1. Introduction – Design of Indigo
iUSD is a cryptocurrency asset designed to mimic the price action of USD. Its price on decentralized exchanges is influenced by Indigo’s rules, aiming to match the USD.
Each iUSD is backed by collateral in a Collateralized Debt Position (CDP). This collateral value must always exceed the Minimum Collateral Ratio (MCR), as set by the DAO.
According to the Indigo paper, specifically section 2.9, if iUSD drops in price relative to its peg, it provides CDP owners an opportunity to buy iUSD to repay their loan at a discount. This can cause buying pressure on iUSD to rise its price. If there is an abundance of iUSD supply, Indigo can increase MCR towards the iUSD mode CR.
Each CDP has its own CR. The iUSD mode CR represents the most frequent CR value users select for their CDPs. By moving MCR towards the mode CR, probability of liquidation increases, incentivizing users to close their CDPs, which can cause iUSD buying pressure and reduced iUSD supply.
A higher MCR results in a higher cost to mint iUSD supply, reduces the maximum leverage utilizable, and increases the margin of arbitrage value for Stability Pool stakers. This creates a disincentive to create new iUSD supply and incentivizes users to buy existing iUSD supply to stake into the Stability Pool. The reduction of supply paired with the increased buying pressure can push iUSD price upwards.
2. Current situation
Currently, iUSD is trading around $0.87, and the iUSD mode CR is at 295%.
The proposal to raise the MCR of iUSD to 150%, followed by a gradual rollback to 130% over 40 days, was approved on November 26th. However, its implementation was delayed until December 1st. When the off-chain poll commenced on November 16th, iUSD was trading at $0.82. Since then, its trading value has fluctuated between $0.82 and $0.95.
Given the current market conditions, which show a high demand for leverage as evidenced by Liqwid’s 7.4% interest rates on iUSD and over 16% on other stablecoins, it’s crucial to align the cost of minting iUSD with these market dynamics. Although an immediate correction was not anticipated, the current market volatility indicates that a 150% MCR might not be sufficient to ensure price stability.
3. Proposal details
I propose an immediate increase of iUSD’s MCR from 150% to 190%. This change overrides the previous “MCR Rollback Plan” to 130%. The adjustment aims to stabilize iUSD’s price and realign it with current market conditions, ensuring its peg to the dollar and addressing the increased demand for leverage.
The rationale for proposing a 190% MCR is as follows, with Liqwid’s annual borrowing rate for iUSD at 7.4%, and considering that the cost of minting iUSD is 2% on the collateral, Indigo users would require a CR of 370% for an equivalent deal (for a one-year term). This implies that Indigo could be more favorable for longer-term ADA leverage (exceeding a year), while Liqwid might be preferred for shorter-term borrowing. Currently, the mode CR at Indigo is 295%. Increasing it to 370% represents a 25% hike. Hence, I propose we raise iUSD’s MCR by 25%, increasing it from 150% to 190%, to better reflect current market dynamics.
Indigo is structured with static parameters, where the iUSD’s price on decentralized exchanges is the key variable reacting to market conditions. By design, we can alleviate these fluctuations, adjusting the MCR in line with current market trends. This approach is geared towards maintaining the stability and health of the iUSD within the Indigo ecosystem, adapting to the ever-changing market dynamics.
The aim of this proposal is not to cause the liquidation of any CDPs.
While there may be more effective methods than modifying the MCR, they would require alterations to the core Indigo protocol.
It’s crucial to understand that these MCR changes are short-term remedies. We eagerly anticipate the rollout of Indigo V2, expected to offer more substantial and enduring solutions.
In conclusion, the market should recognize the Indigo DAO’s strong commitment to price stability. Our primary aim is to preserve the protocol’s integrity and protect the interests of our community.