Should DAI be Removed from the Curve Pool?

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

Not really, the reason for discussion, if you refer to @Spreek post, is that MKR is just adding risk with nothing to show for it… Basically it’s the same degree of risk as USDC + it’s own contract related risks…

I disagree with this assessment. Currently 72% of the collateral is made up of ETH. If Centre/USDC (or Bitgo/WBTC) blacklisted the Maker vaults today, this would cause at most a ~30% haircut to DAI holders. MKR backstops the system and would theoretically cover the losses through dilution like in March.

Especially in the wake of the Wirecard debacle, I think USDT brings a lot more risk to Curve pools than DAI. Does anyone believe that they have the money to back all of their tethers?

I was writing that, having in mind, PSM as a solution to restoring the peg (which was being discussed) ^… This proposal would allow for DAI minting without any vault… So basically like “thin air minting” against USDC… Effectively, this means that whatever USDC risk their is, it’s now shifted onto every MKR owner out there… I am not a big fan of “peggy-backing” on centralized protocols as part of the core protocol… as it just for me defeats the purpose of trying to be give off the appearance of decentralization…
To give a concrete example of synthetix, if USDC decides to attack our protocol, they would just freeze tokens inside CRV… effectively that would be a complete loss for LPs however this isolates the loss from minters that don’t put synths on CRV… These “chinese walls” separating MKR vault owners from each other is reduced significantly, if MKR decides to implement PSM…

I guess for now synthetix is in the safe zone, since there is ample room to cut rewards and cut c-ratio… So we are yet to reach the ZLB that MKR probably is at… But this happens to us, for some reason (i.e. low-cratio, low rewards and premium on the peg), probably negative interest rates on sETH loans against ETH could be a way out… Still better than throwing the sink at the problem and decentralization with it, as MKR is currently planning to do with PSM…

No doubt, I’m not questioning that, if there was a reliable stable coin that doesn’t have all the issue that MKR has, probably bring it forward… but the thing is, as I noted ^ is that LP on curve is a separate function from minting…
So synthetix as a platform is kind of isolated from the risks of USDT and USDC… However LP’s aren’t isolated, and they are compensated for taking on that risk with rewards… Now with that in mind, SNX can decide what risk to allow and what risk to not allow, as it would cause a lot of instability to the platform if the curve, being the primary on-ramp is affected by USDT/USDC centralized action… Well I see that DAI risk = USDC risk + more risk… so might as well remove it all together…

If MKR DAO decides to partly fund curve sUSD pool by shooting MKR tokens at pool owners, as we are doing when shooting SNX at staked curve tokens, we wouldn’t be having this discussion at all… as they would paying LP their fair share for that extra risk… but of course they wouldn’t do that…They just enjoy the benefit without incurring their dues…

I still don’t quite follow. DAI risks are isolated from the core Synthetix mintr infra just the same as USDC/USDT. But DAI doesn’t have a blacklist function in it’s ERC20, so if DAI lost ~50% of it’s value that would be a 50% loss to LPs instead of 100% loss if Curve pool was frozen by centralized stablecoin.

I think it would be a great idea if Maker offered pool incentives alongside Synthetix :mechanical_arm:, but you’re probably right that it would be a tough sell to MKR voters.

The idea of having separate pools connecting sUSD to each other supported stablecoin could also be feasible. One can isolate the risks from each other and ensure that there’s at least 1 functional sUSD curve pool during a black swan event (DAI technical flaw, USDC blacklisting, USDT insolvency). It would fragment sUSD liquidity but this might not have too big an impact on traders. Rewards can also be dialed up or down on a per pair basis, so if USDC liquidity is most useful to the ecosystem this could be expressed in a dynamic way.

To give a concrete example, let’s say PSM is a go… So what happens, to fix the peg is arbers will shoot USDC at the contract MKR sets up and receive DAI for that… Basically you’ll have a concentrated storage place for USDC that is different from that of vault owners… This injection of freshly minted DAI will fix the current premium we’re seeing and the scale issues…
So effectively it’s side-stepping the limits on how much DAI can be issued with USDC, right? But worse than that, if USDC wants to shutdown MKR, just freeze that contract where PSM is used… Effectively what is happening with this is 2 fundamental things:

  1. Walls have been broken between all vault owners, because if USDC decides to take action, every vault owner is on the hook for that concentrated uncollateralized DAI.
  2. Any problem with USDC gets shifted to MKR, example imagine malicious user finds a way to mint USDC… He just sends that to MKR and absorbs DAI, making DAI worthless…

So what I’m saying these risks here ^ they are risks related to the use of USDC, MKR has took them on with almost no bounds with the PSM proposal…

Agreed that the PSM model puts greater risk on Maker than stablecoin vaults, but it is a misnomer to say that these risks pass through directly to DAI holders. Your DAI will never be frozen or blacklisted, so the max downside for Curve sUSD LPs from this is the allocation of USDC in the DAI collateral portfolio.

The PSM will have debt ceilings so it bears limited risk from an infinite minting attack, and will charge fees for swapping which should ensure it has an EV of greater than 0.

I see it as a trade off. DAI has more technical risk than USDC, but lower centralization/seizure risk.

Sure but that USDC could be worth zero if frozen… so the risk shifts to DAI

I mean, PSM is a workaround around the USDC collateral ceiling, right? It’s how they will be scaling it with… How big is that ceiling is yet to bet set, but set high enough (as I expect it to be) it’ll definitely open up that infinite mining attack risk…

Well on this it’s hard to seperate the two, the contract risk, has centralization risk(s) embedded…

Btw, side question, are you involved with MKR, and if yes, are you voting for PSM or against it?

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Yep I contribute in the Maker forum (hope that doesn’t disqualify me from peanut gallery comments over here :slight_smile: ). I’m planning on voting for the PSM (once gas chills out a bit) with my minnow’s share of MKR. It definitely does increase risk to Maker of USDC blacklisting, but I see it as the best option among:

  • Approve PSM
  • Abandoning USD peg (negative DAI rates)
  • MKR inflation rewards to ETH vaults (actually I think this is a good idea but it is going to be a hard sell for the MKR whales)

Grain of salt: my (also minnow size) SNX bags are too small to be effective for minting (I just supply to Aave) so I don’t have as much at stake as others who are in the sUSD pool.

Last crazy idea before I stop sucking up all the air in this conversation: potentially have multiple single asset curve pools (e.g. sUSD-USDT, sUSD-USDC, sUSD-DAI) that share a single SNX rewards incentive, and then weight the rewards allocated to each Curve pool by total value locked * weekly trade volume or something similar. This would allow the market to demonstrate which pools are most worthy of rewards based on trader and LP utilization (with care taken to ensure that the rewards don’t make wash trading profitable).

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