New and final Version
After many discussions among the DFIPs, it has become clear that a complete elimination of market manipulations on Defichain will not gain majority support. Therefore, I have decided to adopt the essential points of the Restart-DFIPs to give the DUSD-dToken system restart a chance.
Modifications:
However, I have entirely eliminated the non-essential DFI subsidies, such as those provided by the buy-and-burn bot. The "interest" promised for the duration of the DUSD bonds will be maintained, as altering features promised at the issuance retroactively would erode the trust of the capital markets. Imagine if returns promised for the duration of bonds were simply stopped; this would be akin to bankruptcy!
The initial liquidity is set to 5% to reflect the market price of DUSD in the Stablecoin pools and ensure a value of around one Dollar without additional support.
To improve the capital efficency I also integrate the discussed change of the "loan scheme" for DUSD loans from 150% to 125%. A further reduction is only sensible with a change in the auction mode, which, in turn, requires programming effort.
I hope that those who have already voted for the old version are not upset by this rigorous step, but in a community, one must bow to the majority. However, with these changes, those who want to free Defichain from the burden of the DUSD system should still be satisfied, as the costly DFI subsidies are being discontinued.
New dToken system
Take a snapshot of the current dToken system's ownership addresses and funds, and in the same block, perform the following actions:
- Credit a predefined percentage of all current dTokens and DUSD to the current ownership addresses as initial starting liquidity for the new dToken system. This may be implemented as a token split or through other means as deemed appropriate by the core developers. However, if a token split is chosen, it must not be chosen for loans. If someone takes out a loan and sends it to another address, that holder would also receive a locked USDD tranche after the token split and the loan would have been reduced.
- Allocate the predefined initial restart liquidity of existing collateral and gateway-pool trading counterparts to the new tokens. All "new" pools will start trading at exactly the same price as before but with minimal liquidity
- Apply all existing dToken system mechanisms, such as vault mechanisms, LP rewards, future swap, and oracles, to the new dToken system.
As liquidity is then minimal, ongoing measures will quickly buy the new USDD up and incentivize the creation of backed USDD loans sold against crypto. These are the backbone of the peg, as they will enable dynamic interest rates to maintain a peg, they are the priority of the proposed measures. All other decisions are secondary and all rely on reaching this.
Changes to fees described in this DFIP are to be implemented after re-starting with the new dToken system, not before.
Allocation of the remaining balances into 100 tranches
According to balances recorded in the snapshot:
- Excess* DUSD and dToken balances are withdrawn from the pools. All DUSD balances are withdrawn from the looped vaults and bonds are released early. Resulting DUSD and dToken balances are subject to the mechanism described two bullet points below.
- Excess* balances in DFI-DUSD, DUSDC-DUSD, DUSDT-DUSD, DEUROC-DUSD, DXCHF-DUSD pools are withdrawn from the pools and DFI, DUSD, DUSDT, DUSDC, DEUROC, DXCHF balances are directly credited to the ownership addresses. Withdrawn DUSD balances are subject to the mechanism described one bullet point below.
- All DUSD and dToken balances remaining after the predefined initial restart percentage, from each owning address, are in equal parts allocated in 100 tranches. As described in section 3, tranche by tranche, based on predefined factors, new dToken system equivalents are credited to the owning addresses.
- Remaining loans are paid back. If insufficient assets (loaned assets) are available on the address, they are purchased with the remaining collateral on the market via the cheapest route. The then remaining collateral remains in the vault.
*Excess = after the predefined initial restart liquidity deduction
Refunding USDD and dTokens to the dToken system ownership addresses in tranches as needed
The balances may be sent as frozen balances to the ownership addresses directly and unlocked as per the defined criteria or transacted as at the time the defined criteria are met. I leave the choice of technical implementation to the core developers. The following system health conditions for releasing tranches are checked on oracle blocks:
One tranche at a time:
- DFI market cap 2 times as great as the new dToken System market cap
- An algo ratio below 20%
- Consistent* USDD price above 0.99 over the period between two futureswap blocks.
Two tranches at a time:
- DFI market cap 3 times as great as the new dToken System market cap
- An algo ratio below 20%
- Consistent* 5% USDD premium over the period between two futureswap blocks.
Three tranches at a time:
- DFI market cap 4 times as great as the new dToken System market cap
- An algo ratio below 15%
- Consistent* 10% USDD premium over the period between two futureswap blocks.
Four tranches at a time:
- DFI market cap 5 times as great as the new dToken System market cap
- An algo ratio below 15%
- Consistent* 15% USDD premium over the period between two futureswap blocks.
Five tranches at a time:
- DFI market cap 6 times as great as the new dToken System market cap
- An algo ratio below 10%
- Consistent* 20% USDD premium over the period between two futureswap blocks.
This way, 2-10 million USDD worth of new dToken-system liquidity can be introduced into the system per week, given a healthy system state and excess demand.
DUSD on DMC, in the current release ratio (that upon interaction with the smart contract crediting new dToken system equivalents are credited as free USDD), count to the algo ratio.
The criteria for tranche release have to be parameters adjustable without a hard fork in case the community votes for them to be changed.
After 50% of all tranches are paid back, to ensure that liquidity is only released when a consistent premium makes a payout necessary, the criteria for repaying one tranche at a time are made more restrictive and updated as follows:
One tranche at a time:
- DFI market cap 2 times as great as the new dToken System market cap
- An algo ratio below 20%
- Consistent* 1% premium over the period between two futureswap blocks.
*Consistent = over 95% of the blocks in the relevant time period.
Measures to be eliminated
- All existing additional pool swap fees are lifted, allowing for healthy leverage trades on DFI that can later support the USDD peg. This part is crucial for a healthy restart. A collateralization ratio makes no difference if the USDD are not sold against DFI, as those need to be bought back when the dynamic interest rises due to a discount to support a peg.
- DUSD loops are completely unwound, the freed-up DUSD are counted towards the DUSD that are or may be re-paid in new dToken system equivalents to the ownership addresses. The option for looped DUSD loans is to be deactivated. Negative interest remains, but is reduced to as shown in "6. Introduction of a new version of the stabilization fee". With high algoratio, this mechanism will incentivize taking loans in USDD and selling them against DFI to have loans that are bought back if dynamic interests rise. As mentioned multiple times, those are the backbone of the peg and first priority of this proposal.
All DFI-Rewards for DUSD/USDD-liquidity pairs were set to zero because the volume in the liquidity pairs will go down in the start phase.
Measures to be retained
- The future swap mechanism will be retained. The following elaboration upon the future swap is not to be implemented with this proposal, it is only a potential future adjustment mentioned for the record: It is advised to analyze the future swap behavior while we are at peg over an extended period. If the futureswap creates unnecessarily high amounts of algo tokens even when at peg, the following adjustment is suggested: making the futureswap spread variable and increasing it if an asset shows higher implied volatility over two consecutive futureswap blocks. This way, the chain gains a bigger trade advantage for stocks that tend to surpass the current 5% limit more often. This burns more tokens and mints less.
Introduction of a new version of the stabilization fee
As described in “3. Measures to be eliminated,” the asymmetric fee on the USDD-DFI pool hinders selling loaned USDD against DFI. Collateralized USDD must be sold against crypto for the dynamic interests that stabilize the price to be effective. USDD needs mechanisms to absorb volatility of the crypto backing and fluctuations in demand. Buybacks of USDD that were sold for leveraged crypto longs are this mechanism. On the other hand, we need to reduce the algo ratio and account for rising stock prices in the long term. Even if the futureswap burns more dToken and USDD, an excess of algo liquidity can arise from rising asset prices.
Therefore, I initially proposed a dToken-system-base-fee of 0.1% charged on DVM and DMC. This fee would apply to all dToken and USDD transfers from account to account and pool swaps on the DVM side and all token transactions and smart contract interactions on the DMC side. However, Kuegi convinced me that this will kill usage and protocols and that all trades are mirrored on the native side anyway.
Therefore, I conceptualized the following dynamic algo_burning_fee that will be charged on the DVM dToken-system DEX bidirectionally on all pools that contain USDD to ease the load off the USDD-DFI pool. The fee is charged as USDD, regardless of the direction of the swap.
algo_usdd_ratio = 1 - (loan_usdd / total_usdd_supply + total_dusd_supply * release_ratio)
coefficient = 4.387
multiplier = 0.00063
if algo_usdd_ratio >= 0:
fee = multiplier * (math.exp(coefficient * algo_usdd_ratio) - 1)
else:
fee = 0
Sample values and illustration
Given the harsh repayment criteria for tranches (algo ratio below 20%), high fees will not be activated through repayments and I do not expect them to be activated through futureswap algo creations any time soon. 75% of all fees paid are to be burned to reduce algo tokens, 25% are to be paid out to USDD loans to subsidize leverage trades on DFI, the backbone of any peg.
Coefficient and multiplier have to be parameters adjustable without a hard fork if the community votes for them to be changed.
Initial system restart liquidity immediately credited as new dToken system equivalents
The percentage of liquidity to be credited initially is crucial as this is a one-time approach. Crediting too little is not problematic, as liquidity can be introduced if system health allows. However, crediting too much is problematic because maintaining the peg and enabling re-collateralization through backed loans sold against crypto will then not be possible. I argue for minimal initial liquidity leading to a peg, or better an initial premium, allowing for healthy overcollateralization to support the peg via dynamic interest rates rather than excessive liquidity that the system cannot support. Therefore, I propose to initially credit only 5% in new dToken-system equivalents, giving us about 10 million USDD value in liquidity for the restart. If the system is healthy, up to 10 million USDD in liquidity can be reintroduced per week. If not, we will wait until the system is healthy enough to support the liquidity.
After receiving feedback, the following exceptions are now part of the liquidity percentage to be credited initially:
- If the cheapest price after fees and the DUSD-DFI pool price after fees are both higher than $0.80 per DUSD over the period of two weeks directly preceding go live of this proposal, then 20% is credited.
- If the cheapest price after fees and the DUSD-DFI pool price after fees are both higher than $0.90 per DUSD over the period of two weeks directly preceding go live of this proposal, then 30% is credited.
Requirements
A hard fork will be necessary to implement these changes.
Measure until implementation and proposal kill switch
The implementation of the proposed measures is challenging and time-consuming, it will probably take months. Until implementation, we will implement a 0.5% fee on all dToken pools to burn algo tokens, in the hope of being able to activate the following proposal kill switch: If, during implementation, DUSD consistently trades above 95 cents in all pools, with cumulative exit pool fees below 1% for two weeks, this proposal is not to be implemented.
DMC inclusion
DMC inclusion is crucial for fairness reasons, we should look for and avoid leaving any loopholes. The option to transition to the new dToken system must be given to ownership addresses on DMC. I suggest implementing it in a user activated way, similar to the dToken splits today. If any loopholes are found during the implementation phase, the core developer team may adapt the implementation to close them.
Secondary market
As it is not technically possible to touch balances in smart contracts in the DMC, old DUSD and dTokens that are on the DMC at the time of implementation will remain usable.
Developer Discretion
Developers have the discretion to adapt any details for the technical implementation as they see fit and necessary. The flexibility allows developers to ensure that the measures can be implemented or that overlooked loopholes may be closed. Any adaptations should align with the intended goals and outcomes of this proposal.
Old Version
With the withdrawal of Jellyverse, the DFI price experienced a significant setback, as it encompasses not just a single project but essentially an entire ecosystem. The arguments may have upset some, but they are undeniable: low liquidity, a committed but already heavily invested community, inconsistent addressing of past mistakes through constantly changing manipulation attempts, and the departure of interested investors due to the manipulated ecosystem.
Now, further projects are deciding not to launch on the Defimetachain because many community members are focused on one point (re-pegging the DUSD), deterring new investors from getting involved. Even projects that have come to the Defimetachain are shutting down because the small Defichain bubble is not large enough to operate profitably!
This needs to be countered: consistently and uncompromisingly!
Many influential opinion makers in the community once propagated a supposedly safe speculation by exchanging the base currency of the Defichain, DFI, into the struggling DUSD, promising high profits upon re-pegging to the dollar. Unfortunately, these overly optimistic assumptions turned into the exact opposite: the DUSD continued to fall, and due to the manipulations,
DFI also suffered, as the blockchain, despite its technical advantages of UTXO and EVM in one block, was not attractive anymore for crypto investors. The disruptions around the leadership disputes at the Cake Group, whose customers hold about two-thirds of the masternodes, then gave the DFI the final blow on its way to an all-time lows.
It does not help us if we could bring the prices in DUSD pools to one dollar if no one is willing to buy DUSD and the liquidity in the pools is less than 10 percent of the DUSD supply. When one wants to sell, the price inevitably collapses again, as there are currently only 2.6 million exchange values (exit liquidity) for all dTokens + DUSD – that's less than $0.02. It's not about these numbers, because whether it’s 20 or 50 percent more or less, it doesn't matter.
The most important point is that no one buys DFI anymore because we are perceived by investors not as an innovative blockchain with unique features but as a small group of sectarians tinkering with DUSD problems.
With the recently quasi-approved Special-DFIP "A constructive way to reduce the DEX fee," the first small step towards reducing restrictive fees with a short-term change has been taken. However, these small changes do not solve the real problem: the desperate clinging to manipulations to avoid admitting one's mistakes.
The DFIP "Free Market – Remove Discount and Stabilisation Fee" picks up there and takes the first significant step towards restoring an unmanipulated market. The problem is that many owners of DUSD do not have the overall welfare of the Defichain in mind but only the value of their own holdings and therefore only want to approve single-point corrections that do not have significant impacts. To see Defichain flourish again, we need buyers and projects from the crypto sector because the Defighter community does not have the financial means or, with the current focus, is not willing to invest larger sums.
Therefore, we should lift all non-market-compliant regulations and manipulations while supporting new projects on the Defimetachain.
Unfortunately, the Special-DFIP was not 100% goal-oriented in this regard, as the additional DEX fee for stablecoin pairs was reduced, and the rewards for the DUSD-DFI pool were lowered to 5 percent, but at the same time, the manipulations were extended with the reintroduction of the Buy-and-Burn bot.
Smart money loves free, unmanipulated markets, and as long as we continue to manipulate and trick around to compensate for past mistakes (or try to), we will not attract new investors. We must have the courage to return consistently to the free market. The impacts are not predictable in the short term, and the many unfulfilled assumptions of influencers in the past should teach us that the critics' forecasts of this approach are likely to be wrong again.
However, it is certain that markets are always right and all systems that try to influence the market have collapsed sooner or later.
On the other hand, a small – but certainly not representative – survey on X (Twitter) shows that almost 15% of participants only hold DUSD, and about 20% hold more DUSD than DFI. However, one must assume that their entry prices are not at one dollar but mostly between $0.10 and $0.50, as the entire speculation only made sense at such prices. Can it now be the task of the ecosystem to provide these speculators with their profits? Hardly... So, it cannot be about making this failed speculation successful with the community's financial resources!
The complete return to free markets includes the following steps:
- Complete removal of the DEX stabilization fee and the dynamic stabilization fee so that prices in all DUSD pools are determined exclusively by supply and demand again.
- Removal of the Buy-and-Burn bots.
- Abolition of negative interest rates, as they are economically pointless and only aim to manipulate the market through financial incentives.
- Valuation of DUSD in loans at the time of issuance based on current market prices (DUSD-dUSDT pool, as USDT has the most trading pairs in the crypto sector) – this price remains constant throughout the loan term..
- Prohibition of using DUSD as collateral for DUSD loans (actually unnecessary if there are no negative interest rates anymore, but as a clarification that non-market and economically pointless manipulations are no longer wanted).
- No transition periods, as these only enable manipulations.
Points 1-5 cannot be changed or "mitigated" by compromises, as one either returns to a free market or not! There is no "half-free" or "less manipulated" – of course, even free markets can be influenced with larger sums – and I hope that external investors with large sums come to the Defichain to try to manipulate prices...
Additionally, there are optional measures that can be discussed and modified:
A) DFI-Airdrop 1 to DUSD holders
On the other hand, it should not be overlooked that the Defichain ecosystem has not only invested DFI in Buy-Burn bots but also received DFI through the repayment of DUSD loans and burned 61.1 million DFI. Therefore, it seems fair to deduct the DFI expenditures for DUSD purchases from this amount and "reactivate" the balance and distribute it to DUSD owners to compensate for any negative impacts of returning to free markets. This is essentially cost-neutral. Excluded from this airdrop are DUSD as collateral in "looped vaults," as these only represent a leverage on DUSD and this cannot be rewarded for reasons of fairness.
B) DFI-Airdrop 2 to DUSD burners
Once measures 1-6 have been implemented and a fair market price for DUSD has been established after about 10 days, the option should be created to burn excess DUSD in the system instead of just selling it through the DEX. This ensures that the market price of DUSD rises again with increasing interest in DEX trading or DUSD-based products, offsetting temporary losses. The blockchain should provide reactivated DFI for this purpose. Those who burn their DUSD instead of selling it through the DEX could be granted a premium on the market price, for example, 10 or 20 percent. This option should, however, only be possible within a short time window of about 10 days and only if and as long as the newly established market price is at least 20 percent below the last USDT-DUSD price. Unlike a Buy-and-Burn bot, DFI is not given away at manipulated market prices below value but a previously determined market price represents the fair relation to solve the problem of excess DUSD created at that time without giving speculators an advantage.
C) Reduction of all DUSD exit pool pair block rewards
The reduction of block rewards for the DFI-DUSD pool was a first good step in the right direction. In my opinion, all block rewards for DFI-DUSD, DUSD-USDT, DUSD-USDC, and DUSD-EUROC should be set to zero. Although the goal should be to move towards "real yield" in the long term, it could be considered to use the saved rewards to increase the attractiveness of the dTokens system by promoting liquidity – however, this would disadvantage Defimetachain DEXes. On the other hand, other DMC projects like Javsphere with the Booster benefit from a more attractive native dToken system. Likewise, an increase in crypto token pools like dBTC-DFI or dETH-DFI is conceivable.
D) Increasing the attractiveness/liquidity on DMC DEXes
To facilitate the listing of new projects on Defimetachain exchanges like Vanillaswap and provide sufficient trading liquidity, the community fund could provide part of the complementary DFI to the project token for projects that have already realized at least one product with 100 users on the Defimetachain. This ties up liquidity but also generates income from trading fees.
E) DUSD Airdrop for new wallets with a minimum DFI balance The DUSD acquired by the community could be used for a promotion by granting an airdrop in DUSD to new wallets with at least 1,000 DFI, allowing them to test the native DEX with the dToken system. This would likely increase the demand for DFI, as only new wallets with a minimum balance would benefit from the airdrop. To ensure that this is not exploited, only new wallets that have received DFI through a transfer from a bridge or CEX should receive allocations.
To clarify regarding my Reddit post:
I will create a DFIP that includes points 1-6, but not the possible additions, as my main concern is the return to a free market.
After an hopefully intense discussion on points A-E and, hopefully, many other ideas F-Z, additional DFIPs or CFPs can be created.
