Proposal For iUSD Parameters

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Proposal For iUSD Parameters

Motivation:

In the last six months, we’ve observed a severe depegging of iUSD, coinciding with an upward trend in the market. A depeg diminishes the utility of iUSD, which is crucial to maintaining growth of the protocol.

The primary cause of this depeg has been identified as users seeking leverage via iAssets to engage with the market. As iAsset represents a debt token, leveraging is a key motivation for users to engage with the protocol. This, combined with the market’s upward trend, has resulted in less frequent liquidations.

Consequently, the equilibrium between the risks and rewards for leveragers versus spot holders has been impacted.

With the introduction of V2, new features and parameters introduced with V2 offer the opportunity to adjust this balance between leveragers and spot holders methodically.

Primary Adjustment Tool - Interest Rate:

Borrowing from the practices of lending/borrowing protocols, perpetual futures, and other CDP protocols, where the borrowing rate typically ranges between 30%-40% under current market conditions, iUSD’s borrowing rate stands at 15-18% within Cardano local lending borrowing protocols. This proposal suggests setting the introductory daily interest rate of 0.055%, with room for adjustments as the market evolves. Unlike increases in the Minimum Collateral Ratio (MCR), an interest rate hike doesn’t immediately pose a liquidation risk, allowing for a more gradual decaying of CDP.

In the future, 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:

  1. Strengthening the iUSD Peg: The primary purpose focuses on the stability and reliability of the iUSD through the injection of incentives to iUSD 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.
  2. 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.
  3. 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 iUSD 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 range of approximately 150%

Other parameters:

We propose resetting the Liquidation Ratio (LR) to 120%, as there is no need for an excessively high collateral ratio with introduction of MR. This will allow the protocol to resume normal growth with interest as the primary stabilizer.

The Maintenance Ratio (MR) is suggested to be set at 150% 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) 150%
Liquidation Ratio (LR) 120%
Redemption Margin Ratio (RMR) 120%
Redemption CDP Reimbursement Fee 1%
Redemption INDY Staker Fee 1%
Debt Minting Fee 0.5%
Daily Interest Rate 0.055%
Liquidation Processing Fee 2%
Stability Pool Withdrawal Fee 0.5%

This proposal aims to restore the balance and functionality of iUSD 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 iAsset peg health to return in a stable state over a period of weeks/months following deployment of these new parameters and features.

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Just to be sure, will the interest be paid in ADA or in iUSD? I remember seeing this discussion before (saying it would be paid in ADA) but it would be nice to have it clearly stated to avoid any doubt

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Paid in ADA, but accrues based on iUSD price iirc

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I guess the interest is deducted from collateral so it has to be in ADA.

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Seems reasonable to start with interest rates and measure the impact first before utilising RMR.

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So what exactly is Maintenance Ratio and how does it work?

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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.

I feel like this is a bit vaguely stated. The market is dynamic and so there can, at best, be “local” steady state equilibria at given points in time.

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 range of approximately 150%

I’m confused about what this is suggesting. What is expected to be approximately 150%, the RMR? You’re suggesting turning it off initially, but then when would we know it is time to vote to increase it to 150%? and why is 150% “an expected range”? Because that’s what the MR is set at?

I guess what I’m wondering is, why not just vote for a RMR parameter now along with an RMR “full implementation” date and either 1) have the RMR be automatically adjusted linearly based on the time remaining to the “full implementation” or if that’s too complex 2) Split this “full implementation” date into a number of discrete steps where everyone knows well in advance that on date X the RMR will increase by Y%.

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That’s what I understood from previous conversations and Relent already replied on discord channel. Anyway, I think that should be stated within the proposal to avoid any misinterpretation or even fud

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Yes definitely market is dynamic so will interest rate until an algo based solution is developed.

RMR can be moved up to its long term target if there is improvement in peg health.
Maintenance Ratio while having similar figure, it can be lowered or increase independently to restrict or allows mint supply without any impact on existing cdp.

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20% APR seems a bit high for the initial rate, perhaps start it a bit lower to see how the market reacts.

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I think 20% is quite comparable to the rest of the market and seems fair to me considering the amount and duration of the depeg. If we aren’t going to implement the RMR initially then interest is our only option to help re-peg. Regaining the peg a bit too quickly is better imo than taking too long, so even if people find this rate aggressive, I still think it’s justified.

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Will current CDPs automatically fall under these new rules? what will be the fee to close a CDP, say on the second day after V2 launch? Tks

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I feel before deciding the interest rates we need to make a fundamental decision about what exactly is iusd ?? we want it to be a stable coin or a trading tool for going long or short with leverage function ??

  1. If we want it to be a stable coin then one needs to make sure the peg is defended 24*7, in this case peg is the most important factor and rate of interest will not help to restore and defend the peg, if we want iusd to be a stable coin then RMR will be the most important tool then interest rates for this use case interest rates needs to be as low as possible to keep the protocol capital efficient.
  2. If we want iusd to be a trading tool for utilising leverage to go long or short on USD/ADA trading pair then we can decide to use interest rates as the most important tool, but we have to understand that for leverage most important thing is predictability about the leverage position is the most important thing, one can not use RMR regularly if we want to cater this crowd but can keep interest rates as high as 50-60% also if required.

We need to decide what we want iusd to be, a trading tool for leverage or a stable coin. there are trade offs for both, so lets decide first what we exactly Iusd to be, before randomly deciding interest rates.

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The thing is, as a CDP its really both.
Ultimately issuing iUSD which is a debt to your collateral which is leverage by nature.
That really needs the peg for effective use of the protocol whether one wants to go long on ADA or borrowing for other purposes.
Leveragers can become the largest minters of iAssets and this requires peg and sufficient economics incentives for other users to take on the spot iAssets.

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Section 2.1 of the Indigo Whitepaper says

Prices of iAssets are influenced via protocol rules with the intention of matching the prices of the tracked assets.

Nowhere in the whitepaper does it say that iAssets should be expected to perfectly maintain a stable peg, or that they are actually stablecoins. I think lots of users want iAssets to be stablecoins because we didn’t have an alternative, but Indigo wasn’t designed for this and USDM has finally arrived to fill this gap.

Even bridged assets like Wan USDC or cBTC which can be literally exchanged for the asset they represent have a price delta compared to the underlying asset based on supply/demand (plus gas and bridge fees), which affects every blockchain, not just Cardano.

I would expect a synthetic asset to have sufficient pressure to properly chase the price of the tracked asset as closely as possible, but I would not expect it to maintain as tight a price peg as a bridged asset.

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I would suggest a change to the Liquidation Ratio (LR) to be 110% instead of 120%. This way all iAssets will have equal LRs and will attract more users to the protocol.

We won’t need higher LRs to maitain peg due to the new redemption mechanism and the average collateral ration for iUSD is way higher than that today (~380%).

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20 % is nuts.
I get less than 10% APR on my ADA I use as collateral to mint iUSD and stake in the LP.

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I feel lets start the discussion about what a debt/ leverage/asset is??
According to my understanding something is a debt or leverage when someone borrows assets from someone else by keeping their own assets as a colateral. example can be that when i take loan of djed from liqwid protocol i get debt of djed from a lender who wants to earn interest on their djed asset and for their safety borrower keeps Ada or other assets as a collateral, understand that there are 2 parties in this case or sitiuation other than a smart contract, in this situation risk is devided in both the parties (if colateral drops in value then its benificial for the creditor and vise versa if value of the asset used as loan falls then its benificial for the debtor )
Now lets discuss the Synthetic assets or iusd in this case which is issued against CDP,
when someone issues an iusd tecnically there is no one on the other side to riduce the asset risk. in case of iusd, issuer himself has to protect the value of iassets plus he only will have to start giving interest on an assets which technically he only has created which is unfair. In this case there is no seperation of risk plus there is no choice of an assets to borrow against your asset.
if you personally ask me then i dont see Iusd as an debt or leverage untill and unless the issuer decides to sell it. iUSD becomes my liabilty or a debt instrumet only in the case if issuer sells it. so there for rates should not be constant like a lending and borrowing protocol but it should be variable as per the leverage of the CDP.
what i suggest is that interest rates should be as low as 3% if issuer issues upto 10% iusd compared to his cdp and it should be as high as 20% if someone issues iusd worth 60-70% compared to the CDP.
in technical terms charge 3% for 1.1x leverage and charge 20% for 2x leverage and cap the leverage to 2x by usage of maintenance ratio.

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When you mint an iAsset, you are borrowing from the protocol.
The protocol is not able to distinguish your intention to mint whether you sold it or not.
Its clear that once you mint, you are putting on debt for which you have to repay someday.

The reason why the interest is only relative to the amount of debt is because, in an over collateralised debt, it doesn’t matter whether you have 500% CR or 120% CR.
The interest is much more equitable rather than just benefiting larger CDP accounts with an extremely high CR. After all it is the amount minted that changes the supply and demand, not collateral ratio.

As for whether the interest rate, stables borrowing rate is much higher in cardano ecosystem as mentioned.
A higher interest is required to defend against predatory looping. This means it has to be at the very least higher than the supply yield rate of other stables in the ecosystem, in particularly towards stables that can be used as collateral to borrow iUSD.

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So the daily interest that is accrued. Is that supposed to be off-set by the rewards earned in the stability pool? What would be the incentive to put funds in the stability pool if your rewards were less than a few percent? Is the daily interest redistributed to the stability pool suppliers at all to negate this effect? Thanks!

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