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.