we can answer your questions from the chat or anything like that. The other seeking consensus thread is the, should we modify the stability fee voting cadence and stepping? |
| # / 00:13:23 | David Utrobin | As of recent, the discussion has leaned towards making it a bi-weekly cadence for stability fee adjustments. And we saw that there was a 79%, 21% split for a bi-weekly cadence. And so there's ... and that's based on 16 votes, so it's kind of hard to say if there's real consensus, which is still just some issue to keep in mind in regards to the polling. But it seems that people are actually for a bi-weekly cadence. And also Vishesh makes a really great point for it in that if we have a very fast reaction every time something is going on with the peg, it doesn't actually give time for our previous adjustments to have an effect. |
| # / 00:14:14 | David Utrobin | So it's important to slow things down a little bit, and also slowing things down will give us the additional benefit of having different types of votes rather than just stability fee votes. Which we're kind of host to right now. The next signal request seeking consensus thread is regarding, it's called, define a standard stability fee changes based on recent price of DAI. So user Latetot kind of put out a signal request seeing if people would be willing to standardize what the poll should ... or rather, what the executive vote should be based on something like a three day volume weighted average price for DAI. |
| # / 00:14:58 | David Utrobin | And so there was a lot of back and forth in that thread, it was pretty interesting. The open questions that exist that actually make it really hard to do this is the fact that, how do you decide on these parameters? Like, what's the lag time for the effect to kick in? Is it a one day view opposite a three day view, opposite a seven day? And so there was not a lot of strong consensus around that signal request. |
| # / 00:15:23 | David Utrobin | And then the last signal request I want to talk about is the thread, should we move to exponential rate stepping for stability fee polls? So the way stability fee polls are right now, it goes in 1% increments up and down, nine different options. The middle option is to keep it. There's four up and four down. And so the exponential rate stepping is just you walk to it. It's like 2%, 4%, 8%. So it gives more flexibility to governance to make more radical changes if they needed to. |
| # / 00:16:00 | David Utrobin | And there was 16 votes in that poll. 75% over 25% for, two against. So mostly people are for it, but again, I actually didn't see any serious negative comments against the suggestion except for maybe remove the 8%. Because 8% is like, it's a really big move. And also because if you have 8% that's actually I think two, four, six, eight, yeah it's still nine options, so if you remove the 8% you actually have less options on the poll overall than we currently have. So instead of nine options I think it'll be seven options. And that might make it actually better for user experience. |
| # / 00:16:45 | David Utrobin | But again, that actually takes away your options from what we have now, because we have the 1% increments. So interesting thread. All right, and that's it for the signals for the different types of signals that are being seeked on the forum. As for ongoing initiatives, there's three different threads that are pretty active conversations going on. There's the meta for coordinating collateral due diligence. And so a couple weeks ago the foundation's internal risk team put out the collateral onboarding guide and a bunch of documentation for that. |
| # / 00:17:24 | David Utrobin | And we started talking about how to onboard collateral in a few of the previous risk calls as well. And so at the moment, so user LongForWisdom actually came out and made a suggestion for people to volunteer. And so I think we had 27 total votes in the poll. And of them I think 26 people volunteered to do some level of research for collateral onboarding. Which his great, but Cyrus made it a point that, hold your horses right now because integrations in the internal risk team are actually already doing a lot of the due diligence for these first collateral types. And that in the next week or two they're going to be discussing more about their findings and they're going to just show what they have in regards to some collateral is what I understand. |
| # / 00:18:22 | David Utrobin | So hold your horse there, but I know a lot of people want to be super sleuths and revered sleuths. Yeah revered sleuth herders is how LongForWisdom put it. But basically people that project manage and organize and centralize all the data for a single collateral onboarding application, and then all of the super sleuths which just are assigned by the sleuth herder. God I can't do these names. But they're assigned by the project manager to dig deep into one of the questions or one of the areas in the collateral onboarding application. |
| # / 00:18:59 | David Utrobin | So like legal risks, or technical risk, or whatever it might be. So it's really great to see community actively being excited about doing this kind of work. But regardless, we're on pause for this waiting on the internal risk team. And then there's another thread in ongoing initiatives called, systemic risk directory. Also made by user, LongForWisdom. It basically puts a 1:10 weighted poll. Oh, sorry. Andrew I'm going to mute you. Or actually, Rich, can you mute Andrew. Yeah. |
| # / 00:19:38 | David Utrobin | All right, so yeah so the systemic risk directory basically puts a sentence to each unique risk and polls our governance community about how concerned they are with the risk. One being not concerned at all, 10 is basically the maximum concern they think an emergency shutdown could happen because of this risk or something. Right? And so there's three different risks there currently, so I'm not going to go through them right now, but I encourage you to check it out. And each of the risks is also linked to a discussion thread. So it's not just the poll and a sentence for the risk type, but there's also a place to talk about it. |
| # / 00:20:19 | David Utrobin | The last thread in ongoing initiatives is, estimating the DAI/USD price from the ETH to DAI order book, instead of Dex Trades. So in here I think it was Lix, right? Let me just double check. Yeah, so Licks did a lot of work around calculating the DAI price and he made a point that calculating it from trades actually introduces a lot of noise because of the nature of how trades are made. The fact that removing a limit order from like ETH to DAI takes multiple blocks. And that there's a lot of noise in the signal basically from watching DAI price through Dex Trades. |
| # / 00:21:03 | David Utrobin | And so he did a similar DAI price analysis, but instead of using Dex Trades he used the order book activity and it's actually really interesting. There's a couple of graphs in the thread that overlays the signals and shows actually the reduction in noise. And also just it's a really really great suggestion, so anybody that's doing DAI price and that kind of stuff, check out that thread because he makes some [inaudible 00:21:36] with his approach. |
| # / 00:21:40 | David Utrobin | Yeah. And then the last two threads that I'm going to cover in this little recap of what's going on in the forum is the stuff that's on the horizon. So these are threads that are further looking, so they're not immediate concerns, but they're conversations and problems that need to be sorted through. And the main problem right now that's being sorted through is how we create policy around stability fee changes and DSR changes with the coming of multi collateral DAI. |
| # / 00:22:12 | David Utrobin | Because right now in single collateral DAI the stability fee is used as a policy tool, it's a monetary policy tool. Nobody in governance really thinks of the stability fee right now in terms of the risk premium of the underlying asset, but come multi collateral DAI, and the DSR with it, we're actually going to have an intersection between monetary policy and risk management of all these underlying collaterals and CDP types and CDP packages. |
| # / 00:22:45 | David Utrobin | And so it's not obvious what the best way to do the math there is, and the decision making. But yeah, so the first thread is called, navigating the waters between now single collateral DAI and multi collateral DAI with the DSR. So specifically to this thread, Matthew Rabinowitz talks about what the best step by step process for launching multi collateral DAI would be without disrupting the DAI price. Because if multi collateral DAI launches with some ability for CDP, would be CDP users to mint a lot of excess DAI, we want to be able to control the supply so that it increases gradually if it does. |
| # / 00:23:30 | David Utrobin | We want to do it in a way that maintains the homeostasis of the system as it is, and then slowly transition out. He outlined a couple of really great ... not a couple, I think it was four or five great steps for actually managing this kind of transition. And then the second thread is, is anything wrong with DSR and stability fee calculations as planned for MCD? That's where the discussion that I just referenced earlier is actually outlined pretty fantastically. So LongForWisdom defines all the terms. And actually boils down the problem to this one sentence which I'm going to read right now. |
| # / 00:24:10 | David Utrobin | So, "Under the currently proposed system and policy there is no adequate tool that could be used to curtail a high demand for a single collateral package without negatively affecting other collateral packages, especially those with lower risk premiums." And so, yeah, that's basically the summary of what's been going on in the forum. And that's not referencing ... |
| # / 00:24:36 | David Utrobin | Yeah, so Akiva actually makes a good point. The thread that I just talked about, the DSR, like on the horizon threads, they are going to have a lot of back and forth because it's not obvious what we're going to do. And coming to the solution of what's best is going to take some back and forth in our community and some constructive thinking on top of constructive criticism. And that's just the path we have to take to come to a real solution. |
| # / 00:25:05 | Richard Brown | All right, that's a good point, and I think that we'll ... cut it. That's a good segue. We need to get to the risk section, thanks for that David. |
| # / 00:25:14 | David Utrobin | No problem. |
| # / 00:25:16 | Richard Brown | One of the main takeaways here is surfacing the fact that there's a lot of interesting things happening in this forum. Serious business is going on, deep discussions are going on. Future direction is being established. So if you have an interest in governance, if you have an interest in risk, please participate because the way that those debates are turning out on the forum are better than I could possibly have hoped. |
| # / 00:25:44 | Richard Brown | And it's working out precisely the way that I had hoped it was. I'm sorry, I got distracted for a second. Lots of really interesting things and the discussions that are happening in the forum now will be surfaced in these calls soon. And will eventually be changing the course of the DAO. So get in early and have your say because there's a lot of interesting things happen. |
| # / 00:26:08 | Richard Brown | With that, I think we're going to turn it over to you Vishesh for the state of the peg. |
| # / 00:26:22 | Vishesh Choudhry | Okay. Right. I'll share my screen. |
| # / 00:26:29 | Vishesh Choudhry | Okay, so if everyone can see everything. Well just to kick it off, state of the peg seems all right at the moment, is the synthesis. So trading volume for the last 24 hours was about 3.8 million DAI for ETH. Earlier it was a little bit higher, a little bit over 4 million, so I think the trading volumes are light but not so small that we should be concerned that price is not actually around $1. But yeah, it's trading at like very very slightly over $1. And in the previous 24 hours was trading very very slightly below $1. |
| # / 00:27:15 | Vishesh Choudhry | So it appears to be hovering right around the peg. And so we just tough on that. Yeah. So you can see over time previously we were hovering between 98, 99. Had a little bit of a rough period at the beginning of July, dipping down to 97 some a couple of times. And then basically slowly but surely after this 18.5% increase there is a bit of a recovery period where that price was consistently increasing. And has now settled around basically literally at $1. |
| # / 00:28:00 | Vishesh Choudhry | So that seems to be functioning well. As you can see some of the driver as that as well, right, and this is something that I say at this point pretty much every week. But stability fee doesn't determine that DAI price, right? If it did then it would have immediately gone up to $1 at 20.5, or even previously at 19.5, it would have just sat at $1. So clearly there's more going on then just the stability fee. And so that's another thing that I wanted to touch on here is we've now entered a little bit of periodicity with what's been going on with DAI. |
| # / 00:28:39 | Vishesh Choudhry | You can see here at the 16.5, 19, 17, 16, 17, 18, 20 levels. So stability fee's increasing, DAI price is still low. DAI price comes up and then comes down a bit. Stability fee is lowered, DAI price stays relatively steady for a while and then suddenly dips. Stability fee is increased, DAI price stays relatively steady. Stability fees further increased, and DAI price holds for a moment and then continues to rise. |
| # / 00:29:12 | Vishesh Choudhry | So essentially if you were to draw a simple correlation, which I'm happy to show if somebody wants to see it, between the stability fee and the DAI price, it's not a very strong relationship. But if you start to use it as a multivariate calc with what's going on with ETH price it does start to make a little bit more sense. So at this 20.5% stability fee another thing was going on right at the same time, which was this ETH price was coming down pretty significantly. And pretty suddenly. |
| # / 00:29:46 | Vishesh Choudhry | So during the decrease, and I think this is something that we tend to see over time with ETH. During the decrease there's not necessarily a recovery in DAI. But post this decrease, if the ETH price is just holding steady, then if multiple people are not levering back up on the ETH because they were already levered up, so the ETH price had risen in the June time period. People were levering up during that time, it held steady at the turn of the month, and people had not cashed out during that time. So what's interesting is had ETH's price risen further, potentially people would have cashed out and the leverage would have gone down. |
| # / 00:30:25 | Vishesh Choudhry | Then the drop in ETH price would have precipitated a massive increase in leverage which would have depressed the DAI price. So these behaviors actually are what drive the DAI price more than anything. And the stability fee changes the sensitivity to those behaviors. So right now what you have effectively is a higher stability fee and the secondary lending picture fills in some of this gap of why this doesn't visually make sense if you just look at it. But yeah the DAI price has been recovering though ETH price took a big hit. And a lot of that [crosstalk 00:31:01]. |
| # / 00:31:02 | Richard Brown | -a question? |
| # / 00:31:03 | Vishesh Choudhry | Sure. |
| # / 00:31:04 | Richard Brown | How hard is it to figure out how much of a sensitivity the stability fee does have in relation to the ETH's price? Do we know that [crosstalk 00:31:13] smoothed out by 25%? Or is that going to be possible to determine without [crosstalk 00:31:19]? |
| # / 00:31:19 | Vishesh Choudhry | It is possible. It is possible. I think some of those analyses took a back burner to some of the other collateral risk stuff, but definitely it is possible. When I initially ran the numbers I found a very high ... it's not the same as a confidence interval. But basically a fairly reliable R-squared value when looking at the relationship between ETH and DAI price using stability fee as a modifier. So something in the 60, 70% range, which is pretty good. |
| # / 00:32:01 | Vishesh Choudhry | That was prior to the most recent crash, so I could rerun it and see what it looks like with the most recent crash. But essentially it was decent enough where you could reasonably say ... and the relationship between stability fee by price was significantly lower, like in the 20s and 30s. So it was [crosstalk 00:32:21]- |
| # / 00:32:21 | Richard Brown | Because of the major factors here it's not legacy inventory levels on prop desks or community sentiment, or secondary lending platforms. It's primarily this price instability thing? |
| # / 00:32:37 | Vishesh Choudhry | Well, no, I mean so this is kind of like proxies, right? So if you want to directly measure, you want to directly measure leveraging behavior, and that would give you the most direct explanation. The problem is, that there's not a very good variable you can point to that says this is leveraging behavior. There are proxies for it. You can look at some of the ETH/USD long shorts. You can look at some of the purchasing and selling behavior on Unistop or something like that. |
| # / 00:33:06 | Vishesh Choudhry | And there are these proxies that exist. What I find is looking at some of those proxies is decent in terms of explaining what's doing on with DAI price. But a more holistic view of actually looking at this graph and actually breaking down, okay when was there a run up? When was DAI price depressed? What were the trading volumes during these times? And actually physically looking at these graphs I find to be the most effective strategy for understanding what's going on. |
| # / 00:33:35 | Vishesh Choudhry | But mathematically speaking, you can look at some of those other indicators as well. Like long and short behavior was something that we had looked at in the past. But even ETH and DAI, so this is where I had a long time ago spoken about this ratio between the short and longterm prices. That effectively is a similar proxy, right? So if you were to look at a second derivative of the ETH price compared to its long run average, effectively what you're saying is, when was it decreasing? When was it increasing? And what you're looking for is a time period where it was decreasing and then increasing, and whether DAI price was affected during that time period. |
| # / 00:34:22 | Vishesh Choudhry | Because that would effectively mean that ETH got cheaper, people levered up, then ETH appreciated, and if during that dip DAI went down. And then after that dip DAI went up, that you can reasonably guess that is an instance of people levering up and selling DAI and then cashing out and purchasing DAI back to pay down their debts. So looking for those kinds of patterns I think is the most reliable strategy for explaining drivers for DAI price. But even just visually looking at these things it seems to be pretty clear. |
| # / 00:35:00 | Vishesh Choudhry | Yeah, sorry to just touch on what's been happening with the DAI price. So what's really interesting about DAI lately is there's a lot of debate around, is this caused by the stability fee, or would it have happened otherwise under a lower stability fee? Now the thing is with the ETH price going down significantly, what you have is effectively a bunch of stressed leveraged positions, right? So a lot of traders who levered up on ETH using DAI, and now have to either re-liquidate it, or have to make a hard decision of holding onto that position and paying increasingly higher interest rates, not just on Maker, but now with the change in how Compound is calculating their interest rates, or the removal of the Cap effectively. |
| # / 00:35:49 | Vishesh Choudhry | Those interest rates have gone up as well, because the excess supply has dwindled to next to nothing on secondary lending platforms. So really now you actually do have a lot more exposure to the stability fee, or at least the stability fee with a slight discount than you did before. So that really does kind of bone on bone is a concept that I've discussed before. You have less of a buffer for demand, and now people are actually starting to feel some of that pain they feel. And that tends to put a premium on DAI and drive the price up a bit. |
| # / 00:36:28 | Vishesh Choudhry | And then what's going on with supply makes that extremely clear. You can see here, and what I find fascinating is you start to see some of this periodicity in these repeated patterns. And you see a repeated pattern under an extremely different rate. So if you look back to February/March very very low stability fees. The DAI supply was running up fairly significantly all the way up to 95 million. Now March 18th around that same time period ... I'll just zoom out here a little. |
| # / 00:37:05 | Vishesh Choudhry | Around that same time period you had the DAI price was roughly 97 cents on the dollar. So lower than what was deemed acceptable at the time, and I think lower than what we would currently deem acceptable. The big difference is not really ... but 97 cents vs. 98 is not a huge difference. So the big difference I think is in the variability of DAI price. And so I want to show volatility here, but it's effectively the volatility of DAI is decreased significantly. |
| # / 00:37:43 | Vishesh Choudhry | And so that's a big difference between that time period vs. now is DAI was far more volatile during that time period. The supply was higher, oversupply was obviously higher. But in nominal price in supply terms it wasn't a significant difference, right? So if I run this back through an analysis script it wouldn't produce hugely different values, but when you plug in that ... and this is what Licks is alluding to is noise in the prices vs. order books. But the noise in the prices is actually also an important data point to capture, right? Because those prices that those trades are getting executed at is effectively what people had to do during that time period because more often than not I think when people are trading DAI they have a very high time preference for getting access to that DAI, or selling that DAI to get access to leverage to take advantage of a particular price. |
| # / 00:38:46 | Vishesh Choudhry | And so DAI I think is actually a very high time preference currency very often. At least when it comes to dealing with CDPs. So I think the numbers look similar, but things were actually very different at the time. Then you have sort of DAI supply running down in May, and the stability fee getting significantly increased in April/May. And then DAI supply bottoming out here around 80 million. Drops of the stability fee, and at the same time ETH price running up. And then DAI supply is running up with significant amount of leveraging behavior, but at a higher stability fee. So actually comparatively a fairly stable DAI price, right? 98, 99 cents on the dollar is not that bad. |
| # / 00:39:40 | Vishesh Choudhry | So this was effectively a similar situation to what was going on in February/March, but with a different experience I think for those that are trading DAI. And part of that is just a different level of confidence in the ability to arbitrage DAI. And I think that's psychological effect is not to be discounted, but also I think less oversupply and so at this point in time 85 million vs. before meant two very different things is effectively the answer. |
| # / 00:40:13 | Vishesh Choudhry | And so what's really interesting is with the 20.5% stability fee and just a tremendous amount of stress on people going long on ETH, right now this supply has just plummeted down to just below 79 million. And the most recent it's back up to 79 million. But you saw 5 million DAI getting wiped in a day and then 2 million, then 3 million. There's repetitive behavior burning millions of DAI each day. |
| # / 00:40:49 | Vishesh Choudhry | So a lot of this is repayment and refinancing to secondary lending platforms, as we've discussed. But also the excess supply on the secondary lending platforms had dried up pretty significantly which we'll touch on. This is legitimately just a destruction of oversupply. And so now I think there are very thin margins and I think at this point likely that someone could come in and make the argument that this has actually been a dip in demand potentially due to just stress on what's been going on with ETH, or even due to a 20.5% stability fee. |
| # / 00:41:24 | Vishesh Choudhry | This is data I think that indicates either holding the position or even dropping stability fee back half a point, a point, to see the effect. But this is strong caution I think against increasing the stability fee further. At least just in terms of what he data is indicating. And I think the circulation of debt tends to back this claim up quite a bit. So what you saw was essentially open debt had significantly decreased in age. And closed debt has actually increased in age a bit. So to overtake the age of open debt. |
| # / 00:42:07 | Vishesh Choudhry | Now what that effectively means is, more old loans getting paid back, which we only tend to see happening ... I think that's a good thing to look out for effectively. On a standalone I think the repayment of old debt is more often a good metric than bad metric. And it speaks to circulation, which I think is good for the system. It keeps unrealized fees lower, which is obviously a mathematical benefit to Maker holders. And I think it decreases the amount of risk and keeps efficiency up effectively. Economic efficiency up in the system. |
| # / 00:42:45 | Vishesh Choudhry | And this is I think fairly directly related to similar to what we were talking about in terms of Compound, InstaDApp and things that have been going on there. So just to quickly explain the open debt age decreased. This kind of ties into more of the debt that's being drawn out, is being drawn out from pre-existing CDP's. And less new open debt has been created recently, but more old debt has been closed out. And so that makes total sense when you consider that the DAI supply has come down from 90 million 12 days ago to 78, 79 million. |
| # / 00:43:33 | Vishesh Choudhry | Which is, I think, one of the more significant drops in a 10 day period that you've seen. I mean there was similar degree of drops in the end of 2018, and in August when there was seen a lot of new stuff being released. So this is touching on collateralization. With this 20.5% increase the collateralization had run up with what's pretty interesting July 14-19 range, because if you look at ... zoom back out here. |
| # / 00:44:12 | Vishesh Choudhry | If you look at the ETH price during that same time period, it's fairly flat, actually decreasing a bit. So this is actually perfectly opposite reaction to the ETH price right around here. So people were scared, there were liquidations, and a significant amount of ETH was being locked on a daily basis, and then what's interesting is just in the last few days with the significant decrease in DAI supply there is a fairly significant decrease in locked collateral. Which kind of makes sense. |
| # / 00:44:54 | Vishesh Choudhry | And what it actually speaks to is some of those CDP's that were closed out appear to have been fairly well collateralized CDP's. So fairly risk averse actors. And I think it's just a bit of a selection that caused this, the run up was a bit of like fear and this effect which I guess somebody else will name at some point. But the counter reaction to collateral value in terms of nominal amount of collateral locked. |
| # / 00:45:23 | David Utrobin | So Vishesh, I have a quick question about the collateralization ratio actually. I was thinking about it and what if a CDP holder wipes their entire DAI debt, has zero DAI in their CDP, and they just have their ETH sitting there? So technically, and you know just collecting whatever the peth appreciation rate is as people get liquidated. So that ETH is not actually collat ... I mean I guess it is collateralizing the system somewhat, but it's not actually backing any DAI debt. Is that a significant scenario to filter out of the data to get better data? |
| # / 00:46:06 | Vishesh Choudhry | So in terms of total collateral in the system, I believe I would still be counting those cases, but most of the calculations that I do, I try to filter out for non-empty CDP's. So effectively, if CDP's have no debt then for most calculation they're counted out. In terms of the total pool of collateral, those are still included, but I've graphed this before. Those are pretty tail, like pretty edge case, I think. I don't think ETH locked with no debt makes up a significant portion of the ETH supply. |
| # / 00:46:46 | Vishesh Choudhry | And it actually makes no sense because what you're talking about in terms of the yield on just the [peeth 00:46:54] leaf spread is actually pretty low. Like it was much higher in end of 2018 early 2019, that ratio was growing much more significantly. But- |
| # / 00:47:07 | David Utrobin | It's better than the Compound supply rate for ETH. [crosstalk 00:47:10]. Like .1%, I think it's higher than .1% a year. |
| # / 00:47:17 | Vishesh Choudhry | Oh. Oh ETH supply rate. |
| # / 00:47:21 | David Utrobin | Yeah, on Compound. |
| # / 00:47:22 | Vishesh Choudhry | Yeah. |
| # / 00:47:24 | David Utrobin | So we know that there's a market for like some passive yield on just ETH. |
| # / 00:47:30 | Vishesh Choudhry | Actually is it better than .1%? Because look, 1.0431 currently, and if you look at end of 2018 it was 1.0402, so it's a very slight spread. So I don't think that that's a real profitability scenario that people are chasing [crosstalk 00:47:56]. |
| # / 00:47:57 | David Utrobin | I guess it depends on the amount of liquidation events people are forecasting for in the year. But yeah, I don't know. |
| # / 00:48:03 | Vishesh Choudhry | I mean I think there are much better safer ways to cash out on ETH, but yeah. I mean the simple answer is, I don't think there's a significant portion of CDP's that have large amounts of collateral in their debt. Is the simple answer, but I can pull the exact percentage for you next time. |
| # / 00:48:26 | Vishesh Choudhry | So just to polish it off here, the secondary lending rates is this is where a lot of the magic has been going on in the past week. So I don't want everyone to just hear, oh DAI supply dropped by 10 million, everything's going to hell in a hand basket. Because it's not that simple. It's a severe destruction of oversupply. There may be some slight decrease in demand, it would be stupid to totally exclude that scenario, but that wouldn't be the whole picture. |
| # / 00:49:02 | Vishesh Choudhry | And so if you look here the weighted average bar rate for dYdX and Compound has basically come up within spitting distance of the stability fee. And it has come close in the past and there's always this spread, dYdX fluctuates above and below. Compound basically keeps the spread below. That spread was sitting for a while earlier in July. But in the past week or so has come up very close. And that's pretty easily explicable with the utilization here, so dYdX utilization, like is said, for other reasons fluctuates a little bit more and stays a little bit lower. Because I think dYdX is kind of nestled into this use case of being a little bit more shorter term loans and a little bit more derivative highly leveraged plays. |
| # / 00:49:54 | Vishesh Choudhry | But Compound is kind of like the discounted version of Maker at the moment. So effectively like when people want to source DAI at a slight discount they'll source it from Compound instead of Maker. If people just want to supply DAI currently, since there's no DSR at the moment, they'll just go do that on Compound. So that's kind of where that's sitting right now, but the utilization rate has shot up in the past month and now is hovering around 98% which is pretty crazy. |
| # / 00:50:28 | Vishesh Choudhry | So the excess amount of supply on dYdX and Compound are both very low, less than 2 million in total. And the borrow volume is just it exploded in May, was kind of quiet in June, and then has shot up again in July. And no small part of this is attributable to, or you can attribute a decent portion of this to what's been going on with Instadapp, the changes in the Compound rates, and I think just a lot of it don't underestimate UI and awareness branding, marketing, things like that are very powerful as well. So I think just a better awareness of the fact that you can get the same DAI at a cheaper rate has reduced the excess supply that's available in these platforms. |
| # / 00:51:19 | Vishesh Choudhry | And so you can see, I tweeted about this the other day, like 38% of the total supply of DAI is being borrowed on secondary lending platforms right now, that's huge. And actually [inaudible 00:51:31] just dYdX and Compound it's not counting in like Dharma, Nuo or anything like that. So that's fairly significant. It's I don't think something to be worried about per se, right? So I think there should be this narrative of like oh what happens on dYdX and Compound is taking market share away from Maker, is not necessarily true. |
| # / 00:51:53 | Vishesh Choudhry | And that's where this excess supply comes in, right? So this has basically been like 7-10 million DAI at times. It's just sitting there not being used by anyone, and so that sum, if you look at July 7th, that was around five and 2.5, like 7.5 million. It's come down by about 5 million. So at least what you can effectively think of as pigeon hole principle, what goes in and what comes out, about 5 million of that excess supply has come down. And so at least half of the decrease in DAI supply could reasonably be explained by an increased amount of usage on secondary lending platforms. And so that's literally just an arbitrage of people getting a cheaper rate and saving themselves a couple of points. |
| # / 00:52:47 | Vishesh Choudhry | It was like three points earlier, and now it's down to about a point, which makes sense, right? So as that opportunity decreases in size, the profitability of that opportunity decreases. And so I think that explains a decent portion of what's been going on with the decrease in supply. I don't think anybody should make the case that it's even, I think mostly, been a decrease in demand. I think it has mostly been an improvement in efficiency, but at the same time, now we're very very close to the margin. I would seriously take this as a data point to keep the stability fee as is, or even potentially decrease it slightly. |
| # / 00:53:30 | Vishesh Choudhry | But again, I would caution again, and I think David was really good to point this out earlier in the call. I would caution against this sort of ping ponging behavior and overshooting in both directions. Which I think has caused some problems in my honest estimation. So going from 19.5% suddenly down to 17.5% and then again further suddenly down to 16.5% was an over reaction I think. And so I would caution against doing the same thing now. |
| # / 00:54:01 | Vishesh Choudhry | I know there was some discussion of a 22.5% stability fee, I'm sure there will be further discussion about a more dramatically decreased stability fee as this price comes up a little bit because I think, again, most of the community tends to make a fairly simple decision of if DAI price is high, decrease the stability fee and vice versa. So I would not be surprised if a lot of people start to come out as this DAI price increases and say, hey drop the stability fee. |
| # / 00:54:29 | Vishesh Choudhry | But what I would caution against is over simplified thinking and chasing your own tail. And so definitely don't suddenly decrease it to 16.5%, and definitely don't increase it at this point. I think what's [crosstalk 00:54:44] is to hold it steady or just slightly decrease. Yup. |
| # / 00:54:47 | David Utrobin | Really quickly, just so that the audio captures it, Rich pointed out in the chat that the governance poll that ended today, ended with an 18.5% stability fee. So there's going to be an executive poll this coming Friday to decrease the stability fee by 2%. |
| # / 00:55:04 | Vishesh Choudhry | Got it. Thanks, yeah, sometimes it's hard to keep up with the most recent update. Yeah, so 18.5%, again, I mean that's hopping it back to where it was July 9th, so there's actually a logical reason for doing that. I would have probably suggested a smaller decrease. And so this I think speaks to the exponential voting polls. I think having small infrequent changes is most of the time going to be easier to manage for the system. And I think manageability is something to significantly prioritize for this system at this point. |
| # / 00:55:44 | David Utrobin | So Vishesh, I have a quick question. |
| # / 00:55:46 | Vishesh Choudhry | Yeah. |
| # / 00:55:47 | David Utrobin | That's totally relevant. It's the fact that with this decrease if it passes, it actually is going to I guess ... I don't know if it's going to make it even more narrow, or even potentially beat the borrow rate on Compound. But do you see the parity of the rates between something like Compound or secondary lending markets in general with Maker to be like a significant point of data? |
| # / 00:56:18 | Vishesh Choudhry | Yeah, it is significant. DAI is inherently asymmetric, and I will say that over and over and over again. So similar to how when you arbitrage DAI above $1 it's a quick and easy thing, when you arbitrage DAI below $1 you have to potentially sit with it until it returns to peg and take on a bit of risk and a bit of time and cost to capital. Similarly, when it comes to lending, if you drop the stability fee to below the Compound borrow rate you will immediately incentivize refinancing. |
| # / 00:56:52 | David Utrobin | People are going to use that InstaDApp bridge the other way. |
| # / 00:56:56 | Vishesh Choudhry | Extremely predictable outcome I would say. That would be a very very likely scenario. The problem is, doing it in the reverse direction, when the stability fee is higher having that bridge and refinancing to Compound, for example, has not always been as quick I think of a reaction as you would see in that scenario. I think people would be quicker to refinance back to Maker because the stability fee is a slightly more predictable rate I think than like Compound rates for example, or dYdX rates for that matter. |
| # / 00:57:31 | Vishesh Choudhry | So there are reasons why it would make sense for people to immediately switch back to Maker. It takes a little bit more time I think for people to refinance to something like Compound. So again, inherent asymmetries in DAI, and I think you got to be weary of those. Similar asymmetries I think when decreasing the stability fee is not equivalent to increasing a stability fee. And you have to take into account very different concerns and you have to I think be much more careful about decreasing the stability fee than you do about increasing it. |
| # / 00:58:09 | Vishesh Choudhry | And so there's all these different asymmetries when it comes to understanding and managing DAI. And so similarly, I think when you're thinking about these secondary lending rates you have to think much more carefully about decreasing the borrow rate of DAI to less than what is currently available on other platforms than you do increasing it to a rate that is higher than what's available on other platforms. Because when you increase it to a rate that's higher than what's available on other platforms, people can just eat into excess supply and there's relatively little increased risk for the system. |
| # / 00:58:47 | Vishesh Choudhry | When you do it in the reverse direction you're now immediately going to justify refinancings back to Maker and you're immediately going to justify potential increase in DAI supply, and at the same time, dumping more excess DAI supply back on the secondary lending platforms. Potentially making it cheaper, and potentially putting more DAI back on the market, which could potentially decrease the DAI price. So it could ironically have a much stronger effect than an increase in the stability fee would have on improving the DAI price. |
| # / 00:59:22 | Vishesh Choudhry | And so I think you have to be very careful about doing that, and again, just another data point for why I would have suggested, and have suggested, slower more slight decreases even potentially keeping it 20.5 or dropping to 20 or 19.5. And so, 18.5, we'll see what happens. But small even half a percent changes at a time I think make a ton of sense. And making them slower than inter week and definitely seven days I think makes sense. So every other week half a percent I think is not crazy and makes a ton of sense in terms of managing the system smart [crosstalk 01:00:07]. |
| # / 01:00:08 | David Utrobin | So Vishesh, sorry for bombarding you with all these questions but I have one more. |
| # / 01:00:11 | Vishesh Choudhry | Okay. |
| # / 01:00:12 | David Utrobin | What does the scenario have to be for borrow rates to drop on DAI? Like generally speaking. |
| # / 01:00:24 | Vishesh Choudhry | Can you clarify the question? |
| # / 01:00:26 | David Utrobin | So currently the stability fee is like 20.5%, what do we have to see? Do we have to see a change in the profile of what DAI has demanded for to see like rates drop, lets say like if we wanted to see an equilibrium come about naturally of let's say a 10% stability fee on DAI. Like in single collateral, because this might change conceptually in multi collateral. But yeah, you get my question. Kind of. |
| # / 01:00:53 | Vishesh Choudhry | Yeah I get the question. So I'm just going to restate in my own words what I think is effectively when do you consider actual data driven scientific signals for decreasing the stability fee? And I think one, you watch that excess supply and you watch the utilization rates on the secondary lending platforms. Especially in the absence of the DSR. So to what extent is there excess DAI supply floating out around there? And to what extent can that shield the demand curve from the stability fee being potentially too high? |
| # / 01:01:28 | Vishesh Choudhry | So theoretically if you're going to lower the stability fee, it's because you're saying it's too high. You should just lower the stability fee to try to get it as low as possible. You should lower it because you think it is too high. And those are I think an important distinction that seems very subtle, that I think gets lost. But the nuance is important. So there is an equilibrium that theoretically exists, you want to manage to that equilibrium so that you're balancing DAI price, you're balancing cost of using the system, you're balancing holistic system level metrics, and level of risk in the system so that if ETH makes a crazy movement tomorrow the whole system isn't screwed. |
| # / 01:02:09 | Vishesh Choudhry | And so like your balancing all these things at the same time, and that is the equilibrium point that you're trying to manage. The problem is we have low visibility on the equilibrium point, and so you use the stability fee as this very indirect gain knob to try and navigate to that equilibrium point. And so when you're trying to decrease the stability fee it should be because you think it is too high. And so then what does it mean when you think a stability fee is too high? |
| # / 01:02:40 | Vishesh Choudhry | Well what you're saying is there's a demand curve and there's a cost, and that cost exceeds the demand curve's preferred cost and so ... I won't say price because this isn't the same economic question. But effectively if that excess supply is not present or is significantly decreasing, now you run into the risk of hampering the demand curve. And so I think excess supply is effectively what you're trying to manage towards with that stability fee. |
| # / 01:03:11 | Vishesh Choudhry | So if you see the DAI price is relatively steady, if you see that excess supply is decreasing, then you can start to say okay well potentially the stability fee is too high. But if everything was totally steady, if the DAI price was precisely at $1 and excess supply was not moving an inch, borrow volumes on secondary lending platforms were not moving an inch, then you might say, yes we're at an equilibrium point. And there's nothing at this moment that justifies making any change to the system. |
| # / 01:03:42 | Vishesh Choudhry | The problem is, and this is the thing that I'm trying to caution against. I think even if we were to run into that scenario people would want to make changes. And that's, I think, where some of the dangerous behavior comes from is when you want to make changes when they don't necessarily make sense. |
| # / 01:03:57 | David Utrobin | Thanks, that's a good answer. I want to keep talking, but I know we should probably get [crosstalk 01:04:03]. No no, Rich is okay. But it's already the hour, so we probably have another half an hour that we can go reliably, but yeah, so I think Matthew is up next if you're done Vishesh. |
| # / 01:04:19 | Vishesh Choudhry | Yup. |
| # / 01:04:20 | David Utrobin | Yeah, so Matthew you in the call? |
| # / 01:04:27 | David Utrobin | Hold on, let's see. Oh Matthew is actually not in the call, I think he left a bit early. Or maybe he wasn't here at all. I don't know. All right, well, Vishesh in that case you want to keep having a conversation? |
| # / 01:04:45 | Vishesh Choudhry | I'm happy to answer anymore questions. I think I ran out of stuff to talk about. |
| # / 01:04:51 | David Utrobin | So okay, I have a question relevant to the discussion we were having. So right now we see that Compound utilization is super high, excess supply as seen on dYdX and Compound has dropped. But you think that this is kind of at the margin because we didn't see a premium in the DAI price, right? You think we're at like a very delicate ... do you think we're at a very delicate equilibrium point right now because we don't see a premium in the DAI price? Despite the fact that this excess supply has dropped significant. |
| # / 01:05:24 | Vishesh Choudhry | No. So DAI price is a function of where all the markers are at, and what's the volume of both buying and selling DAI for ETH and ETH for DAI. And so if there was ... right, so this is what I was talking about is the volume is mid to low range in the 3-4 million range. Had it been 14 million yesterday, then you would have seen a huge run up in DAI price. Had a bunch of people decided to lever up at whatever 222 ETH price currently, had you seen a bunch of people decide to lever up at that price then you would have seen DAI price depress significantly. |
| # / 01:06:10 | Vishesh Choudhry | You would have seen it depress significantly less than if it had been 16.5% stability fee, but with that excess supply being lower I think now it's not about the DAI price, is basically my answer. And this is I think the really hard thing for people to get away from is just looking at the DAI price as being the be all and end all. When that excess supply has soaked up fairly significantly, I think now as long as DAI price is in a relatively good place, right? So if DAI price had been 96 cents on the dollar than what you're basically going to say is, I don't care what the demand function is, I need to soak up oversupply today so that DAI doesn't go into some kind of spiral scenario. |
| # / 01:06:51 | Vishesh Choudhry | And so your kind of artificially forcing up the DAI price by hoping that whatever trading activity comes along at a higher stability fee it's going to be buying activity. And that's what you really try and change is the ratio of what is buying activi ... the percentage of buying activity vs. selling activity on DAI. |
| # / 01:07:13 | Vishesh Choudhry | So yeah, to answer your question. I don't think it's about DAI price. The reason that I'm saying I see a case for holding the stability fee or dropping it very very slightly is because that excess supply has soaked up significantly because DAI supply overall has come down significantly. Because I think the amount of organic demand is very close to the amount of supply that currently exists. |
| # / 01:07:43 | David Utrobin | Right. And you mentioned that this isn't something that's necessarily something we should be super concerned about? |
| # / 01:07:52 | Vishesh Choudhry | Yeah. I mean here's still a little bit of wiggle room. So it's not like a extremely stressful scenario where ... and the thing that I'm cautioning against being extremely worried about is this decrease in DAI supply. So I could hear people thoughts effectively when I saw that DAI supply go down. And I'm sure there were plenty of people who were concerned that okay Maker is losing usership to things like Compound and dYdX. And I'm sure that's the narrative that ran through some people's heads. |
| # / 01:08:24 | Vishesh Choudhry | What I'm basically saying is that would be a premature narrative because a lot of the movement was coming out of basically this reserves of oversupply. So it's not impossible to think, but I think it would be primarily due to ETH price not due to stability fee. That there was some decrease demand for leverage. And so there may have been a slight decrease in demand, that's totally possible. But that 10 million was not a 10 million drop in demand. It was at least [crosstalk 01:09:02]. |
| # / 01:09:04 | Vishesh Choudhry | Yeah, I mean I think it is more than half and it's hard to say exactly how much, but at least half was a decrease in oversupply and just kind of an arbitrage for refinancing. I mean, I think at least 4.9 million of that was literally through Instadapp, or something like that. And so I think there's a big portion of your answer. |
| # / 01:09:27 | David Utrobin | Yeah. Yeah absolutely. Thanks. |
| # / 01:09:30 | Psybull | Could I pose a scenario that I've been kind of worried about? And I brought it up a couple times on chat, but I'm actually really interested to get Vishesh's point of view on it. Which is that, Compound did not uncap their rates, what they did was they moved ... or maybe it's changed since then, I could be wrong, but within the past week their change was to move the Cap, still at 100% utilization, the borrow would be 20%. And what I have been thinking about is that actually creates a race condition between in any kind of a scenario where the stability fee on Maker is above the total possible cap on Compound. |
| # / 01:10:11 | Psybull | I worry that it creates an issue where it will always be beneficial for someone to InstaDApp their CDP over to Compound, even up to 100% across the board. And that, in that exact scenario lenders cannot take out any money. And I worry that this could create some kind of a feedback loop in a 0% oversupply scenario that there is actually still no reason for anyone who has lend out on ... or for borrow out on Compound to take it out. But then none of the lenders can actually take out to rebalance the system where they actually hold a third of the DAI on the market where people may need to close out their positions. |
| # / 01:10:56 | Psybull | Like I actually think in a quick crash scenario DAI price is heavily stressed because ... in a case where we are heavily leveraged because people need to buy DAI to close their positions quickly. And so it is a very short window of time, but then market Makers react by generating a lot of DAI to push that back out. We don't have to worry about a longterm worry in this, because let's say DAI settled at $1.05, we have plenty of Cap we can print new DAI and sell it to the market. |
| # / 01:11:27 | Psybull | But do you think that there's an issue if our stability fee is above the max cap of Compound is my overall question? |
| # / 01:11:35 | Vishesh Choudhry | Yeah, so you bring up a good point. And actually this would be a good thing to clarify. When the stability fee moves down, does the cap immediately move back down on Compound? Or is it a manual switch? |
| # / 01:11:48 | Psybull | No. I believe that it is a hard coded value where they code it essentially at 100% Compound utilization. They cap the borrow at 20%. And that's moved up from 17 and could move in the future too, but that- |
| # / 01:12:00 | Vishesh Choudhry | Right. Yeah, so that was kind of my point earlier. And it's a good distinction, I kind of over simplified it in my explanation. It's not a removal of the cap, it's just a moving of the cap. But I think the effect is ultimately the same. So if the cap is moved from 17 to 20, I don't think the fee would not be extremely likely on Compound to hit that exactly 20 cap. Even in the current scenario. I think I am more worried about the Compound, or dYdX for that matter, rate being cheaper ... or sorry being more expensive than the Maker rate because that's an immediate effect of increasing the supply. |
| # / 01:12:52 | Vishesh Choudhry | Which I think immediately is likely to flood more DAI onto the market. And so I think has some potential concerns, especially for the peg specifically. But I think especially with the absence of the DSR currently, Maker has benefited from Compound and dYdX having more often than not a cheaper route for obtaining DAI. And so this is where I kind of go back to if the stability fee is too high, and this was a big criticism while the stability fee was being raised three, five, seven, 11, 14, et cetera. People were worried about the demand function. And the likelihood for the stability fee to actually decrease the demand for DAI. |
| # / 01:13:42 | Vishesh Choudhry | And so one of the big boons for Maker I think has been the fact that people can always obtain cheaper DAI, or at least in the relatively recent past, can obtain cheaper DAI on Compound and dYdX. Because that actually helps to protect the demand function from a stability fee that is potentially overshot. And so I think it's actually in Maker's best interest for Compound and dYdX to have a cheaper rate. So I'm not worried about that scenario. |
| # / 01:14:09 | Vishesh Choudhry | I am more worried about the reverse scenario where the stability fee is lower than the borrow rate or God forbid the supply rate on one of these platforms. And that immediately throws us back into a 2018 scenario where there's some kind of screwed up incentives and potentially some adverse effects on DAI's function. And it's very hard to unwind those as we've seen. |
| # / 01:14:36 | David Utrobin | Wait, can you say that scenario again? Where the stability fee is smaller than the supply rate? |
| # / 01:14:42 | Vishesh Choudhry | So if the stability fee is smaller than the supply rate that's very bad. When we get back into the way things were, I think it was end of 2018, if the stability fee is smaller than the borrow rate on these platforms then it's cheaper to mint DAI than it is to borrow it from the secondary lending platforms. But which- |
| # / 01:15:03 | David Utrobin | But wouldn't the market auto correct that kind of quickly? |
| # / 01:15:06 | Vishesh Choudhry | Well, it depends on how quickly. |
| # / 01:15:09 | Vishesh Choudhry | What's that? |
| # / 01:15:14 | David Utrobin | What was that Cole? |
| # / 01:15:15 | Cole Kennelly | Yeah, I mean what do you think about that? Is it just the fact that FT's like it's hard to figure out how to [inaudible 01:15:28] having so much trouble. |
| # / 01:15:31 | David Utrobin | Cole, you're cutting out a little bit. It's hard to hear the question. |
| # / 01:15:40 | Vishesh Choudhry | So, David just to answer your question there. What I was saying was effectively it may happen, yes. But first I think what would happen is people would source DAI from Maker, that would drive up supply, DAI would get flooded onto the market. Some of that would potentially get supply to these platforms. Borrow volume may decrease on some of these platforms. And then that propagates into their systems and then those rates get adjusted. |
| # / 01:16:09 | David Utrobin | We actually saw this [crosstalk 01:16:11] scenario. |
| # / 01:16:10 | Vishesh Choudhry | What's that? |
| # / 01:16:15 | David Utrobin | Didn't we see this scenario earlier in the year where there was an arb where you could just borrow DAI because of the stability fee was lower than the supply rate. |
| # / 01:16:23 | Vishesh Choudhry | Yeah, so I'm even just talking borrow rate, but yes there were scenarios prior where it was lower than the supply rate. And then people were inherently just minting DAI and lending out on secondary lending platforms which [crosstalk 01:16:34]. Yeah. And it's very flimsy and so- |
| # / 01:16:38 | David Utrobin | It's bad for the DAI peg. |
| # / 01:16:39 | Vishesh Choudhry | Right. And when it goes onto the market DAI price takes a hit, people freak out, stability fee gets raised. I mean this is exactly what happened. But even if the borrow rate is cheaper on Maker, I'm saying there are some potential concerns to think about where I think you do have a short term effect of DAI ... like yes those rates would get arb'd, but in the process DAI I think would make it onto the market and the peg would potentially take a hit. |
| # / 01:17:08 | Vishesh Choudhry | I don't know how the market Makers- |
| # / 01:17:10 | David Utrobin | Wouldn't a scenario like that indicate that there is a whack of DAI supply and that scenario is basically fixing that lack of DAI supply? Because if- |
| # / 01:17:21 | Vishesh Choudhry | It depends. So if the supply goes up and people do not refinance from secondary lending platforms, then yes. But if people start to decrease the amount they're borrowing on secondary lending platforms, and then go ahead and increase the DAI supply, you're basically just returning a portion of the oversupply and flooding some DAI onto the market in the process. I don't see how that's a positive. |
| # / 01:17:47 | Vishesh Choudhry | So yeah, again, more, no I would not be concerned by perpetually having the scenario of Compound being cheaper than Maker. I think it's actually been helpful for Maker. And I think this makes sense, right? So if you start to think about dYdX as a short term more expensive highly levered platform for primarily derivative plays. If you start to think about Maker as the last resort for minting DAI supply when there's not enough floating out there in the market. And you start to think about Compound as this middle ground of a slightly cheaper place to borrow DAI, and a place where you can lock up some DAI to get this pseudo DSR effect. |
| # / 01:18:34 | Vishesh Choudhry | These roles I think are what have emerged for the three platforms respectively. And I think they've been working in kind of tandem, kind of synergy and I think it's nestled in form following function, I think it's evolved into the structure that seems to work for this market. |
| # / 01:18:56 | Vishesh Choudhry | And this is where people start to talk about some of the efficient market hypothesis and all that jazz. And Instadapp and what it's doing. I think the structure that has currently emerged is the one that works right now. |
| # / 01:19:10 | David Utrobin | Right. Yeah. Cool, thanks for the really great answers. |
| # / 01:19:19 | David Utrobin | So if there's no other explicit questions or conversation that we want to have ... oh yeah, there was this one comment from Psybull that we didn't get to from earlier in the call. What do people think about posting their voting rationale? I think I want to do it more regularly, but do people think that it's positive, negative to the process? |
| # / 01:19:42 | David Utrobin | I mean I have some thoughts. I think it's probably good when it's done well. I know that if a lot of people have a lot of text, like almost nobody's going to read it except for those people that already are commenting and giving their rationale. But, for newcomers it gives them kind of like an Amazon's rating page where they could go and make their own decision. Like oh okay, this person is doing it for this reason. It gives people the ability to think for themselves, so I think it's probably positive. |
| # / 01:20:15 | David Utrobin | But I think the cognitive overhead for reading everybody's ... it's a good option. I don't think it's actually bad. And I think it's good for you as a voter because it lets you put your reasoning and thoughts on paper, figuratively on paper. And that's always actually really useful. |
| # / 01:20:36 | Vishesh Choudhry | So David, actually I would agree with your conclusion. But I'm going to push back on the reason alone. So I think there's been a problem in Maker governance which is a bit of a disconnect between what the conversation is and what the votes end up being. And I think in order to have effective governance you need to resolve that gap. Or the community needs to resolve that gap. That would be my inclination. |
| # / 01:21:04 | Vishesh Choudhry | Because how do you manage something well if you're talking about one thing and doing something different? Or at least then it begs the question of are you appropriately devoting your time and resources? And so I think there's a tremendous lack of visibility into the thought processes and rationales of a fairly decent chunk of the voters. I don't often hear ... I hear myself talk, I hear people on these governance calls talk. I hear a lot of great posts on the forums and the chats, but rarely do they tend to be making the same case as what the polls and the votes end up being. |
| # / 01:21:44 | Vishesh Choudhry | And so what I'm really missing from my perspective as like a participant of this community is understanding really well why 18.5%, what were people thinking? Why increase of to 20.5%? Where is some of the rationale [crosstalk 01:22:01]? |
| # / 01:22:01 | David Utrobin | So that a case for writing out rationale for your votes. |
| # / 01:22:06 | Vishesh Choudhry | Well writing out is a very specific suggestion, right? So it's like this is how you going to go about doing this. What I'm more talking about is, it may not necessarily be writing it out because I think that's high overhead and you're not likely to force people to write out what they're thinking. But there has to be a way at some point I think to understanding why people are voting the way they are. It doesn't necessarily have to be writing it out. |
| # / 01:22:31 | Psybull | So my thinking on this was just that, a lot of it mirrors what Vishesh was just talking about. I think I guess what I'm thinking is like I would like to post it to the forum because I do feel like there's no current coordinated place to talk about what you're voting or why you voted. And so I guess I'm looking in one sense I'm looking like should be do the discussion afterwards? Which is like, I don't say anything before, but afterwards I say, hey I voted 19.5, here's my reasons, blah blah blah. |
| # / 01:23:05 | Psybull | Or is it valuable to do it ... or do people think there's value to doing it during the process where I can say, okay once I've made up my mind I think there is definitely a piece of it speaks to what David is bringing up. With like it helps me crystallize my reasoning. But I do think that for instance part of the reason that I think this is important is that I'm pretty sure there is some 14,000 Maker holder that is constantly voting on the rates, but is not reading ... either not reading chat regularly, or not reading chat at all. |
| # / 01:23:35 | Psybull | And so I don't know the way to kind of funnel everyone into one place to talk about it, but I feel like the forum post for the current executive poll or regular poll is not a bad place to do it. So I'm just going to start doing it there and we'll see. If other people want to do something different, but like the chat is definitely the wrong place and it's too ephemeral. But yeah, I do think we need somewhere where we can start, just to kind of funnel everyone into a discussion about it because I do think there is a huge disconnect between how the people are voting and how the talk about it in governance process goes. |
| # / 01:24:10 | David Utrobin | Yeah, I think when Rich posts those threads every time there's a vote that's what the threads are meant to be, but they just [inaudible 01:24:17]. You know people don't know ... yeah, exactly your point. And I think it would be probably a good thing. So yeah man, good question. |
| # / 01:24:29 | David Utrobin | All right, cool. Well I'm satisfied to end the call here. Unless you guys want to keep going. I'm going to stop the recording, so you guys can keep talking and hang out in here if you want after. Or I don't know if I leave the room if it'll kick you all out. But I think I have to set somebody a host. But here we go. |