Posting this on behalf of Nour.
The purpose of this proposal is: (1) reduce exposure to CRV and CRV-derivate collaterals on FiRM (2) reduce risks of cascading liquidations on FiRM (3) incentivize some borrowers to repay their FiRM loans in order to re-allocate their DOLAs to AMM Feds
In order to achieve (1), this proposal pauses new borrows on CRV, cvxCVV and st-yCRV markets. This will prevent more loans backed by these collaterals and will only allow borrowers to repay their existing loans. This will also prevent the Fed Chair role from further expanding exposure to these markets until further notice.
In order to achieve (2), this proposal reduces the liquidation factor of the 3 markets above to 20%. This will prevent liquidators from seizing and selling a significant portion of borrowers’ collateral during liquidations, reducing the likelihood of cascading liquidations.
In order to achieve (3), this proposal reduces the maximum DBR streaming rate from 20M/year to 12M/year. This reduction will turn DBR supply deflationary until FiRM’s global debt is reduced down to $12M/year.
I would like to provide my perspective on why I oppose some of these specific changes.
I believe that the proposed changes to pause new borrows on CRV, cvxCRV, and st-yCRV markets are too drastic a measure. Reducing exposure to these can be achieved by emphasizing growth of other markets, without the need to completely halt new borrows. On the other hand, the recent challenges faced by the CRV market have arguably made the token and the Curve ecosystem more robust.
- Through the various OTC deals, CRV ownership is now significantly more decentralized. We are able to quantify this with the Token Distribution Score (TDS), a component of our in-house “Asset Scoring Model” which assesses token safety based on a variety of different attributes and scores CRV with 7.85/10, up from 6.33 in May. For more on how the TDS is derived, see here.
- Contributions of crvUSD towards veCRV weekly fees have given CRV inherent value. Since crvUSD’s launch, weekly veCRV fees are up 13.64% on average (35.99% if excluding outliers). There’s a strong likelihood that these increase significantly as crvUSD continues to grow and find market fit. See here for more.
- The strong demand for CRV we’ve witnessed during the last few weeks further reinforces its significance in the broader DeFi ecosystem.
With that in mind, by preventing any new loans we would actively be discouraging healthy market activity. Rather, we should be exploring the possibility of a follow-up proposal that aims to further reduce the CRV market’s collateral factor, potentially from 65% to 55%, while concurrently resuming borrowing activity, so long as certain liquidity conditions are met. This approach, aligned with the evolving nature of CRV, would strike a balance between risk reduction and market vitality.
Curious to hear thoughts from other core contributors and our community on all the above.
Prefer the approach laid out by Edo here, starting with a reduction in CRV CF.
My two cents are as follows:
Pausing these markets makes no sense to me, while I understand it as a prudent approach to risk I fail to see how it will create the conditions for bad debt to be repaid in a timely manner, and consequently for FiRM and DOLA to grow.
CRV has show its resilience and is seemingly far less risky than prior to all of the commotion. DBR is trending upwards for now but I fail to see how closing new borrows on the above mentioned assets will increase buy pressure. I think the focus on bringing other collaterals in would be much more effective in allowing the DAO to address bad debt (but I may be sorely mistaken). I worry that the initial risk-adjustment parameters proposed will create a deflationary feedback loop for DOLA that may be hard to pull out of.
Overall I understand the need for risk adjustment, but shifting the collateral balance backing DOLA seems more prudent to me than reducing the total dollar value of the market which I again believe will create a negative loop
During the recent CRV-related panic, DOLA witnessed significant selling pressure, causing the AMM Feds to quickly deplete the majority of their holdings to protect the peg. The result was DOLA losing its peg for a few days, going as low as 97 cents per DOLA on AMMs.
These large outflows and the lack of peg arbitragers during those events signal a reduction of confidence and a feeling of uncertainty among DOLA holders due to FiRM’s large CRV exposure. I personally agree with this sentiment. In my opinion, the DAO has so far failed to properly diversify FiRM collateral exposure. Until exposure is diversified elsewhere, any additional of CRV-backed debt is risky and will reduce trust in DOLA and its backing.
I understand that my proposed changes will slow down FiRM’s growth in the short term. In my opinion, this slow down is necessary for long term sustainability. I also understand the need for the DAO to generate interest revenue in order to repay existing bad debt. However, this cause should be pursued without taking new bad debt risks.
In your opinion are there ways to incentivize the other current markets, or introduce new markets, that would be able to alleviate your concerns in the short term?
The sell pressure from current borrows has presumably already hit the market. Personally I would prefer to see a very minimal reduction in CRV CFs to increase further collateralization rather than pushing for these loans to be repaid.
At its core FiRM and Inverses success come down to DBR demand. High DBR earnings per INV are what will drive INV demand and make a more liquid DBR market possible as it becomes economically viable for more INV stakers to sell their earned DBR.
While short term demand for DOLA from repaying loans is nice and potentially allows AMM fed expansion, we should be focused on exogenous DOLA demand so that the total number of unique loan holders grows and along with it demand to repay DOLA borrowed across a broader array of assets.
I know we’re all here looking out for the interests of the protocol in the long term and the above should be viewed as no more than my particular opinion of how that should manifest.
I agree with Nour that new bad debt risk should be avoided as much as possible. CRV might look all right here but there is no guarantee in the upcoming market.
But I also agree that slowing down the protocol too much is not ideal as we want revenue to pay back bad debt.
In my opinion action (1) (2) could be sufficient to reduce the risk of bad debt while not doing (3) to avoid having a too high DBR which would prevent borrowing in other market. Only when other market have grown enough then we could turn back CRV markets with potentially stronger parameters.
So 10 days ago this proposal posted by surrogate, 9 days ago a lot of disagreement then nour posts, there are questions and no response, then it gets pushed to governance by “deployer” before the weekend, then 60K INV votes come from deployer and one other party.
A little disappointing, would have been a great opportunity for a bit more communication.
Overall I’d like us to explore ways to better decentralize governance; quadratic votes, proposer vote discount, etc. I didn’t think this necessary but the lack of communication and ram through of a vote that had clear dissent without any addressing is again, disappointing.
I’m not a fan of governance kayfabe