Proposal for iUSD Parameters change

Temp Check Discussion
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Proposal for Parameters change

Introduction

Following the launch of Indigo Protocol V2, new parameters were introduced to enhance peg management. The interest rate for the iUSD market was initially introduced at approximately 21%. This introductory rate was intended to allow CDP users to adjust to the new interest environment gradually. However, this rate remains significantly lower than comparable markets and has not sufficiently improved the peg.

This proposal aims to align Indigo’s rates with the average borrowing rates of other stablecoins in the ecosystem. In the calculation, the liquid staking nature of CDPs, which allows users to participate in staking, ISPOs, and governance voting is also considered. The current median collateral ratio aka “CR” in the system is higher than the initial 185% Redemption Margin Ratio (RMR), warranting an increase in the RMR to better reflect the mode of the Protocol’s CDP collateral ratio curve.

Let’s reference the supply levels of the top three stablecoins in the largest lending and borrowing markets:

DJED: 30.05%
USDT: 18.74%
USDC: 18.63%

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Proposal Details

To stabilize the iUSD peg and ensure the long-term health of the Indigo Protocol, the following changes are proposed:

  • Interest: Increase the annual interest rate for the iUSD market from 21% to 32%.

  • RMR: Raise the Redemption Margin Ratio (RMR) for the iUSD market from 185% to 300%

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With iUSD set at the RMR threshold of 250%, we can see that roughly 589k iUSD would be in the redeemable zone. If the entire redeemable amount is redeemed, less than one-quarter of the total supply of iUSD would be eligible for redemption. It is estimated, based on the iUSD liquidity on Minswap, Wing Riders and SundaeSwap, that roughly 180,000 iUSD net purchase is needed for supply to be balanced excluding any marginal sellers.

As of June 21th, we can see the number of total iUSD that is eligible for redemption at each listed RMR threshold ranging from 250 to 400%:

  • RMR= 400; redeemable= 4,726,918 iUSD
  • RMR= 350; redeemable= 3,442,083 iUSD
  • RMR= 300; redeemable= 2,343,710 iUSD
  • RMR= 250; redeemable= 1,153,519 iUSD

Rationale

When V2 was adopted by the DAO, the members voted to ease into the V2 parameter and feature updates. The success since V2 of iBTC and iETH has demonstrated the potential benefits of appropriate interest and redemption levels.

It is now time to take action to stabilize the iUSD market. By increasing the RMR to 300% and the interest rate to 32%, the supply of iUSD will be drawn off DEXs and returned to the protocol. This reduction in supply will help push the value of iUSD back to its target peg.This is a necessary and aggressive leap in order to regain its peg and establish a solid and stable foundation for Indigo’s future growth. Indigo Protocol V2 delivered the needed features to manage iAsset pegs and was the priority of its design specifications, as stable iAssets are needed for the Indigo ecosystem to build a strong foundation. Now is the time to use these features to achieve this goal and give the Cardano DeFi ecosystem a more reliably pegged stablecoin. By adopting these changes, the Indigo DAO will be better positioned to manage its iAsset pegs and move forward with confidence, delivering on everyone’s goal to build a robust and sustainable ecosystem for all stakeholders. With a reliable and sturdy peg within a reasonable range, the entire ecosystem can benefit and grow, not just Indigo Protocol.

It should be expected that these aggressive parameters will be revisited once the peg for iUSD is sustained for a considerable duration of time such that they can live up to its potential for additional uses in the Cardano DeFi ecosystem.

Update 2 July 2024
The proposal has been updated with changes to the following:

  1. Proposed Interest to stay at 32%
  2. Proposed RMR 250% instead of 300%
13 Likes
2

As much as I agree we need a more drastic approach for recovering iUSD peg, every action on Indigo has been a phased and slowly progression to avoid any possible friction or abrupt disruption. I am curious why did team/PWG decided to propose changing both RMR and interest rate at the same time? Wouldn’t it be better to modify the RMR and then, in a later moment, the interest rate?

5 Likes
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Yes to both. The peg comes first.

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4

I like the 300% RMR proposal but against the 32%. Is it possible to separate the two? How do you come up with 32% number rather than, let’s say, 25%? There’s barely any defi yield that’ll give you more than 21%. I don’t know any that’ll provide more than 32%. Only those who got extreme conviction to ADA will keep their CDP open at this rate.

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You have my votes! I would increase RMR even higher, but together with the interest increase it most likely will do what it’s supposed to do.

Let’s do it!

2 Likes
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I have two doubts, this proposal seeks to increase the current interest rate from 21% to 32% per annum, and the RMR from 180% to 300%,

When and how will this be done?

And in case iUSD in the future due to lack of users to create CDP, what will they do with those rates, i.e. today iUSD is worth $0.89 but if in the future due to lack of CDP creators it will cost $1.32, what will they do.

I think they have to look for very aggressive Dynamic rates when unbundling in the main DEX.

I believe that when iUSD is below $0.95 the rates should start charging from 20% and for every $0.01 difference to the dollar it should go up by 20% and up by 20%.

if iUSD is worth $0.90 the interest would be 100% per year.

in the case of RMR it would go up the same way, 20% every time iUSD loses $0.01.

And I think as it happens with the impact price it could dynamically increase the fee by requesting more iUSD iBTC iETH, currently the fee is 0.5%, it could increase by 0.25% every time it unlinks 0.01% in the case of iUSD.

This would be like an aggressive penalty for unlinking the asset and is only taken by those who want that risk.

If iUSD is 1:1, the rates could be normalized. or Free fees

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I understand why the changes need to happen, but at the same time, its getting unattractive to mint iUSD at this rate.
Supply $100 to mint only $30… while eating 32% interest rates… and waiting for ada to do something :sweat_smile:

How’s a degen suppose to degen under these conditions?

Give us a new iasset or two atleast? We’ve been waiting on that longer than iUSD has been depegged :joy:

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You can buy the iAsset on the free market and reduce your position at any time. Join the discord and people are going to help you.

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i feel increasing RMR is the need of the hour but increasing interest is not a good decision,
interest on those lending platform is high because they have higher capital efficiency there.
for example on liqwid you can have 3x-4x position on your base capital.
by increasing RMR to 300 you are going to allow about 1.3x maximum capital efficiency at 31% per anum cost that is ridiculous.
for now i feel only increasing RMR makes sense, please do not scare away CDP holders by asking such high interest for that low capital efficiency.

4 Likes
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if we decide to implement both the changes then we will be the most expensive and least capital efficient system to mint all over cardano.
i feel lets increase RMR which will decrease the capital efficiency but lets not give up the cheapest platform to mint debt position by increasing interest rates.

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Hello,
Joining the conversation for constructive criticism and hoping to join the few voices of concern of liquidating the users, nuking the iUSD supply and destabilizing the peg further due to low liquidity. Really love this app so apologies this is a bit wordy.

  1. Retaining Users
    I think there is a disconnect between the governing body and the user base. The balance is incredibly important in order to have long term success for the Dapp and also for $INDY. The users want to use the app and not have to check in every other day to see if the CDP they signed up for is still the same CDP. People still think they have 0%, not knowing they’re being charged $100s-$10,000s without their consent and being liquidated only to come back and realize their hard earned ADA has been taken from them. These “upgrades” are burning and hurting a lot of people in the worst way, literally taking their money and ruining lives that not only drives people away from the app but from crypto in general. You can say people can close their position but users take out loans in order to buy something that they didn’t have the funds for in the first place and they can’t just come up with the money next week or sell what they bought in order to close the position so PLEASE slow down and give this some more thought before increasing the %s again.

  2. Re-pegging iUSD
    I want to stabilize the peg as much as anyone but if we reduce liquidity it’s going to obviously make the trading pair more susceptible to price swings. iUSD de-pegged because traders did the math and knew if there is no corrective mechanism that people are going to sell their iUSD for ADA at the lows. We need to reinstall confidence in the traders and get them to do the work for us to get to $1 and hold it steady, not nuke the supply and have an over-correction that causes a bank run on everyone. IDK why treasury funds aren’t being allocated to counter trade the depegging forces??? Even just announcing $$$ is going to be used to just buy when it’s below $0.95 and sell at $1.05 or something would incentivize people to buy right now at $0.87 and hold til it reaches at least $0.95 for an easy gain. Then the people outside see the momentum shift and view it as a $1 stablecoin discounted 5% and do the rest of the work. This also give a minimum 10% gain in treasury holdings, providing even more pegging force.
    Instead I see the interest money is going to reward the governors after liquidating users and we remain unpegged??? We’re just giving people a good price to sell the $INDY as they leave the app for good. IMO none of us should be getting bonuses until the problem is solved… The peg comes first and it shouldn’t be at the cost of devouring the user base. Need to reduce cost and fees to grow the user base. Small fees from a lot of people still give a lot of funds to work with. Then we will be the #1 cardano app when millions of new users show up, have stable assets and earn $100+ $INDY in the bull run.

  3. Bank Run Bug?
    This might actually be a catastrophic bug due to introducing interest so please read carefully and tell me if I have this right…
    -Before interest, lets say users loan out $10M and there is now a debt of $10M in the protocol. There’s no holes in the balance sheet, it’s a closed system, every $1 is accounted for. Great, no issues.
    -Now w/ interest, after a year w/ 20% the debt is $12M… but there is only $10M iUSD in existence… so a few ppl get liquidated, pushes the price of $iusd up, more ppl buy, more ppl close, price keeps going higher until everyone is liquidated and there is $2M unaccounted for. And imagine if we increase to 32%, and a couple years go by.
    If this is correct, it would be an assured bank run and it’s game over, nobody will trust the app and it’s a permanent stain. I hope I’m misunderstanding, but if not, that interest needs to be used to plug the hole that has been created,

Thank you for reading,
I honestly love this app and want to see it back at #1

5 Likes
13

Regarding #3
the interest are accrued and settled in ADA for now.
iUSD direct settlement is probably possible in the future interest upgrades.

At all point, iUSD will have its minimum collateral backing in ADA at 120% liquidation ratio.

I understand the concern of the mismatch in available supply. its a great point to bring up.
However that isn’t the case.

1 Like
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Sometimes to fix things, you have to break them; we can always adjust later. For me, it’s a yes to the proposal.

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Thank you in regards to #3, I see how that works out.
Also general thank you for people that made the community call yesterday and happen to see this.
Wanted to consolidate the points in increasing the interest/RMR and implementing a pegging system.
This is my best interpretation and it’s open for correction just so we can all be on the same page.
Keep in mind I’m not against the interest rate as the pegging mechanism that has been suggested in the forum is funded from the interest.
IMO I think implementing a pegging force should be attempted before turning up the heat on CDP users.

  1. Increasing Interest/RMR

Goal: Reduce iUSD supply

Positive Effects:

  • Will initiate the buying pressure to happen sooner rather than later.
  • Increase in treasury funds accumulation

Negative Effects:

  • Reduction in supply/liquidity leads to increase in price swings.
  • Amplifying reactive mechanism. Could overshoot $1 causing cascading redemptions & liquidations.
  • CDP owners are being charged more.
  • RMR increase means more CDPs will be redeemed when ppl weren’t intending to lose their ADA.
  • AFK users, people that can’t repay now, will have less time to save their collateral.
  • Loss in trust of the protocol and governance due to unexpected changes harming CDP users.
  • Nullifies the incentive of any new CDPs being opened. ie 30% returns from stability pools or providing liquidity in other protocols now provides no gain/benefit.
  • Reduction in CDP users/fees.
  • Not a long term solution
  1. Pegging Mechanism

Goal: Peg iUSD to $1

Positive Effects:

  • Accumulates the margin of iUSD under $0.95 now rather than soon.
  • Instills confidence in traders that we will establish $1 to do the work for us.
  • Minimum 10% gain on iUSD traded.
  • Active mechanism that pegs from both undervalue AND overvalue.
  • Long term solution that strengthens and scales with protocol growth.

Negative Effects:

  • ?
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The interest rate might be too high?
What are the expected result for the most boring user s.t one that use just stability pool. Isn’t rewards - interest rate makes this healthy usage not much beneficial?

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Wouldn’t drawing the supply off the DEXs will also make the liquidity at these DEXs very thin and more prone to manipulations?

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Haha, you are talking about me…:smile:

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RMR increase should be phased, e.g. 5% per month, interest rate at 30% does not make sense. If you refer to Cardano DeFi, it is very illiquid at the moment, so 30% is just because of low liquidity. If you look at other chains, it is 5-10% for stables. Secondly, market rate changes with the market, i.e. today it is 30%, next day it is 10% because of demand/supply. How this CDP rate is going to change respectively? probably not, and the users of Indigy are screwed. Moreover changing the rules amidst the game is not a fair play. Early adopters helped to launch the protocol and now they get rekt. So if anything new is introduced, it should only apply to NEW CDPs.

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I think the impact of this change will drastically reduce the TVL on Indigo. We have already seen a significant drop since the introduction of the existing Interest and RMR parameters. Personally, I would prefer it if the annual interest dropped to better reflect the drop in HDR for the iUSD Stability pools. I also agree with previous comments that these types of changes could have the impact of recking existing positions.

2 Likes
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I doubt that very much. The last lot of changes to the parameters resulted in a significant drop in the protocols TVL. Can’t imagine why you think the result of these parameter changes will result in more TVL coming to the protool.