Redemption Pool

Temp Check Discussion
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As an amendment to the prior proposal discussion (or any proposal which can generate a stream of income) , interest accrued by a DAO fund could be used to support a redemption pool. A redemption pool would be a pool of funds that effectively provides liquidity at the iAssets pegged rate, with a fee for use. Initially, it would only be funded using ADA from interest accrued from CDP holders when the iAsset is below peg. This ADA could then be redeemed by depositing an iAsset. Once there are iAssets in the pool, those could also be redeemed for ADA at the iAsset peg price less fees. In this way a redemption pool provides an arbitrage path for both upward and downward depeg events.

A number of specifics need to be identified.

What would the fee to use the redemption pool be?

TBD. This fee should be high enough so that it does not overly compete with liquidity providers (LP). However, this fee also determines how tight the spread is on a depeg when there is sufficient liquidity in the pool, as a lower fee results in a more effective arbitrage path. It might also be prudent to have the fee lower than that of redemptions from CDPs using the RMR in order to incentivize taking this arbitrage path before the RMR path, if both are available.

Would there be a single redemption pool for all iAssets, a separate pool for each iAsset, or multiple pools for each iAsset?

TBD. There is likely a tradeoff between the number of pools and ease of accessing those pools without contention. If there is a single redemption pool for all iAssets then that implies that Indigo’s entire synthetic asset ecosystem becomes tied together. A strong depegging event of a single iAsset could drain the pool of ADA and leave none left to help stabilize the remaining iAssets. On the other hand, it could be quite useful to have ADA generated from interest on iUSD, the protocol’s flagship product, help to stabilize the peg of other iAssets that struggle with maintaining peg due to liquidity problems.

What are some advantages of a redemption pool?

A redemption pool provides an arbitrage path to help maintain the iAsset peg regardless as to if it is trading above or below peg.

It is self-sustaining. As the redemption pool is used more frequently, the fee for use accumulates to help deepen the pool liquidity. Eventually, fees for use may sustain the pool and the source of funding from CDP interest may be able to be removed entirely.

What are the potential shortcomings of a redemption pool?

Like any of the other mechanics to maintain peg, it is not a silver bullet. Primarily, a redemption pool is only effective if it is funded. Funds accumulate into the redemption pool at a slow drip, but depeg events might often require a substantial amount of capital from the pool all at once.

A redemption pool would likely often have its asset distribution heavily lop-sided. For example, during an ADA bull market, ADA in the pool would likely run out relatively quickly in its earlier stages. Conversely, assets such as iUSD would likely be in short supply or depleted altogether during the middle to end of prolonged bear markets.

Wouldn’t the redemption pool be competing with liquidity providers?

Well, yes and no. The redemption pool would act as an alternative pool of assets when iAssets are well outside the range of the peg and might also be a source for high volume transactions where slippage on DEX would be significant. However, the fees imposed for redeeming from the pool would be relatively high as to not compete with liquidity providers for most transactions. Additionally, the pool would help mitigate impermanent loss (IL), which could make up for the reduction in fees from the volume that was “siphoned” from DEX.

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This is what I had in mind as well (but not as detailed and elaborate as yours :sweat_smile:) and mentioned it in the forum and in discord. A dedicated Redemption Pool that needs to get funded from somewhere (fees or farming rewards) is probably best instead of having an RMR. Current proposal for the Redemption feature will be rendered unusable once users keep up with their RMR. We saw how users responded when MCR was increased recently and there was barely any funds that was liquidated.

With the RMR proposal, Redemption feature will only get funds if people go full degen or if volatility is very high. It is just effectively another MCR but just partial liquidation. Other protocols (different chains) only have the RMR equivalent as CDP don’t get liquidated 100%. It only liquidates until your CDP gets into the MCR which I find more capital efficient and imho is a better design.

I hope we can come up with ideal solutions and enact on them before other CDP protocols show up.

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Just throwing it out here, we could also let users supply ADA into the Redemption Pool (borrowing $Shen’s design, probably 1 iUSD : $1 worth of ADA x4 to have like 400% over collateralization) to increase it’s funds but it will probably introduce another token (Reserve Token) and a lot of engineering and tokenomics work? A feature that automatically pause minting of the iAsset or Reserve Token once it hit a threshold might be needed as well to help with supply and demand? Very much like Djed protocol.:sweat_smile: Every iAsset will probably have its own Redemption Pool for better management and isolate issues.

This probably deviates from the original design but I could see Indigo become like a Forex platform (I think Ardana promised to be one but rugged.lol) with different kind of stable currencies (GBP, EUR, etc. once Oracle protocols mature) and has robust pegging mechanisms for its iAssets.

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I like the idea of having some way for users to bootstrap the pool as liquidity would be the major obstacle for it being effective at aiding a depeg. I certainly don’t like the idea of creating a who new complex ecosystem with a reserve token. The only way I could think to do it would be to essentially make it a “protocol owned liquidity pool” where users would get LP tokens for depositing side of a pair. The problem is, we don’t really need iUSD liquidity currently in a redemption pool, we need ADA, so it seems very capital inefficient to have the users deposit both ADA and iUSD. You’d also have to figure out what happens with the other sources of income/fees to the pool. Would those go to the “LPers” or would they just go directly to the pool? If they don’t go to the pool, then you aren’t really making the pool sustainable long term (the idea is to not have to have these “LPers” long term). If you they do go to the pool, then people will need some quite high rewards to make the IL worthwhile (IL is essentially guaranteed by the pool, as it’s job is to absorb the IL).

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A redemption pool require it to be funded and there is a likely hood that it is going to be used heavily by leveragers instead of peg. eg a whale who sold million of iUSD.

It will take some time for the interest to sufficiently fund the pool as well.
When such redemption occur, this would also mean the DAO will be taking on the iAssets.
The governance part of this would be challenging afaik.
Because iAssets can only be burned against collateralised debt positions.
There would be a risk if the DAO holds a majority of the circulating supply if undeposited into stability pool.
Basically requiring multi-sig DAO to manage this portion of DAO revenue.

The idea does have merit as ADA revenue is funded from interest.

For example, the fee can be charged in INDY, a large redemption will equally require large amount in INDY giving a self balancing dynamic as INDY has a lower liquidity and no peg to maintain relatively.

Having iAsset in DAO is something discussed before and governance challenges that possibly come with it.
For example charging of interest in iAssets directly and have them paid to DAO would almost have the equivalent effect.

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Yes, I agree that it would likely be used heavily by leveragers/shorters. That’s essentially why I would like to see it funded by a variable interest rate on those same leveragers/shorters; however, I’m still open to any form of interest or revenue stream that could potentially fund a redemption pool.

When such redemption occur, this would also mean the DAO will be taking on the iAssets.

I suppose it is “revenue” that was generated by the protocol (at least, if it came from interest) so the DAO could vote to do with it what they want, but the intent is to have these iAssets essentially locked and out of circulation until they are needed to restore a peg to the upside. Any claims for iAssets would be via individuals interacting with the smart contract so there shouldn’t be any need for the DAO to touch anything outside of extenuating circumstances.

There would be a risk if the DAO holds a majority of the circulating supply if undeposited into stability pool.

I can potentially see this being an issue if, say >50% of the minted iAssets were contained in the redemption pool (and not enough in the SP) and there was a mad rush to close positions before liquidation (ADA bear market). There could be a cap where only up to, say 25%, of that iAsset could be held in the redemption pool, otherwise redemptions for ADA would be blocked.

For example, the fee can be charged in INDY, a large redemption will equally require large amount in INDY giving a self balancing dynamic as INDY has a lower liquidity and no peg to maintain relatively.

Introducing some sort of an INDY requirement may be useful, though I’m not sure how it would work. I don’t think you’d want to charge a fee in INDY, you’d charge it in ADA so that you can stretch the number of redemptions that you can provide with a limited amount of ADA. If you had fees in INDY then the ADA dries up quicker and at that point you definitely have to have someone figure out to do with all of this INDY accumulated in fees.