Temperature Check for DAO Approval: Proposal to Deploy Indigo Protocol V2.1

[CodyCodes]

Introduction

The Indigo Labs team is excited to propose the deployment of Indigo Protocol Version 2.1 (Enhanced Interest Suite) to the Mainnet network. This upgrade introduces iterative improvements to V2 by introducing an algorithmic interest rate, a settle interest on demand/at will feature, splitting interest between the Treasury and INDY stakers, and adding a staking credential to the DAO Treasury. This step represents a significant milestone in our journey, introducing a suite of enhanced features and optimizations designed to improve the protocol’s overall health.

Feature Suite

Algorithmic Interest Rates

Indigo Protocol initially launched with a Collateralized Debt Position (CDP) system featuring a robust and battle-tested liquidation mechanism. This design ensured the protocol’s solvency, even during black swan events. However, as the decentralized finance (DeFi) space evolves, relying solely on full redemptions to maintain the peg has proven to hinder the protocol’s usability. Unlimited redemptions can fundamentally alter the protocol’s use cases, necessitating a balance between redemption capabilities and peg defense.

To address this, the Redemption Maintenance Ratio (RMR) was introduced, but managing the peg requires additional mechanisms. Interest rates were proposed and approved by the DAO in version 2 (V2) to manage the balance between leveraged users and spot holders. The goal now is to transition to a more algorithmic approach that dynamically adjusts interest rates based on the protocol’s health metrics.

During the initial launch, Indigo Protocol attracted primarily delta-neutral users, resulting in a system collateralization ratio consistently hovering around 180-200%, with the peg generally above its oracle price. As new financial primitives emerged on Cardano, users began leveraging stablecoins in lending protocols, creating the first wave of downward pressure on the peg.

Mid-last year, users started leveraging through Indigo Protocol, and supplying to external DeFi primitives that resulted in downward pressure on iAssets, particularly iUSD… This activity pushed the total collateralization ratio over 300%, exacerbating downward pressure on the peg. Leveraged positions benefited from favorable market movements, but as yields on iAssets declined, spot holders began exiting due to insufficient returns, further stressing the peg.

Additionally, the lack of debt repayment until leveraged users face liquidation means the peg remains under pressure. Early high-yield returns that attracted spot holders have diminished, and relying on market movements to correct the peg is not ideal for the protocol’s sustainability.

To enhance peg stability without over-reliance on redemptions (RMR) or market conditions, we propose an algorithmic interest rate mechanism that adjusts based on the protocol’s collateralization health. The key objectives are:

• Balancing Incentives: By adjusting interest rates according to the system’s health, we can incentivize leveraged users to manage their positions responsibly and encourage spot holders to maintain their holdings.
• Improving Peg Stability: Dynamically adjusting interest rates can help correct imbalances that put pressure on the peg, making the system more resilient.
• Maintaining Protocol Sovereignty: This approach reduces dependency on external protocols in the Cardano ecosystem and mitigates risks associated with low-liquidity environments or potential manipulation.

Proposed Initial Interest Rate Formula

The algorithm adjusts the interest rate based on the Total Collateralization Ratio (TCR) of each iAsset:

Example Calculation:

For iUSD with the following parameters:

• Base Int: 10%
• NTCR: 200%
• ITCR: 280%
• CTCR: 350%
• Upper Limit Int: 50%

Justification for the Interest Rate Formula and Parameters:

• Dynamic Adjustment: The formula increases the interest rate when the system is overly collateralized (healthy) and decreases it when the system is less collateralized (less healthy).
• Encouraging Repayment: Higher interest rates at higher ITCRs incentivize users to repay debts, reducing the total collateralization and alleviating downward pressure on the peg.
• Preventing Over-Leverage: By making excessive leverage more costly, the system discourages practices that can destabilize the peg.
• Lowering NTCR: Adjust kink point where interest rates start to climb due to higher utilization.
• Raising CTCR: Adjust interest rate sensitivity through steepening or flattening of the interest rate slope by extending the range over which the interest rate increases.

Incentives for Peg Discount

To further enhance peg stability, we propose a discount mechanism on the interest rate based on the proportion of redeemable iAssets:

Justification for the Peg Discount Formula and Parameters:

• Encouraging Peg Recovery: As more assets become redeemable (indicating peg improvement), the interest rate decreases, rewarding users.
• Incentivizing Position Management: Users are motivated to keep their positions near the redeemable threshold to benefit from lower interest rates.
• Dynamic Stability: The system self-corrects by adjusting incentives as the peg stabilizes or destabilizes.

Final Interest Rate

Combining the initial interest rate and the discount mechanism, the interest rate can be calculated using this formula:

To help provide a better understanding, we have included a chart to display the Ideal distribution of CR that we expect the protocol to lean towards:

Proposed iAsset Parameters for Algorithmic Interest Rate

iUSD

Base int : 10%, NTCR : 200%, CTCR : 350%, Upper Limit int : 50%, Max Disc Factor : 95%, Buffer rate : 5%

iBTC

Base int : 5%, NTCR : 170% , CTCR : 250%, Upper Limit int : 30%, Max Disc Factor : 95%, Buffer rate : 5%

iETH

Base int : 5%, NTCR : 170% , CTCR : 250%, Upper Limit int : 20%, Max Disc Factor : 95%, Buffer rate : 5%

Conclusion

Introducing an algorithmic interest rate mechanism in Indigo Protocol V2.1 is a proactive measure to enhance peg stability while maintaining the protocol’s usability and independence. By dynamically adjusting interest rates based on system health and incentivizing users through discounts, the protocol can better manage the balance between leveraged users and spot holders.

Interest Settlement on Demand & Adjustment

In Indigo Protocol V2, users were required to pay their interest balance when closing a CDP, making it inconvenient to manage the timing of interest payments. Users had to close the CDP entirely to settle the interest. However, in V2.1, this process has become more flexible. Now, users can choose to pay interest at a time that suits them best. Additionally, whenever a user modifies or adjusts their position, they must settle the interest as part of the action. This enhancement allows users to make strategic decisions about interest payments if their position remains healthy, while also ensuring more consistent revenue generation for the DAO Treasury and $INDY stakers.

Interest Payment Splitting: Treasury & INDY Stakers

V2.1 introduces a per-iAsset parameter that allows the DAO to decide on a percentage of interest payments that should be sent to the DAO treasury vs. sent to INDY stakers. This feature was introduced as a result of the DAO proposal #53 - Treasury Management. The current process requires that the Indigo Foundation withdraws funds from the Treasury and sends them to the Collector contract. This will bypass any of the human intervention and make the payments directly to the INDY stakers at the time of the interest payment.

The parameter will be default set to pay 30% of interest to INDY stakers, and 70% to the DAO Treasury for each iAsset as per the approved Treasury Management proposal noted above.

Treasury Stake Credential

As part of the V2.1 upgrade, the DAO Treasury address will be attached to the Indigo Foundation stake credential. By attaching this stake credential to the DAO Treasury, the DAO will be able to accrue native Cardano staking rewards. As part of proposal #31, the DAO has approved the staking of DAO Treasury funds to the EASY1 pool.

Stake Key: stake17xurtz4d6vxxp6apdpsg440gw4vjaxmuhrrspqnum6rlngcp8emwq

The above Cardano stake key is attached to the Indigo Foundation multi-sig. The Indigo Foundation will work at the direction of the DAO to stake funds to the DAO-decided stake pool delegator. In addition, the Indigo Foundation will Abstain from all Cardano governance voting unless the DAO decides on a DRep to delegate to.

Process of Deployment

The deployment of Indigo Protocol V2.1 will commence with the creation of an on-chain deployment proposal. Following the successful conclusion of this proposal, at the direction of the Indigo DAO, the Indigo Labs team will execute the deployment. This will necessitate a planned downtime of several hours. During this period, access to CDPs, Stability Pool accounts, and Staking Positions via the web app will be temporarily unavailable. Communication regarding this downtime will be issued well in advance, ensuring users are adequately informed and prepared.

Code Review Report, Upgrade Policies, and V2.1 Contracts

As part of our continued effort towards security, MLabs was hired to do a review of the changes introduced in v2.1.

MLabs has provided a report of their review, which can be found here:
audit-v2.1-report.pdf (223.4 KB)

In the spirit of transparency as well as providing technical users the ability to confirm the validity of the V2.1 smart contracts and upgrades Indigo Labs has open sourced the Indigo Protocol Test Suite. This test suite has over 900 tests covering V1, V2, and the upgrades. In addition, attached is a script that generates the Mainnet V2.1 validator hashes as well as upgrade minting policies. You can find the test suite repository here: Indigo Upgrade Details repository.

V2.1 Validator Hashes

Script Name	V2.1 Validator Hash
CDP Creator	0910f79461a71f74782dcd450f22b0c2cac31ab036b66c9219355d99
CDP	0805d8541db33f4841585fed4c3a7e87e2ff7018243038f06ceb660c
Collector	0752abd65a0c983bfb1c9c3880cc632c099ba3adb2fe307afb4bbd9c
Execute	e0612a2268eab843de10df4d02aaeafbc915b537dfe6ce1fc6e8d323
Governance	578db3783ea967554812e837040e25fbd376ee61d24c024ccdc4c863
Poll Manager	0b26e6c1a098434684f1028561705194b456ebbc8bd7e3e0e070a885
Poll Shard	2b54b48d17c9689751d7c57d92b3daca98b28bf0b065dd4d49daa0c8
Stability Pool	88e0299018563dd10c4860d9f34eda56fdb77f302da0e3980620535c
Staking	a23793f529179e09cefb3c37fc6ae081e0e99e99be5cdb55a00941a5
Treasury	3bd5f8ba0100f39952472619abfddb52d941a5347b88635e874a7b37
Version Record (Currency Symbol)	d626ddf398b0bca6e112cf0b78c8124b989a6ca4e7c0dfe8c18c7c2e
Version Registry	ea84d625650d066e1645e3e81d9c70a73f9ed837bd96dc49850ae744

V2.1 Upgrade Minting Policies

Script to Upgrade	Minting Policy Hash
CDP Creator	7b795e29f8fcc12e9d619832dd98d11716b47707957061f325b2c4d4
CDP	5ccb32a97d14e074fc8d1db6e24b715f68e18d7167d2b1479dbc8914
Governance	ecf2b02535a1de46f024d6b04aa2160be405b3897a5fb2042d2777c4
Stability Pool	9e9195fffb2a29538219f34008bbc945fb2b47f4d2d37b0641d7eaf7
Treasury	6ad900d9b6a5bf1046b1e709907f653c296e138df8fa361a947bce03

Conclusion

This temp check is designed to provide a clear overview of the Indigo Protocol V2.1 deployment. We invite all stakeholders to review the details and contribute their feedback and suggestions. The Indigo Labs team remains committed to transparency, innovation, and the continuous improvement of the Indigo Protocol, and we look forward to your support in this significant step forward.

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Update Sept 25th, 2024

The proposal has been updated to include the following:

1. A copy of the review2 report from the MLabs Audit team.
2. A repository with the V2, V2.1, and upgrade upgrade details and UPLC of smart contracts.
3. The V2.1 smart contract validator hashes as well as the upgrade minting policies.

[cardanodappanalyst]

As always team well done.

I’m really excited for the new changes!

[Vlashe]

Why Algorithmic Interest Rate is based on collateral ratios?? How this is related to peg? Discount’s logic is weird… incentivising CDPers to get their collateral redeemed to get discount on interest rate? Guys this is not a playground anymore, be careful… Can you take current state of iUSD and model what would be the interest rate under the proposed algorithms so we know what it actually means?

[solitude]

The algo interest is designed in a two fold manner.
Encouraging efficiency such that aggregated CDPs do not run into infinity on a up trending market.
while also taking reference of positions that goes into redeemable zone implying peg health.

Collateral ratio has been the measurement of health and parameter for redemption.

Interest would be allowed to go both as high as it needs to be as well as low as it can be.

By imposing discount via amount of redeemable assets. It creates a utilisation rate and a kink point where interest would scale when necessary. This also removes the need to be dependent on any oracles or subject peg to random liquidity shifts giving a smoother rate of change on the interest.

[Cardaflow]

Considering that Interest rate are now set upon CDP collateral ratio dynamic and Peg, could we consider removing minting fees as part of V2.1 update in order to lower down barrier at entry?

[solitude]

That can be proposed in a separate proposal imo.
Do agree that there is some merits in remove/reducing that fee

[foxep]

Seems like the higher ada goes the more interest people will need to pay. So the dao is basically penalizing cdps for making a smart investment decision and capping their max gain. And forcing cdps to take on more risk than they will be comfortable with.

So if ada runs to 1$ we better mint more iassets to keep a lower interest rate or just leave the protocol all together until the next bear opportunity comes around to mint more and take on risk.

This will discourage people from keeping their cdp open for longer and basically steal their potential to gain from the cdp they have been paying high interest already to keep up to this point.

It will push users away when they are finaly making profit and discourages people from leaving their cdp open and paying interest for longer.

And also we have interest based on the overall protocol, that dossnt seems like a web3 thing, seems like something that will worry users because they have to guess what the rest of the cdps will do and get out before other peoples cdps have too high of a collateral because that means indy will start really cutting cdpers profits with outrageous interest.

The biggest problem with this is people who are concervative need to take on more risk in order to get a lower interest?

The dao is driving conservative cdpers away with this logic and lowering the max gain on cdps that are finnaly benefiting from an ada increase.

So when when the system gets too overcollateralised people will be driven to pay off their cdp and leave. Or take on more risk which will mean cdps will need to mint more iasset to get a lower collateral ratio just to try and save on interest.

Encouraging people to mint more and lower the collateral ratio to get lower interest is forcing cdps into a risk on environment and will likely invite more minting and selling becuase interest will be lower when collateral ratio is low and why hold on to iusd when ada is rising.

And we know ada would be rising at that point because collateral is too high and people will need to either cut their gains which is not good for the protocol or for users or they will need to mint more and take on more risk, with a lower max gain so they are being pushed into taking on risk.

Theres also lots of huge cdps in ada value that took on very little debt. It would be in the best interest of the protocol to have low, competitive interest to attract users. So these big cdps that are waiting for the best opportunities to mint cannot stay because they are ruining the interest rate for the rest of users. So well want to push away big conservative users here or have them mint and bunch of iusd to get their collateral lower which will likely come with more sell pressure on the iasset cuz they are now minting something they didnt want to begin with.

This is isnt good for users, its not good for tvl and well be missing out on having concervative cdps stick around for longer and paying interest longer.

Its good to have people pay interest before doing more to their cdp, or pay at least some of it, but i thought the variable interest would be the opposite. Ie. Lower interest for higher collateral health actually makes sense.

But of course were doing the opposite…were literally forcing people to take on more risk or leave before they start making money off their cdp. So what new user would sign up for this and what current cdp would stay for the next bull on ada?

The answer is only and idiot would want to stick around when there is a protocol that charges more interest when cdps are finally supposed to be harvesting the fruit of their cdp and risk that they took on, on top pf the already super high interest they have been paying. Its actually another slap in the face from the dao.

Where are the incentive to burn and close cdps early? Everything the dao has been doing to try to fix the peg is always a huge penalty for cdpers and drives away users, its not ab opinion looke at indy, look at tvl.

Better figure out some POSITIVE INCENTIVES FOR GOOD ACTORS instead of all these NEGATIVE PENTALTIES AND PUNISHMENT FOR CDPERS.

[Vlashe]

you do not have to go through this mantra, we know the purpose, I just need to understand exactly:

1. why collateral ratios are used, why these are linked to the interest rate
2. what would be the interest rate right now, if we take the current iUSD asset and apply the suggested formulas
3. why max is 50%, not 35%?

as simple as that

[solitude]

Collateral ratio represent the odds of liquidations as well as redeem ability.
Example is stated within the proposal and that is pretty similar to what the current state is. Market dynamics can change over time including behaviours that will be altered due to the presence of algo interest.

The parameters is currently modelled to historic trend of market dynamics in the cardano ecosystems for now including studies based on other stables borrow rates.
Both the algo and the parameters within the algo can be further adjusted and updated in the future as this is the first iteration.

[RedXIII]

Good job team, a really nice proposal!!

[Coffee]

would you explain me more?
“Interest with 5% redeemable”
“Interest with 2.5% redeemable”

[Vlashe]

Thanks, so under current conditions, the interest rate would be 31%… pretty bad for those did not think this turns out this way

[solitude]

If CDPs start targeting to place some position into the redeemable zone, interest can also be significantly lower.
This opens the pathway to both end of the spectrum.

[Cardaflow]

What is the rationale for Int limit setting ? 50% for iUSD, 30% for iBTC and 20% for iETH… moreover, I have understood from where we were to set iUSD interest rate higher for iUSD versus other iAssets, but why considering such difference between iETH and iBTC ?

[solitude]

iBTC and iETH has higher correlation relative to ADA while iUSD is delta one.
In simple terms. iusd has full exposure to volatility of the market to execute leverage.

[Cardaflow]

Ok, and then difference between iETH and iBTC parameters ?

[Massi1]

I hope this analysis is not considered FUD. At this moment the 15 largest CDPs hold 7,000,000 iUSD out of a total of 8,950,000 iUSD or approximately 80% of the supply (considering that of these 15 it seems to me that only one person has 4/5 open). The liquidity of iUSD is therefore held by very few people who will decide how much to keep the interest, in my opinion this is not a bad thing. The current general ratio of iUSD is approximately 275% and this would mean interest equal to 30%. I predict that these whales will remove a part of the ADA from CDP to settle the ratio at 250% keeping the interests almost the same as now, their position will be slightly riskier (almost imperceptible) but they will keep the removed ADA for ready liquidity in case of ADA’s price movements. In this case I don’t see iUSD buybacks or iUSD mint to reduce the ratio and interest. Some whales will probably decide not to move anything and settle for paying 5-7% more interest. I like the proposal but I think it is necessary that the interests are indexed to the depeg and not to the ratio

[solitude]

ETH has higher correlation with ADA than BTC is.
both historically has higher beta.

Then again these are the initial parameters that can be subsequently propose for modifications as and when there is new market data or needs.

[solitude]

Peg based interest has fatal flaws such as actually requirement of depeg for interest to scale.
There are ways in such where the interest move in exponential terms relative to peg eg 0.1% depeg would have 10% interest and 2% depeg would have 100% interest. If one is hoping for 20% depeg for 20% interest. that would definitely not work.
However that would also make it extremely sensitive towards market volatility due to the base trading pair is in ADA.

[foxep]

So why do the people who are doing the right thing and taking on the most risk have to pay more interest because other people are not taking on risk and are not actively pulling ada from their cdp when ada goes up compared to the iasset?

And why does eveyone need to pay more interest becuase some people just open cdps and borrow basically nothing?