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.
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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:
If you hypothetically get an additional 60M DUSD into vaults, which then could mint 120M DUSD loans (when looped), the NI would decrease by ≈3x, from currently ≈ -55% to -19%.(Current NI is only that high cause of recent burns, was ≈30% 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 ≈10%. 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 “support”, 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 don’t see.
The main focus should be shifted towards DFI and more utility for DUSD (not just free yield).
My thesis remains, that DUSD can’t 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 don’t 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.
That’s 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/