Proposal to Update Price Feed and Liquidation Incentive for PT-sUSDe-27MAR25 FiRM Market

FiRM
1

Summary

This combined proposal addresses two key updates for the PT-sUSDE-27MAR2025 market on FiRM:

  1. Increase Liquidation Incentive: Increase the liquidation incentive from 5% to 8% to ensure profitable liquidations under current market conditions, mitigating the risk of bad debt.
  2. Update Price Feed Guardian: Redeploy the price feed contract to correct the assignment of the guardian from the RWG multisig to the Policy Committee multisig, ensuring proper governance and oversight of feed switching for this market.

Background

Liquidation Incentive

When evaluating the integration of PT-sUSDE-27MAR2025 as collateral on FiRM, the RWG and PWG considered two oracle designs for pricing the PT:

  1. Discounted NAV Oracle: Prices PTs dynamically based on time-to-maturity and implied yield (Yield to Maturity - YTM). This provides a more accurate market reflection but introduces additional complexity.

    • Pros: Reflects real-time market dynamics and mitigates mispricing risks.
    • Cons: Requires careful parameterization and complexity.

  2. Fixed $1 Oracle: Values PTs at $1, representing their redemption value at maturity. This was chosen for simplicity and reduced risk of manipulation.

    • Pros: Simple implementation, eliminates manipulation risks.
    • Cons: Does not account for PT discount before maturity, especially as APR rises.

The RWG recommended the fixed $1 oracle to simplify risk management. However, with APRs exceeding 25%, the PT price has discounted to approximately $0.94, rendering the 5% liquidation incentive insufficient for profitable liquidations.

Price Feed Guardian

The guardian, operating behind an 18-hour timelock, is responsible for enacting the market’s price feed switch under certain conditions, including extreme market scenarios (e.g. switch the price feed to reflect live market data during events such as a USDe depeg). The protocol’s agility is maintained through three potential feed options: (1) Primary hardcoded $1 feed, (2) Pre-maturity feed derived from the sUSDe Chainlink USD feed divided by the USDe:sUSDe exchange rate, and (3) Maturity feed derived from the USDe Chainlink USD feed for 1:1 parity with the PT. This structure ensures both stability and responsiveness, safeguarding users and the protocol during critical events.

The original intent was for the Policy Committee multisig (0x4b6c63E6a94ef26E2dF60b89372db2d8e211F1B7) to act as the guardian for the price feed. However, the current implementation hard-codes the guardian as the RWG multisig (0xE3eD95e130ad9E15643f5A5f232a3daE980784cd). This oversight needs correction to align governance structure with the intended multi-party model.

The updated price feed contract has been prepared and is available at 0xc950f9d458661dda5c6aa194d2ec93beb5c55408.

Analysis

Liquidation Incentive

The current issue arises when liquidators attempt to liquidate positions under the fixed $1 oracle while PTs trade at a discount. For example:

  • Liquidation Example:
    • Liquidate 100,000 DOLA debt.
    • Liquidator receives 105,000 PT (5% incentive).
    • Selling the PT at market price ($0.94) yields 99,000 DOLA.
    • This results in a 1,000 DOLA loss for the liquidator.

Without profitable liquidations, the protocol risks accruing bad debt. Increasing the liquidation incentive to 8% ensures liquidators can profitably execute liquidations even at current APRs. At a PT price of $0.94, an 8% liquidation incentive results in a real incentive of approximately 1.52%, sufficient to attract liquidators.

Importantly, as the PT approaches maturity and its price converges closer to $1, the liquidation incentive can be reviewed and potentially reduced. This proactive adjustment ensures protocol solvency without introducing unfair liquidations.

Price Feed Guardian Update

Redeploying the price feed contract with the Policy Committee multisig as the guardian restores the intended governance structure. The Policy Committee’s 4/n multisig configuration ensures robust oversight and proper checks and balances for feed switching. This correction aligns with the original design and stakeholder expectations, improving governance integrity.

On-Chain Actions

  1. Increase the liquidation incentive for the PT-sUSDE-27MAR2025 market on FiRM from 5% to 8%.
  2. Set FiRM Oracle price feed for PT-sUSDe-27MAR25 Market to deployed and updated contract (0xc950f9d458661dda5c6aa194d2ec93beb5c55408)