Sirs,
During the last period of expansion for our protocol, we have experienced an expected although somewhat exaggerated depeg on VST.
The reason behind it is simple - Introduction of a clearly desirable product on the market, the implementation of GLP Vault.
This was a unique opportunity, which was quickly taken by various Yield farmers, curious to leverage their returns on extremely attractive GLP token.
If we take a step backward and look at our current product split it is easy to understand that we actually have only two market-fit vaults.
gOHM and GLP vaults are maxing their cap and taking 10m of 11m of our TVL. Furthermore, with the new fee split between Treasury and GLP stakers, DAO earns a comfortable revenue stream in GLP Vault.
Given that Collateral-Backed stablecoins are a function of both supply (attractivity of Vaults) and demand (Liquidity rewards), I want to argue for leaving the stabilization mechanism into the market’s hands.
I propose further expansion on our profitable vaults and leaving the depeg free-floating.
What are the market stabilizing forces?
What happens when peg falls (risk of over-peg is actually demand-driving by itself):
- Vault Depositor:
High incentive to repay - Lower cost of debt due to VST < 1.00
Low incentive to borrow - As expalined by Mikey in other post:
If VST <$1 when they open the position, it effectively increases their MCR. Say that original MCR is 110%, Alice opens a position with $110 and takes out 100 VST when VST is at 98¢, Alice’s debt value is effectively $98. So effectively, Alice’s MCR is 110/98 = 112.2%.
- Arbitrage actors:
High incentive to buy discounted VST on the market and liquidity mine till VST approaches 1.00 (this point can be emphasized by offering “recalculated” APR for LM programming taking into consideration APR from restoring the peg)
For both sides of the play, VST becomes more attractive as the peg slips further. From economics, there must be a point where these two forces meet and find a natural equilibrium. Obviously, the VST can’t be valued at 1.00, but any lower it goes it takes the premium on Supply (Higher incentive to repay and higher cost to borrow) and offers extra returns for Liquidity miners. This would also allow certain cyclical rotation inside of vaults when peg falls, thus creating more fee revenue.
Given these self-adjusting forces, I believe the notion of the peg as fixed 1.00 should be relaxed and that we shouldn’t worry if the peg starts to free float. Educating the community that it is a normal part of protocols ebbs and flows is crucial in order to drown FUD initially. Over time this shall be accepted as normal.
The nature of our collateral assets even without Redemption function is enough of a guarantee that VST will always correspond to 1 USD of collateral.
Behind this wall of text, my view is rather simple - we have two products that are very exciting (gOHM and GLP) both with stable price action and with huge demand. Let’s use these and extract value for both their Users and Protocol. Continue raising the cap to a certain point, as we don’t want to create systemic risk for OHM or GMX. This will increase our proceeds from fees that can be used to enhance our liquidity rewards thus starting a positive cycle.
It is rather obvious that stablecoins are very carefully monitored and very susceptible to crowd-think. Providing a mechanism that is human-free might produce unease, but it is the way of Defi. We want applications and structures that self regulate. This would be a step in that direction.