The 2% cut on Collateral is too high and gives wrong incentives

Dear Indigo Community,

when taking collateral out of a CDP, one has to pay a 2% fee on any deposited collateral.

The mechanism punishes people for overcollateralizing their iAssets and drives them to deposit as little collateral as possible to avoid fees. Which makes the ecosystem less stable.

We should change the fees to apply only when burning iAssets and only on the amount of iAssets burned.
This makes sense, because the service indigo provides are the iAssets, not the possibility to deposit funds. Also it would make it much more attractive to deposit a higher collateral.

Also I think 2% is a very hefty fee.

What do you guys think about this? Maybe I missed something.

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I agree with some of your points, except for the point that it makes the ecosystem less stable. Indigo is very stable, as evidenced by its liquidation efficiency and the high mode collateralization ratio.

The fee is high and we should definitely consider reducing it in the future. However, due to technical limitations now is not the right time to reduce this fee. The protocol only implements one fee that distributes ADA to INDY stakers. After the protocol implements more fees, then this 2% should be reduced.

So while I agree in an ideal world the withdrawal fee would be lower or even possibly not exist at all, today we’re just not there yet.

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I’ll provide some more insight into the reasoning for the high fee. Indigo introduced a color coding system to show users an estimated risk assessment for health of CDPs. There are four colors: red, orange, yellow, and green. Green indicates the safest risk tolerance, and as can be seen from observation from all of Indigo’s CDPs it’s the most commonly selected level.

Adding ADA to increase CR above green level provides no statistical benefit. Indigo is designed to be a more capital efficient CDP protocol compared to others. So adding a 2% fee to disincentivize excessive collateralization makes sense. Additionally, Indigo is the first protocol to implement CDP Liquid Staking. This makes ADA deposited into a CDP almost indistinguishable from ADA in a user’s wallet because both the ADA in the user’s wallet and the ADA in the user’s CDP are attached to the same wallet staking key. Thus, there’s little advantage to adding additional ADA to your CDP and locking that ADA under Indigo’s smart contract payment key. At any time, users can seamlessly transfer ADA from their wallet into the CDP to increase the collateralization. This provides for more capital efficiency because users have access to that ADA before it gets locked inside the CDP. Only after being locked in the protocol is the ADA subjected to a 2% fee.

As you can see, if you decide to maintain a CDP with a collateralization ratio of 300%, you could do by keeping the ADA in your wallet and then transferring the ADA into your CDP as necessary to maintain a green CDP health status.

Keeping the average CR closer to what’s statistically a safer level is ideal. The 2% fee provides friction to disincentivize withdrawal of liquidity from the system. If there was no fee, then high protocol CR would be a less meaningful metric because it could be artificially inflated. With the 2% fee in place it makes the system’s health status more reliably trackable via CR levels, because users are only putting in capital that they want to place at risk rather than trying to spoof the statistics.

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I can see some of your points too. :slight_smile:
Especially that being able to still receive staking rewards on the ADA-Collateral is a pretty awesome feature.

What kind of extra fees have you been thinking about? I think fees in general should be very low to non-existent to drive adoption.
I think it’s better to make profit by using the protocol than by owning it’s tokens. The lower the fees the more profit is possible.

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For CDPs, minting fees or deposit fees.

Yes definitely. If we’re to introduce a minting fee for example I’d suspect a fee of 0.5% or less.

For long term DAO sustainability, fees are necessary. We’ve seen time and time again that treasuries containing purely speculative tokens end up in bankruptcy. Currently it’s only possible to sustain platforms via trading fees. The more users that adopt Indigo the lower those fees can go.

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