Set New SaleHandler for Use by the Virtual XY=K DBR Auction

Inverse Finance DAO
1

Set New SaleHandler for Use by the Virtual XY=K DBR Auction

Background

The virtual XY=K DBR auction, launched in January 2024, has been instrumental in managing DBR issuance and facilitating DOLA bad debt repayment. Over the past year, this mechanism has contributed more than $2 million in bad debt repayments. The current SaleHandler directs all DOLA revenue from auction sales exclusively toward bad debt repayment on Frontier.

Objective

This proposal seeks to implement a new SaleHandler that retains the existing functionality of automated bad debt repayment while introducing additional flexibility. Specifically, it will allow a repayment percentage to be set, directing that portion of revenue toward automated bad debt repayment. The remaining revenue will be transferred to the TWG ETH multisig for discretionary use.

The updated SaleHandler will enable the TWG to allocate DOLA revenue across three key categories:

  • Liquidity Incentivization: Utilize DOLA to incentivize liquidity in DOLA and INV pools
  • Manual Bad Debt Repayment: Allocate DOLA for targeted bad debt repayments on Frontier or other platforms, continuing the practice of millions in repayments to date
  • Treasury Revenue: the DOLA can be sent to the DAO Treasury, adding to the current stablecoin cash balance

For the foreseeable future, 100% of the DOLA allocated to the TWG is intended to support liquidity incentivization. This approach will help stabilize DOLA’s peg without significantly impacting debt levels on FiRM.

Liquidity Incentivization

Since mid-October 2024, the TWG has operated under a net-zero INV inflation policy for liquidity incentivization. Instead, revenue from treasury assets and Feds has been utilized. Most of this revenue comes from combining the Aero Fed and TWG’s veAERO position to generate significant returns.

This strategy has made the Fed Chair hesitant to approve contractions of the Aero Fed when DOLA’s peg on Base is below its target range. Such contractions would reduce the budget for DOLA liquidity incentivization at a time when it is critically needed.

The new SaleHandler addresses this issue by enabling a portion of FiRM’s revenue to supplement liquidity incentivization efforts. Upon execution of this proposal, the Fed Chair will be able to contract the Aero Fed, which should strengthen DOLA’s USD peg through:

  • Reduced Supply: Contraction aligns DOLA’s supply with current demand.
  • Enhanced Pool Attractiveness: Reducing TVL in the DOLA/USDC pool on Aero while maintaining rewards increases yield, encouraging new participants to buy DOLA and farm.

This approach will make DOLA more attractive to borrow (short) when on-peg, potentially increasing FiRM’s debt level. Additionally, the current high vote incentive efficiency on platforms like Curve can generate more DBR burn than the amount issued via the auction, provided the spread between Curve LP yields and DBR’s average price remains manageable.

Minimum Repay Requirement

The new SaleHandler introduces a minRepayBps parameter, controlled by governance, which sets the minimum percentage of auction revenue allocated to trustless DOLA bad debt repayment. The TWG, as the SaleHandler beneficiary, can dynamically adjust the live repayBps between this minimum and 100%.

We propose setting the initial minRepayBps at 20% (2000 bps), allowing up to 80% of auction revenue to be directed to the TWG. This allocation reflects the current low DBR issuance via the auction, necessitating a larger portion of revenue for DOLA liquidity incentivization. As DOLA regains its peg, DBR issuance can increase, enabling a higher percentage of auction revenue to be redirected toward bad debt repayment.

Summary

Implementing the new SaleHandler will:

  • Retain automated bad debt repayment functionality.
  • Introduce flexibility for TWG to allocate revenue across liquidity incentivization, manual debt repayment, and treasury funding.
  • Enhance DOLA’s peg stability by supplementing liquidity incentivization efforts with FiRM revenue.
  • Allow for dynamic adjustment of repayment rates, balancing debt reduction with market demands.

Governance approval of this proposal will equip the TWG and Fed Chair with the tools needed to support DOLA’s peg, optimize liquidity strategies, and maximize DBR burn efficiency. The initial minRepayBps of 20% ensures continued focus on debt repayment while addressing the immediate need for liquidity incentivization.

On-Chain Actions

  • Call sendToSaleHandler
  • Set the new saleHandler to on the virtual auction
  • Set minRepayBps to 2000 (20%)