This proposal recommends a temporary increase in the Minimum Collateral Ratio (MCR) for iUSD from 120% to 130%. The initiative aims to address the current issue of iUSD trading below its peg, leveraging the protocol’s dynamics as outlined in the Indigo whitepaper, specifically focusing on the role of MCR in iAsset price stability.
Background: iUSD’s Peg Deviation
iUSD’s sustained trading below its 1:1 USD peg, approximately at $0.9, poses significant risks to its functionality and user confidence. As per the Indigo protocol, iAssets, including iUSD, rely on protocol rules and market forces for price stabilization, with MCR playing a crucial role in this ecosystem.
The Role of MCR in iAsset Price Stability
Supply and Demand Dynamics: A higher MCR increases the cost of minting iUSD, reducing its supply. This decrease in supply, paired with increased buying pressure, can elevate iUSD’s price towards its peg.
Incentivizing Stability Pool Participation: Increasing the MCR also enhances the margin of arbitrage value for Stability Pool stakers, creating incentives for users to buy existing iUSD supply and stake it, further aiding in price stabilization.
Adjusting Liquidation Thresholds: The adjustment in MCR modifies the thresholds at which CDPs become eligible for liquidation, prompting users to manage their positions more conservatively, which can indirectly support the price of iUSD.
Proposal Details: Raising MCR to 130%
Objective: By increasing the MCR, this proposal aims to reduce the over-minting of iUSD, addressing its current undervaluation and aiding in re-aligning its price with the peg.
Mechanism: The proposed MCR adjustment is expected to reduce the incentive for creating new iUSD, thus decreasing its circulation and creating upward pressure on its price.
Temporary Measure: This proposal serves as an interim solution until the comprehensive updates of the Indigo Protocol v2, including the redemption mechanism, are implemented.
Anticipated Outcomes
Price Realignment: A gradual return of iUSD’s value to its pegged rate.
Enhanced Protocol Stability: The proposed MCR adjustment is expected to enhance the overall stability and reliability of the iUSD within the Indigo ecosystem.
Conclusion: Urgent Community Decision
In light of iUSD’s current trading challenges, this proposal seeks the community’s support for a critical adjustment to the MCR for iUSD CDPs. This decision is vital for maintaining the stability of the Indigo Protocol ecosystem and requires the community’s active participation and approval.
Increasing the MCR to 130% does not guarantee that iUSD returns to 1 USD. It is all to dependent on what happens next to the ADA price. If ADA continues its current upward trend the incentive will still be there to mint more iUSD and the selling pressure will continue. If iUSD continues to depeg there will be less of an incentive to mint more iUSD and an increase in buying pressure. I think we are better of just waiting for the v2 protocol upgrade.
Of course, we can’t be certain that the IUSD will recover as a result of this proposal. However, we do know that it will prompt users to rethink their strategy and potentially buy back some of their IUSD positions. It will also make “liquidation more expensive”, so people will be more careful with their positions.
Im okay with this proposal, however i dont think it will have any impact on market price of iusd. The iusd cdps are quite healthy. Its a good time to raise the bar though since most are well above it.
The same argument is true and the result of a weaker iUSD. If minting iUSD only gives you < 90 % of the buying power less people will mint and be more careful with opening new CDPs. And current CDP holders will consider closing their positions for a < 10% extra profit. The market will correct itself.
I think raising MCR makes a lot of sense. It may not be the perfect solution but I think it will certainly help, plus it’s a solution we can try relatively quickly. Im optimistic about the timeframe for a redemption mechanism but I’ve leaned not hold my breath. Better we mitigate as best we can in the mean time imo.
Unless someone has a better idea, this seems to be the way out for the time being. Also if we are increasing it temporarily, it can be even increased to 140% as iUSD is trading below 90 cents.
Increasing MCR will neither create stability nor will it create a buying pressure for IUSD because average MCR is above 220% and most of the CDPs are well over 150%. All that it will do is that it will slow down the new issuance of iUSD and create instability in the minds of current holders CDP.
Any option which can slowdown the TVl growth for a young protocol like Indigo is not an option.
This seems to me to be an attempt to reestablish the iUSD peg by squeezing out people by changing the CDP parameters in the middle of the game. Considering the MCR has already been adjusted once not too long ago and failed to accomplish the task already, I’m not sure there’s any reason to believe that increasing it again accomplishes what this recommendation sets out to accomplish.
It just looks like a way to liquidate people. And it’s apparently in danger of becoming a habit. I can’t help but wonder what’s to prevent cannibalizing debt holders every time iUSD falls below the peg. People will be even less incentivized to hold iUSD if they have to consider the possibility of having the CDP limit increased arbitrarily because some folks can’t appreciate volatility in a free market.
I don’t personally see the volatility as a problem long term. It makes sense that people will mint more iUSD loans as their collateral value increases (as the ada/usd pair rises) and then sell iUSD for ada, CNTs and whatnot looking for pumps. It also makes sense that they’ll buy back into iUSD at a discount to close out CDP positions after they’ve taken profits. We just haven’t reached that point in the cycle yet.
Fear not free market mechanics.
If some measures need to be taken to stabilize iUSD volatility, I would suggest incentivizing holding it (eg. increasing iUSD stability pool returns) rather than penalizing those holding it already. Arbitrarily changing the rules of a game is one of the most efficient ways to destroy confidence in it. It’s not a good look.
My two cents is that this line of thinking sets a bad precedent.
Really enjoying this debate and engagement from the community. There are solid points on both sides of this discussion.
Changing MCR could erode trust from current holders. Allowing the negative depeg to continue could discourage future users and existing holders who are feeling trapped.
What if minting of new iusd is halted when it trades below 5% for a period of time (lets say 72 hours)?
Minting becomes available again when the peg reestablishes to our threshold % for 24 hours?
The percentages and time frames are just examples.
Im sure there could be issues with this suggestion but it might be the happy medium to partially alleviate concerns from both sides of this debate.
Not even sure if it’s technically feasible to do in a decentralized way that is economically viable. Just thought I would throw it out there.
Update: I just learned pausing iusd minting is not currently an option on V1 of the protocol.
Increasing MCR will not increase buying pressure. Even if the MCR is increased to 150% all it will do is that it will sell CDPs worth max about 2 million ada and exchange it for the iusd from stability pool where stability pool holders will sell their 1 dollar worth of iUSD for about 1.40 dollars in ada terms. and since most of the CDPs will be over 230% there wont be any urgency for stability pool providers to convert their Ada for buying iusd hence there wont be any buying pressure for the stability pool providers.
The idea what you are proposing is good but at the same time i would not want to see any discouragement for the growth of TVL.
For a young protocol like Indigo we needs to target TVL growth over peg, PEG is something which should be the problem to be tackled in V2 which is just few months away.