Proposal for Adjusting iETH Parameters
Motivation:
Similar to the depeg of iUSD, the iETH market has also experienced a price disparity on DEXs. The primary cause of depeg is attributed to users seeking leverage to participate in the market. Given that iAssets are a form of debt token, leverage is one of the main reasons why users choose to use the protocol. This trend, combined with an upward market trajectory, has resulted in less frequent CDP liquidations.
Consequently, the equilibrium between the risks and rewards for leveragers versus spot holders has been impacted.
The introduction of V2 introduces new parameters that enable Indigo to realign this balance methodically.
Given iETH’s higher correlation with ADA, the interest rates will be comparatively lower.
Primary Adjustment Tool - Interest Rate:
This proposal aims to introduce an initial daily interest rate of 0.03%, with the possibility of adjustments as the market conditions evolve. Unlike increases in the Minimum Collateral Ratio (MCR), an interest rate hike doesn’t immediately pose a liquidation risk, allowing for a more gradual reduction of CDP debt.
In the future and based on comprehensive market data gathered from these initial parameters, an algorithm-based interest rate mechanism should be introduced.
An interest rate for Protocol longevity:
The introduction of the new interest rate model represents a pivotal shift from the previous, interest-free framework. While this transition may require some adjustment from the community, it is a critical move to ensure the ongoing health and competitive strength of the protocol in the face of evolving market dynamics.
This strategic decision to implement an interest charge on CDP holdings is not merely about generating revenue; it’s about reinvesting that revenue in a manner that fortifies the entire ecosystem. The funds accumulated through interest payments will be strategically directed back into the protocol, deployed with a clear, tri-fold purpose:
- Strengthening the iETH Peg: The primary purpose focuses on the stability and reliability of the iETH through the injection of incentives to iETH holders. By recovering and strengthening the peg, we aim to solidify the foundational asset of this ecosystem, ensuring it remains a dependable store of value and medium of exchange. This step is crucial for maintaining user confidence and facilitating continued growth within the platform.
- Protocol development: The protocol will have a steady stream of revenue to continuously invest in core infrastructure and development that brings more value and users.
- Enhancing DAO Treasury Value Accrual: As the protocol matures and stabilizes post V2 deployment, attention may shift towards maximizing value accrual for the DAO Treasury. Such changes would incentivize loyal users of the system, but also aligns interests with the long-term success of the protocol.
By carefully reinvesting the interest revenue in this manner, we aim to achieve sustainable growth and long-term value accrual for the protocol. Strengthening the iETH peg enhances the protocol’s overall health, which in turn, provides a more stable and enriching environment for Indigo Protocol. This approach underscores our commitment to sustainability and value creation for all members of the Indigo community.
Phased Approach:
In addition to adjusting the interest rate, other mechanisms, such as Redemption aka “RMR”, will play a crucial role. It is proposed that the redemption feature be temporarily disabled at launch by setting its parameter equal to the Liquidation Ratio. This pause will enable the newly adjusted interest rates to demonstrate their influence effectively and allow for the collection of additional data to ascertain a fair and equitable interest rate. This strategy provides an opportunity for CDPs to naturally adjust and align within the redemption threshold once the feature is activated, facilitating a smoother transition into the redemption phase and minimizing disruption to the existing user base.
Secondary Adjustment Tool for Later Activation - Redemption Mechanism:
Given the severity of the depeg, we propose using the redemption mechanism as another tool for managing peg after enough time has passed for interest to find the steady state equilibrium for peg. This allows interest to organically decay CDPs to fall within a reasonable range for long term RMR to take effect. This is expected to be in the range of approximately 130%.
Other parameters:
The Maintenance Ratio (MR) is suggested to be set at 130% to moderate the rate of debt minting during this period of recalibration and can be lowered as more stability is achieved. This ratio will have a lower bound equal to the LR in times of overpeg and no upper limit during underpeg periods.
Summary:
| Parameter Name | Parameter Value |
|---|---|
| Maintenance Ratio (MR) | 130% |
| Liquidation Ratio (LR) | 110% |
| Redemption Margin Ratio (RMR) | 110% |
| Redemption CDP Reimbursement Fee | 1% |
| Redemption INDY Staker Fee | 1% |
| Debt Minting Fee | 0.5% |
| Daily Interest Rate | 0.03% |
| Liquidation Processing Fee | 2% |
| Stability Pool Withdrawal Fee | 0.5% |
This proposal aims to restore the balance and functionality of iETH and its peg health through careful adjustments of the interest, redemption mechanism, and other related parameters. It’s important to understand that the dynamics that caused the depeg took months in the making to play out, and it should be reasonably expected that it will take time for iETH peg health to return in a stable state over a period of weeks/months following deployment of these new parameters and features.