Should DAI be Removed from the Curve Pool?

Due to recent concerns about the risk of having DAI included in the sUSD Curve pool, a discussion around removing DAI has grown in popularity.

Please discuss below whether you are in favor of removing DAI from the Curve pool or not.

I am personally not too concerned about DAI.
If anything I would prefer PAX to be added and USDT removed…
In other words I can sleep well at night if I am exposed on DAI and I cannot say the same about USDT.

I think it is OK leaving it in there. If it becomes more of a concern, can reduce the weight of DAI in the pool.

I think a greater concern then DAI should be USDT. The New York State AG’s office is going full force after Bitfinex/Tether with possible money laundering charges which could lead to a counterfeiting investigation (if Tether can not prove they have the $10 Billion to back up USDT…which basically means they are counterfeiting USD).

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Allowing other coins into the sUSD Curve pool does increase the risk, DAI has a few problems but I would advise against removing it as it provides a degree of volume for the pool which is somewhat beneficial. If the volume were to fizzle out or if the risks of having DAI in the pool outweigh the value of having it in the pool then I would initially suggest @JimJon’s point of view.

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A few thoughts:

I think the first worthwhile questions is whether we want to have a many stablecoin pool or a few stablecoin pool.

Advantages of few stablecoin pool:

  • Less risk (there is almost a monotonic increasing relationship between number of assets and risk)
  • More synth liquidity + synth demand for each $ of rewards
  • Subsidizes fewer competitors

Disadvantages:

  • Lower trading fees for LPs (which might imply we have to supply more rewards)
  • Slightly more slippage/inconvenience to exchange sUSD into other stablecoins not in pool

In my opinion, the advantages of having fewer coins in the pool (ideally sUSD and one other) outweigh the disadvantages, but this is crucial to the discussion. If we want a plural pool with many assets, then the question is whether the extra trading volume from DAI outweighs the marginal increase in risk of impermanent/total loss (unclear, but probably not). If we want a few asset asset pool, then the question is whether DAI is one of the top 1 or 2 stablecoins to use (IMO, this is clearly not the case).


It also might be worth listing the specific risks of each stablecoin:

USDC:

  • Centralized, can be frozen. If curve works like Uniswap, then any USDC being frozen within the pool renders all the assets in the pool lost until if/when the USDC is unfrozen.

USDT:

  • Centralized, can be frozen. Same caveat as USDC
  • Softish peg and significant insolvency risk

DAI:

  • Uses USDC as collateral, and other shitcoins/toxic collateral.
  • Risks governance capture by MKR holders.
  • Very soft peg with significant deviations on a fairly regular basis
  • Relatively low liquidity compared to USDC/USDT, especially on CEX.
  • Might be an attractive asset for people with “freezable” centralized stablecoins to try to exit into, which could lead to higher chances of dirty USDC/USDT getting deposited into the pool.

TUSD/BUSD/GUSD:

  • Similar to USDC but lower liquidity

I favor a two asset pool with sUSD and USDC. But I think any two asset pool would be superior to our current four asset pool.

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hi JimJon, I am not sure you have control over the weight of DAI in a Curve Fi pool… Newbie here so there is very good possibility I might be super wrong. Again in my “newbieness” I understand that in a Curve Fi pool all coins need to stay in equal proportion. You can achieve different but fixed proportion in other solutions such as Balancer.

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Yes I believe you are correct. The only way to decrease the weighting of DAI would be to add more stablecoins as I understand it. But in a significant peg deviation, regardless of weighting, the pool may become very skewed in one direction or another.

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I just wanted to add I listen to the Maker Governance calls and they are aware the issues of instability of the DAI peg and liquidity. Maker DAO is currently focused on coming up with solutions for both problems.

We are in an industry (Crypto - DeFi) that is relatively new with technology being introduced at a very fast pace. This also means problems arise that were not foreseen when the technology was introduced. I would like to give Maker a little time to fix the issues that have come up regarding DAI. They have some incredibly intelligent people that are making decisions.

My suggestion is to wait to see the solutions Maker DAO comes up with to fix the problems with DAI before we think about dropping DAI from the sUSD Curve pool.

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Yes, Dai should be removed from the Curve Pool. I favor a sUSD to USDC and USDT pool.

  • It makes little sense to provide SNX incentives to subsidize liquidity for DAI

  • DAI collateral types are centralized (USDC) and illiquid shitcoins (BAT, among others), introducing centralized risks to every circulating DAI. Garbage in, garbage out.

  • USDC and USDT are more liquid, have better network effects, and routinely maintain their peg more effectively than DAI.

While there are differences between USDC and USDT measuring characteristic by characteristic, they are both centralized, widely used among DEXs and CEXs, and have a pretty good system of redemption for dollars, even if the censor bug is ever present.

By comparison, the DAI does not have a very good system of redemption for dollars. DAI are not redeemably by anyone in the MakerDAO ecosystem, but only by the CDP holders. What if a CDP holder went off the grid for two years, then what? If that CDP holder minted 1M DAI, it would be impossible to redeem 1M of the circulating DAI supply for those two years. USDC and Tether don’t have these clunky redemption mechanics. (See https://medium.com/@ministry_of_agriculture/a-little-unsteady-55ca9e4c6440)

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Well on the redemption issue, I’m not sure I follow. I mean, this has long been something discussed in mainstream banking is that there isn’t a dollar backing each deposit, because banks’ liquidity is tied up in loans.
Similarly here with the case of MKR, there isn’t a dollar backing each liability (DAI), since on the the asset side we have kind of a collateral. Ok so if we live in a world where you have few actors, and one of them dies, that would be a problem, since not everyone can redeem. But pragmatically speaking, where you have USD 200 million in DAI circulating, a small percentage being lost is just a rounding error on the system (no data is available or put forward by the author of that medium post on how much DAI is lost, as it’s not possible to know in any case).

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I think the risk of DAI using multiple collateral types are mostly overblown. Each collateral type in DAI has risk parameters that limit the scope of the damage that can be caused by failure of a single collateral type. The overall riskiness of a system with multiple independent risks can be less than any single risk, and I believe this is the case with DAI.

However, despite that, I was persuaded by Spreek’s arguments for a pool with only a few stable coins. Having a few curve pools that are each based on only a pair of assets would be ideal, imo. So maybe: USDC/sUSD, ETH/sETH, and BTC/wBTC.

But brian ETH/sETH and wBTC/sBTC are not stable :slight_smile: , so did you mean to separate them in different buckets as to limit the contagion risk… like sUSD/USDC - sUSD/USDT - sUSD/DAI ? The downside of this is less liquidity in any one of them… because sUSD is spread out…

Right. I meant three different pools. I realize there is maybe less per-pool liquidity by making different pools, but the curve bonding curve is so efficient for stable pairs I don’t think it matters that much. Plus ETH at least (and maybe BTC someday) is a primary on/off path for a lot of people, I think.

I guess they can be setup, but I don’t know if it goes without saying that these non-stable pools shouldn’t get any SNX incentive, as to not skew the debt pool… So basically, the only reason a user would put his synth there is to realizing the swapping fees, which I gather aren’t that high…

Part of the reason that the swapping fees are currently low on the sUSD curve pool is because there is so much liquidity in the pool due to all the incentives. I think the swapping fees alone have the potential to be decent, and maybe even good on a risk-adjusted basis.

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MakerDAO isn’t going anywhere. They proposed a solution that satisfies all of my concerns and it is being implemented shortly. The peg will be restored and as I see it there is no reason to remove DAI from the pool. If they were not taking action to remedy the loss of peg that would be one thing. But the proposed solution is a good one and I have faith it will work as designed.

For reference:

MakerDAO’s peg stabilization modules: https://forum.makerdao.com/t/peg-stabilization-modules-a-pre-mip-discussion/3045

MakerDAO’s peg stabilization module implementation timeline poll: https://forum.makerdao.com/t/forum-poll-deciding-the-peg-stabilization-modules-implementation-timeline/3090

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Hey @George thank you for those links. So after reading them, I feel that the points highlighted by @Spreek still hold. Although I believe the PSM will work in forcing through the peg, the cost in my opinion is complete loss of any decentralized censorship resistance, so basically, might as well not have MKR to begin with and just use USDC.
I mean, if this was proposed on the synthetix community, it would be a complete and utter uproar by the community on the total loss of any hope of decentralization, in the world of Synthetix it’s akin to allowing people to deposit USDC and get sUSD at a rate of 1 to 1. :exploding_head:

Maybe this is what MKR wants though I am not sure, I feel they are headed in the direction of piggybacking on on a centralized project USDC, with the intention of offering exactly the same service :neutral_face:.

So basically, the argument for PSM, from the MKR community is that well, we can’t enforce the peg using market forces, let’s just make them swappable against a centralized stable coin… And probably another guy from the MKR community goes on to say, well how about we integrate this into the core product.

The case for synthetix, we have significant chinese walls separating the core protocol (the synth minting core) from the market (Curve) and LP providers get compensated for taking on the risk of loss of funds, but for the case of MKR these walls do not exist if this MIP is implemented.

So imagine one day USDC comes to the decision to kill the MKR project, easy just freeze that vault where the PSM USDC are kept, if that balance is large MKR is as good as dead. One last thing that you didn’t mention, I just can’t understand why MKR has such requirements for the shutdown, I mean that is another case of complete of lack of trust in the community at large and utter lack of respect to the purpose of “decentralized-stable-coin”.

Just want to mention before reading this MIP I was on the sideline, but now, I am 100% behind removing DAI all together from the pool we incentivize, as it’s just bound for implosion because of the clash of projecting the image of “decentralization” while being utterly “centralized” in reality.

Your argument contradicts itself with your concern of decentralized censorship resistance but indirectly supporting higher weights of USDC and USDT (both of which have frozen assets recently). Tether is the antithesis of decentralization and is under investigation for insolvency. MakerDAO collateral is made up of 3/4 ETH and is one of the most decentralized stablecoin options we have. No it is not perfect, and there are decentralization tradeoffs, but I’m not ready to abandon an OG Ethereum project that has some of the sharpest minds in crypto. DAI is an important part of the Ethereum ecosystem and as you said, “I believe the PSM will work in forcing the peg”. Isn’t DAI’s ability to maintain the peg the exclusive reason for this discussion?

I never said I supported USDC and USDT :smiley:, it’s just that DAI is kind of just adding risk to our sUSD pool on curve without contributing add-on value… Because It’s piggy-backing on existing risk. No doubt they have sharp minds there, as I saw that post, but boy do sharp minds can get things wrong… especially in this MIP, which I strongly suggest they scrap and do something else… As it goes against their first principles