Proposal to Expand DAI FiRM Market

FiRM
1

Summary

This proposal seeks to expand FiRM’s DAI DSR market by increasing the supply ceiling from 5M to 20M DOLA and daily borrow limit from 500k to 1M DOLA, in response to the rapid adoption and demand observed in the market.

Background

The DAI DSR market, having been launched less than a month ago, has swiftly risen the ranks to become FiRM’s third most utilized market, with $6.27M in deposits and $5M in borrows. Notably, TempleDAO has significantly engaged with the market and has expressed a keen interest in its expansion. Since its inception on September 6th, 2023, the DAI market parameters have remained conservative and unchanged, adhering to a cautious approach. Market expansions aim to encourage behaviors that are net positive for the DOLA ecosystem and while future action is not guaranteed, DAI market users are for the most part taking on a DOLA farming strategy with their borrowed DOLA. At the same time, despite recent challenges and liquidity shifts highlighted in the risk assessment linked below, DAI has demonstrated that it remains sufficiently liquid to accommodate expansions.

Risk Assessment

Parameter recommendations, which include suggested values for various risk parameters like the supply ceiling, collateral factor, daily borrow limit, and liquidation factor, are derived from RWG Risk Assessments. The latest DAI market risk assessment (dated October 2nd, 2023) can be viewed here.

DAI has scored 10 in our in-house asset scoring model, indicating a stable and low-risk profile. The Asset Scoring Model is a comprehensive model that considers various factors such as market capitalization, trading volume, price volatility, token distribution, project fundamentals, and token utility.

Despite fluctuations and challenges in DAI liquidity pools, the DAI market remains robust and capable of supporting an increased supply ceiling and daily borrow limit. Slippage simulations reveal that trades up to $10M result in minimal slippage, indicating that the market can handle sizable liquidations without significant price impact.

Following DAI’s previous borrow cap (5M DOLA) being depleted, DOLA collateralization on FiRM is 25% stablecoin. Upon the proposed changes, the DAI market could potentially have 25,080,000 in total deposits (assuming 125.4% collat. ratio holds) and up to 20,000,000 in borrows. In this scenario and where all else remains unchanged, DAI could constitute 36.27% of total collateral and 57.97% of total debt. It will be up to the Fed Chair’s discretion to modulate liquidity in the market, either by injecting or withdrawing it, thereby enabling or constraining specific scenarios to materialize. FiRM operates six other active markets, with additional ones anticipated to launch, all of which are poised to witness an uptick in borrowing activity. Given the scarcity of DOLA liquidity, certain markets can be prioritized, taking into account factors such as collateralization preferences and market borrower behavior, among others.

On Chain Actions

  • Set DAI Market Supply Ceiling to 20M DOLA
  • Set DAI Market Dailly Borrow Limit to 1M DOLA

Conclusion

Subject to community governance approval, the supply ceiling and daily borrow limit will be adjusted as proposed. Continuous monitoring of the DAI market will be essential to ensure stability and identify any emerging risks or issues. Additional parameter adjustments may be proposed based on ongoing market analysis and user behavior.

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Is there a plan to scale liquidity? While we’re under 58% DOLA balance currently we’ve been at the high end of the 50% range for an extended period.

Is there an expectation that the new supply will be matched by demand? If so from where?

Overall supportive, but I’m curious how much time its expected to take to reach the new cap given the probable need to pause occasionally due to liquidity balance considerations

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  • Current AMM Fed policy is expansionary and targeting a 55-60% pool balance towards DOLA (depends on A param of LP).

  • So long as DOLA farming strategies remain profitable (given DAI DSR yield, and DBR price), there’s reason to believe that demand will meet supply without the need to increase INV bribe spend. TWG can weigh in here but atm there is no deviation in strategy from current stance regarding INV spend.

  • Hard to estimate a timeline tbh as demand will depend on many factors some of which are hard to predict. One approach would be to scale the supply ceiling gradually (e.g. 5M → 10M → 20M) as demand becomes apparent, however I prefer an approach that allows the Fed Chair to weigh in on such decisions and react to strong demand more rapidly.

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