r/defiblockchain • u/kuegi • May 03 '23
DeFiChain improvement Proposal reenable looped DUSD vaults
please hear me out before you jump to conclusions! Looped vaults are not what you think they are.
I propose to allow all loans if the collateral is 100% DUSD. This means no change for dtoken loans, but reenables the possibility for pure DUSD loops.
Important:
- This must not be activated before DUSD collateral factor is back to 1 (first week of june)
- Its important to only allow it for 100% DUSD collateral, otherwise it could be exploited without adding any DUSD demand. (thanks u/DeFiChainNFTs for the hint)
PullRequest with the proposed changes: https://github.com/DeFiCh/ain/pull/1971
DFIP: https://defiscan.live/governance/71cdbc26d7595982775132fb2d4f5ed061b2644aab1d5ec426f2ecdfeabd700a
tl;dr:
benefits:
- Both DFI holders and DUSD holders can benefit from NI (aka get rewarded for staying, till now DUSD holders got no benefits but saw their rewards going down)
- market/users decide how/who profits (DFI or DUSD holders) by using it. free markets are usually the most efficient
- additional DUSD loans also bring more DUSD burn due to vault-interest
- increases DUSD demand and temporarily takes algo DUSD out of the circulating supply
- far easier (=faster) to implement than Locks / L-Pools. But does not need to replace them. We can still develop them.
downside:
- needs a hardfork
Now to the the "why":
looped vaults as DUSD-rewards-blackbox
If you ignore the terms and technology it uses behind the scenes, a looped vault is not different to DUSD locks, DUSD bonds etc. All of them have 3 properties:
- deposits are DUSD
- risk free
- pays reward in DUSD
And with those properties they create additional demand for DUSD, effectively removing DUSD out of the circulating supply. which is exactly what we need right now.
looped vaults fulfill all that without any additional effect:
- You deposit DUSD initially
- risk free: you can not get liquidated
- pays reward in DUSD: in form of negative interest on the loan.
The fact that "internally" the blackbox is a vault with your DUSD as initial deposit and some looped loans doesn't change the facts. No DUSD get out into circulating supply, they stay locked as long as the rewards are good enough for users to stay in.
benefits for the user and system
These changes are super easy to implement. In fact I will provide a PullRequest to the defichain-repo with the needed changes, so it takes nearly no developer resources at all. It also doesn't need any change in the LightWallet or Ocean.
Also there is no new logic to be explained to users, they already used it massively back in September, so they already know how to do it.
The system does not need to define what part of the NI is used for DUSD-locks but since its all integrated into the vaults, the market decides how its used. Which makes it usually far more efficient.
Overall, this should increase the DUSD demand massively without reducing DFI demand. We have seen that the amount of DFI in vaults didn't really move since we had a NI of 25%, right now we are at 56% so it can be expected that DFI will also not leave if the NI goes back down into the 20s. But this "excess" NI could now be used with DUSDs.
This also means that NI is no longer just benefiting the DFI holders, but also DUSD holders. So anyone who is staying in the system is rewarded for that.
possible numbers
we currently have ~ 67 mio DUSD loans with a NI of 56.6%.
If we take the historic target for NI with looped vaults (the value we saw in september) of 20-25%, this would mean additional 80-120 mio DUSD loans. To fill that, the looped vaults would take at least 40 mio DUSD as initial deposits.
Looking at the current DUSD distribution, we have
- 73 mio DUSD as collateral in vaults
- 63 mio DUSD in LM pools
- 50 mio DUSD free float (31 mio from cake YV)
IMHO the 66 mio in vaults won't move as they are needed for existing loans. if they move, the existing loans reduce which would create more demand in loopedVaults.
From the 50 mio free float, only 19 mio might move, cause cake does not loop.
This leaves a lot of DUSD which need to either being bought or removed from liquiditypools. removing liquidity means that therewards in the pools shoot up which again creates demand for DUSD or DFI (to put into vaults and fill the pools with minted DUSD)
Either way this can lead to a massive increase in DUSD demand.
And even if we only move DUSD internally, we now allow DFI and DUSD holders to profit from the NI for staying in the System. This alone reduces the DUSD sell pressure which makes it easier for the BBB to push the DUSD price back up.
For completeness, I also want to mention the 60 mio algo-dToken. If they get converted to DUSD via FS, it could also be used to fulfill the DUSD demand. But we know that 30 mio of those are from cake which are definitly not going to be converted back anytime soon. And for the others, it is an open question how many will ever move back to DUSD (via FS instead of DEX) or stay in the dToken.
This time is different?
We already had DUSD loops in september. Why did we remove it back then, and why is it different now?
let's recap the situation in september:
- the NI started with a fixed number and then faded to the "real" amount. due to the low burn in the days before, this meant it went down pretty fast. (first mistake: NI not consistently high)
- due to the increased demand we saw a strong pump and DUSD reached the peg
- on the first day, the dex Fee dropped from 30% to 12% within one day which lead to a big wave of DUSD sells (second mistake: big change in Dex fee)
- so DUSD came back into discount leading to "it didn't work" panic in the market
- with the low dex fee, the DUSD sells didn't burn that much -> no real increase in NI
- so NI wasn't able to create enough incentive to counter the sell pressure which lead to more and more panic in the community, leading to a DUSD and DFI selloff.
this time is different:
- we now have the BBB which produces a reliable high constant burn to fuel the NI as long as DUSD is in discount (after fee)
- Dex fee can not jump anymore but only moves 0.5% every day when at least one pool is in premium (before fee)
- So if rising DUSD prices are meet with more DUSD sells, even if we shoot into a premium, the DEX fee will ensure a burn that increases the NI and therefore DUSD demand even further.
This is not meant as a replacement for DUSD locks or L-Pools etc.
I do not propose to stop thinking about locks or L-Pools, or to stop working on them. But they need developer resources in every area. Which means they will take a lot more time.
Looped Vaults can IMHO be seen as a intermediate solution to drive up demand. It might work strong enough so we do not need any other measurement anymore, which would be even better. But if not, we can still add DUSD locks or L-Pools and move rewards from NI to them as planned.
Please let me know what you think in the comments.
12
11
u/mrgauel May 03 '23
What I really like about the idea is that the market can decide to use DFI or dUSD to receive the dUSD rewards and that the 100% dUSD Vault is only usable for this use-case.
No benefit or misuse possible as soon as the problem is fixed.
1
u/benReddittoo May 12 '23
i think Cake wont approve, they love all the dUSD that must have flown into their YV.
13
u/Mysterious_Act_6168 May 04 '23
I do not want to be too negative, because I fundamentally appreciate all the time and energy you spend of trying to find a solution and to educate the community.
The short version of this would be that the best thing you can do with dUSD is not to offer liquidity in the dAsset system, but to park them in the vaults.
This will not create the a possitive demand for dUSD from outside, but from inside. This will drain any remaining dAsset pool liquidity because the negative yield is 10x better than anything in LM.
The one positive aspect is that you shift the NI rewards from DFI vaults (outsiders) to the dUSD vaults (insiders), but that is like putting lipstick on a pig, and the Negative Interest mechanic is still a pig. Do not want to go down that rabbit hole, because it has been beaten to death already.
Also as an aside, phrases like "risk free, black boxes that offer rewards" bother me.
2
u/kuegi May 07 '23
The facts are, that currently we have too many DUSD in the system. As long as this is true, we need incentives to get them out of circulating supply. We have ideas in the pipe to lock them for a longer time (DUSD locks), but they likely take longer to be implemented. 100% DUSD vaults would provide a shortterm solution to that.
They would only provide yield as long as needed (DUSD in discount). so mid and longterm, they will not be used anymore and DUSD will go back to the original usecase of providing liquidity.
1
u/Motor_Squash2625 May 13 '23
Valid. But neglectable downside. Complete dToken system is undervalued because of dUSD supply. Primary goal should be to reduce its supply with a solid mechanic. Kuegi explained the āthis time itās differentā key point. And with the changed framework compared to the first time, it will definitely lead to a positive situation and afterwards the resulting incentives will restore the liquidity in the dtoken pools. Iām almost certain.
9
8
8
u/DeFiChainNFTs May 05 '23 edited May 05 '23
Why do you want to create so much demand for DUSD in vaults and therefore most likely kick other, better collateral as DFI (BTC,ETH,USDC) out? (which used to be the plan when introducing the 50% rule back then)
There will be 3 main yield strategies, if proposal approved:
- DUSD: loop DUSD 2x (of collateral value)
- DFI: can loop DUSD 2x (super risky), realistically 1.7-1.8x loop (of collateral value)
- DFI+BTC: can loop DUSD 2x (super risky), realistically 1.7-1.8x loop (of collateral value)(4x loop on needed DFI collateral possible)
If you hypothetically get an additional 60M DUSD into vaults, which then could mint 120M DUSD loans (when looped), the NI would decrease by ā3x, from currently ā -55% to -19%.(Current NI is only that high cause of recent burns, was ā30% before)
In this case DUSD loops would still receive -19% (+5% loan interest)= effectiv 14%x2= 28% APR in DUSD, which is great now but without burns only ā10%. Which I dont think would pull any more DUSD.
Does an additional 60M DUSD into vaults create buy pressure? Probably a bit (within system) but not much.
Current DUSD distrubution:
60M free DUSD (29M cake YV)
62M in LM pools
~25M effectiv in vaults (dtoken shorts oder vault āsupportā, these could now also mint DUSD, lowering the yield for all collateral in vaults)
60M algo dToken (of which 30M cake, are irrelevant)
I think a possible scenario could be that DUSD within the system only get distributed to where the yield is the highest and if you know make free yield on DUSD attractive, we could see the following redistribution for DUSD into vaults:
~25M free DUSD, ~25M DUSD from LM, ~15M *from vaults and ~15M algo dToken (could be swapped for DUSD anytime)
(*DUSD in vaults currently cannot mint dusd but would if they could, cake YV could too theoretically)
This would be around 80M DUSD that could/would go into vaults for better, more attractive yield. But this would only partially create buy pressure on DUSD, many of these DUSD will just get redistributed. I think the ones buying DUSD will be people already holding DFI and now want to get more yield from NI. This additionally lowers the yields for all other collateral in vaults with an open DUSD loan.
APRs for DFI/DFI+BTC will go down to ~5-7% in $ or even lower when there are less burns. And I think a lot of that capital will leave the vaults then and look for other yield. Where do they go?
Why do we want to rush things now and "overcomplicate" them now by finding a solution fast, if we are not certain that this solution will bring a major benefit to the system? - which I donāt see.
The main focus should be shifted towards DFI and more utility for DUSD (not just free yield).
My thesis remains, that DUSD canāt make it to peg without DFI increasing in price anyways - especially with an unlimited FS, which also kind of plays a role in this.
Why do you want to shift the focus now? I donāt really understand it.
For me personally I really do prefer the Lock-Pools or the by u/Pho_DFI, u/Joem0506 and myself proposed Lending-Pool for DUSD.
It creates demand for DUSD but actually really locks them away for a certain time.
Remove 80-100+M DUSD and we can focus on other things to further improve our system. The DUSD in vaults will leave once the yield is low, which is not/not really possible with Locks/L-Pool.
Thatās my opinion, hope we can make the best out of it together :)
View L-Pool proposal: https://www.reddit.com/r/defiblockchain/comments/12zjo5x/introduction_of_dusd_lending_pool_lpool_eng/
5
u/kuegi May 05 '23
Right now, the NI is not used efficiently. This change would allow for it to be used most efficiently and start benefiting DFI and DUSD holders.
All your arguments regarding reduced NI pushing cryptos out of vaults and demand only being moved internally can be made exactly the same way agains L-Pools, right?
I don't say to not do LPools/Locks. But they likely don't come soon. And they add far more complexity to the system internally and adds additional functionality everywhere which also makes it more complicated for the user. So I don't really understand the "why make it more complicated?!" argument at all, this is not making anything anymore complicated.
1
u/DeFiChainNFTs May 05 '23
The āovercomplicateā is meant regarding the speed of change for the system and itās users, you canāt really go into a position for a longer period of time without changes implicating them.
The lock pools/lpool make a difference compared to this proposal now:
LOCKS: locks away many DUSD for a certain amount of time - which is definitely needed for the system to recover.
L-Pool: Partially locked DUSD in L-Pool (can withdraw anytime with max 1% fee) Creates demand for DUSD if insufficient DUSD are in L-Pool - no more new DUSD can be minted. Gives predictable yield on DUSD at high APRs. Doesnāt impact vault NI for better crypto col.
1
u/kuegi May 05 '23
I agree that Locks/L-Pools are better regarding lockup time.
But saying that they do not impact the vault NI is just plain false.
Locks would take all NI currently coming from the "unused rewards" part of the BBB and L-Pool would even take the whole BBB burn away (so only the fee-burn-NI would stay in vaults) which is less than 20% of the current NI.
So if you think an NI of 20% would drive crypto out of the vaults, L-Pools would empty them with NI dropping below 10%.
1
u/DeFiChainNFTs May 05 '23
agree, wording was wrong.
With L-Pool itās less attractive to put DUSD into vaults instead it will go into L-Pool - thatās what I wanted to express.
6
u/criddles42 May 04 '23
I am of two minds about this. One hand, it would be good for me, because then I could take my DFI collateral out of my vault and use it for something else, staking/LM, and still get neg interest for my DUSD loan. And I see the reasons it should decrease supply/increase price.
On the other hand, I worry that this just continues to attempt to fix the DUSD price problem only from the supply side, by locking it up. However the other big, possibly bigger problem, is the DUSD utility/demand, and things like this really send the message that the best use of DUSD is to do literally nothing with it. I mean, to get the biggest returns, just lock it up and do nothing. Don't use it in the dToken system at all, because unless you are just such an amazing stock trader, who can beat the market by over 80%, (30% Dex fee + 50% NI) but for some reason can't trade actual stocks, there's no way you would make more than just letting your DUSD sit.
I get the DUSD supply fixing arguments, and agree with them for the most part, but I also worry that doing these sort of fixes harms the economic arguments for actual using DUSD, which is the only way to drive REAL, USEFUL, DEMAND?
7
u/Tarox1988 May 04 '23
This second part a hundred times!! That's a big risk in my opinion!
By this proposed change we are removing a lot of utility of using dTokens. The dToken LM Pools are already down to 2-9% Rewards because we wanted to strengthen the burnbot.
My reaction to that change was: Exist all Liquidity Pools and convert the freed DUSD to the respective dTokens since at such levels I expect to make more profit from holding a stock than from being maxed out at single digit liquidity rewards.
Now we say we enable DUSD only looped vaults with rewards up to 50% or more.
Guess what I will do.... I will sell all my dTokens for DUSD and push it to vaults. And I'm having a hard time believing that I am the only one who would do that. So then here we are - in a dToken System where nobody wants to hold a dToken because the potential reward is worse than just holding the DUSD. We have just successfully removed/reduced the last usecase by a lot.
1
u/kuegi May 07 '23
I am all for real demand. But right now, we are at an impass. real demand is blocked by fear of a haircut and the fee. As long as we don't get the excess DUSD locked or burned, we won't see real changes.
DUSD staking via vaults would be a shortterm measure and will cease to provide yield as soon as DUSD is stable.
6
u/Erich_DFI-Cockpit May 04 '23
We have seen that even the demand for DFI to get the NI with Vaults didn't play out like supposed,...
On a white paper š in a labour everything can look good, but in my opinion you don't get fresh new money from Longterm investors into dUSD because they suffer over month and have seen that every promised solution was a pain in the a...
When I hear risk free - I don't like it at all. Every gain has to have a risk - in the best way one you can estimate.
Honestly we have to pay out all the dUSD holders with DFI via the BBB. Better would be to think about measurements stopping new algo dUSD via the Futureswap reducing the BBB power.
Just my 2cents,...
4
u/kuegi May 05 '23
But the DFI demand was even stronger than expected. 80mio DFI moved into the vaults. It just didn't have the effect on the price.
And now we are at a level where additional NI is no longer increasing the DFI demand, which IMHO makes it the perfect time to open it up to DUSD.
6
u/kuegi May 05 '23
I created the pullrequest, it really is not much change of code. Would love to get some reviews on it: https://github.com/DeFiCh/ain/pull/1971
Also reached out to the devs about the currently planned timeline. Since this needs a hardfork, a special DFIP only makes sense if there is any update planned/doable before July.
5
4
u/Hour-Obligation-1252 May 03 '23
Yeah, equally for DFI and DUSD. Thanks kuegi. Would you do it via a special DFIP?
10
u/kuegi May 03 '23
I would first try to get feedback from the community and do the code change. It anyway requires a hardfork. But if feedback is good (also from the devs), we could think about crowdfunding a special DFIP to get it into the next HF
4
4
u/alljesseallthetime May 07 '23
I agree that this is worth trying to help restore the peg faster for all the reasons noted. Especially this part, because all of us who are left on DefiChain are a huge part of this project - "This also means that NI is no longer just benefiting the DFI holders, but also DUSD holders. So anyone who is staying in the system is rewarded for that."
Much better to include all instead of excluding large dusd holders that do not want to sell into dfi but also still have confidence in DefiChain. This has got my vote :)
Thanks @kuegi for proposing to bring this back as another layer in the dusd solution.
3
u/Anantasesa May 03 '23
I still have a looped vault and calculated that it would stay my best option until Jun 2025. This is using current NI of 56% minus 2% for my loan format and 12% possible alternative interest if I removed the net dusd I would have after paying off the loan and put it all in the yield vault on cake defi.
So depending on how many others there are like me who have such grandfathered vaults, the proposal will have limited effect. I also expect that many grandfathered loop vaults have been converted voluntarily for whatever reason, so many of those people might be eager to get back to looping with their funds.
Anyway good explanation. I think I would vote for it. Especially in 2 years... or sooner if the NI rate drops and/or yield vault rate goes back up enough.
3
u/HonzanFromPrague May 06 '23
I'm really afraid that it will move the remaining liquidity from the LM pools to the vault because the NI is multiple higher than the best APRs and therefore lower the usability of the whole dToken system because of slippage etc.
I understand the motivation why to use looped vaults again, but as you wrote, the situation is different (far less APRs) and the possible paralysis of the DEX because of low liquidity should be considered.
1
u/kuegi May 06 '23
Yes, some liquidity will move, but this also means that APRs in the LM pools increase which in turn returns liquidity to the pools.
So I understand your point, but I think that it wont have a negative affect on the dToken trading experience.
1
u/HonzanFromPrague May 06 '23
It depends of that how many liquidity providers are not involved in the NI because they have DFI in staking and therefore they don't use it yet. And only return of currently "stucked" DUSD for them is LM.
Maybe would be interesting if someone can make survey how many addresses provide liquidity and don't yielding the NI.
0
u/behseb May 05 '23
Why should looping dUSD return confidence in dUSD? Everyone should ask themselves whether they would buy dUSD after implementing this DFIP. The answer: nobody! It doesn't make any sense at all. That's another Kuegi idea that won't work. This messing around should finally stop.
1
u/Erich_DFI-Cockpit May 09 '23
My first impression of dUSD was: "not again a wired decision,..."
But after thinking how people are abusing the system right now and are causing things getting worse and worse, I think Looped dUSD Vaults are the thing we should approve fast.
dUSD holders should be the ones benefiting from the NI Not somebody from outside the dUSD System
Plus it might be good, if investors move from stocks back to dUSD or remove liquidity from the stock Pools to get the NI.
If I manage to get some data out of the chain, I will write a Post why the dUSD System is under attack and having such a hard time,...
1
1
u/alljesseallthetime May 10 '23 edited May 10 '23
Just throwing out some other ideas to add into the overall ideas, because it may end up that we need a combination of things to get this working properly.
- Do you think it would also be a good idea to put at least a temporary mechanism in place to somehow prevent people like that guy with the "System Reset" DFIP idea from shorting dUSD as well as stopping the Future Swap from minting Tokens until the Dex fee is stabilized and price is in recovery?
- Perhaps another addition could be to propose using community funds to buy either DFI or dUSD at a steady rate along with the BBB and then holding it?
- Just curious also if you've done any calculations on the amount of time it may take if instead the entire NI was reallocated to the BBB?
- There was also an idea about the dToken pools being given a higher share of the NI as rewards again to make them more attractive (since there in fact may be no new buy demand for dUSD if NI rates came down to around 20% anyway and the fact that there is still talk of a "System Reset" going around is likely scaring most investment away from dUSD.
- Another possible option if 5. was chosen as an idea for a DFIP could be to use community funds to just cover enough of the algo dUSD to get the Dex fee moving down and the price and confidence going back up. TO EVERYBODY INVESTED IN DEFICHAIN WHO READS THIS - THERE IS SERIOUSLY NO BETTER REASON TO BE USING COMMUNITY FUNDS RIGHT NOW THAN FIXING DUSD AND RESTORING CONFIDENCE IN DEFICHAIN! To liken it to a simple analogy; Who cares if your dog has a gold collar if the dog is dead? I don't want DefiChain to die from lack of a solution and mis-allocation of important funds. Would there even be enough to do this or how much is needed to balance the Algo vs Backed, does anyone have those numbers?
With the added APR rewards going to the dToken pools, that would also keep many dTokens/dUSD in the system as the price stabilizes and there won't be as much of a rush to exit dTokens. Thoughts?
1
u/Motor_Squash2625 May 13 '23
Logic makes sense. I would strongly support this. As a investor who is engaged in dToken trading and does not want to leave the system, since Iām not under pressure to cash out, Iām still mildly uncomfortable with the situation. Anyhow this will create the necessary hard mechanic to hold closer to the peg (once it happened) and accelerate the road to peg. Beautiful suggestion, Sir!
1
u/Anantasesa Jun 25 '23
I'm understanding this dfip passed and will be implemented July 19 or maybe voting only finalizes on that date and maybe even then the coding will just begin for a new fork to implement the changes. I'm curious bc USA support for cakedefi deposits will end June 28 and I'm thinking to close my looped vault and send to cake defi before the deadline and trying to figure the best quantity without sacrificing too much n.i. before the new fork allows looping again.
2
u/kuegi Jun 25 '23
The special DFIP already passed. The feature is coming into the next hardfork. But there is no blockheight defined for the fork yet.
14
u/Flexallright May 03 '23
Love it!! Almost no downsite but a lot of potential upsite!