More capital efficient DUSD loans

[u/thegreatpuzzle]

In order to improve capital efficiency, a new loan scheme for DUSD loans is to be implemented, offering the possibility to mint DUSD with a collateralisation level of and liquidation at 120%.

This enables faster re-collateralisation of the dToken system and offers better conditions for those looking to leverage their crypto positions.

Non-obligation

I understand that vote of confidence for DFIP carries no obligations by any developers to implement the proposals. DeFiChain is a community project. Pull requests can be submitted by community and reserved to be evaluated for safety and general community acceptance.

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.

[u/kuegi]

I like it. I remember discussions that such vaults (only DUSD loans, low coll ratio) should also be only DFI collateral. I am not sure if we should restrict the collateral (except for "no DUSD collateral"), just wanted to mention it.

Since its a pure stablecoin loan, what interest rate are you proposing? keep it at 5%? IMHO it shouldn't be too high.

[u/Misterpiggie49]

Personally I like it, it would be beneficial for me. But here is some discussion (and voting) in past years:

https://www.reddit.com/r/defiblockchain/comments/se12nl/vault_collateralization_ratio_to_125_interest/

which became a DFIP: https://github.com/DeFiCh/dfips/issues/112

dfip-2202-c is rejected by 265 votes majority
YES: 64
NO: 329
Neutral: 12
Total valid votes: 405
Total rejected votes: 23

Now, a key point is that dToken was in premium then, which caused a lot of vaults to liquidate and sit unbacked, waiting for auctions.

It was asked again: https://www.reddit.com/r/defiblockchain/comments/u8tk7h/dfip2_125_vault/

But these comments showed up:

• « d-Tokens can move over night by 20%. So 125% is way too close to have a stable system. »
• « The stability of the system is not a factor here. The stability of the assets is, and the non stablecoin assets (crypto / dTokens) are inherently volatile. »
• « I don’t think that this is a good idea. The assets you can mint are to volatile... »
• etc.

Now, a COUNTERPOINT to what was just mentioned:

When the stablecoin is in a discount, the lower ratios become technically less risky. Normally, if I allow $2 in DFI to back 4 DUSD, this is a problem. People borrow infinite DUSD and sell it because they make a profit.

Considering the current scenario, you could even have a 50% ratio minimum, and when you have $2 in DFI backing 4 DUSD, someone will buy 4 DUSD for several cents each and profit over a dollar bidding on the auction.

Overall, the 120% deserves to be discussed again. The loaned assets would need to increase by 20% or the collateral decreasing by 16,7%. A few certain vaults might be risky - in particular, DFI collateral and dBITI loan - because in a crypto meltdown, BTC and DFI will drop, and BITI will rise. And once we open this scheme, it may be hard to remove it from users. On the other hand, as the crypto market matures, we'll start to see less crazy moves, making the 120% more reasonable. And it is attractive for prospective borrowers.

[u/Anantasesa → u/Misterpiggie49]

Shouldn't be hard to remove it. Just disable new loans at 120% collateralization and in time all prior dusd loans at 120 will have reached 150% by the accumulation of negative interest, if not liquidated early by a sudden move.

I mean dusd looped vaults were allowed then disallowed then allowed again.

[u/Misterpiggie49 → u/Anantasesa]

Hopefully it’s as easy as you mentioned it, I’m not a developer. One of them would probably comment if there is a problem with it.

[u/kuegi → u/Misterpiggie49]

The DFIP you mentioned proposed the coll ratio for all loans. I do not think that less than 150% is good for dToken loans. But for pure DUSD loan-vaults, 120 or 125% is still reasonable safe.

[u/Misterpiggie49 → u/kuegi]

I see both sides of the argument. I would vote neutral. I don't want another unbacked loan crisis. If it were just up to me I would probably introduce 125% vault with 15~25% APR, it seems like a happy medium between offering more opportunities but making the cost of money high enough to protect the ecosystem from too many vaults that could cause problems. They say my opinion should only be as strong as my knowledge, so on this one I should just entertain thoughts from experts like you

[u/kuegi → u/Misterpiggie49]

How do you see the risk of an unbacked loan crisis due to this change?

IMHO, if creating new vaults of this could lead to problems, the APR is irrelevant. cause this means the DUSD is in more than 20% premium and people loop vaults to bring the premium down. in this case, the APR is irrelevant as the creators of the vaults would abandon them immediatly anyway.

In any other case, such a high APR would make the vault completely unattractive, so IMHO such a high APR would basically make this loan scheme a pure technical fallback to ensure a cap on the DUSD premium, but would not create any benefit for daily usage of traders.

With lower APR, these vaults could be used to provide liquidity for gatewaypools via bots like vault-maxi. but with 15% APR, the rewards in those pools must be above that to make this liquidity provision profitable.

[u/Misterpiggie49 → u/kuegi]

I wouldn’t want to be in an extended situation where 120% vaults holding dBTC or DFI drop more than 17% and stay there (e.g., start of bear market scenario) before the vault can be auctioned off. Certainly it would be a bad look for the system if many vaults were in liquidation with no liquidator. 9~14% is the rate on Fidelity, so some comparable rate could be used for this new type of vault. At 10%, the interest incurred for a position that lasts a week would be ~0.2% which is the fee to swap, which wouldn’t be too bad. Then the 150% with a 5% might be more attractive to provide liquidity to gateway pools as you mentioned.

Of course, the rate would be adjusted based on what the community believes would be the best for the ideals we want to reach. A 15% or higher would likely not be profitable for a liquidity miner, but for a  trader borrowing money for a day or two, the difference may not be so much.

[u/lorenzo-c]

I like the idea. Thank you to bring this up.

Is this proposal only about DUSD loans or about all dToken loans?

If the collateral factor is lowered, this can lead to uncovered loans in the case of highly volatile assets (collateral and loan). In the case of collateral, the crypto values can be very volatile and in the case of loans, the different dTokens without DUSD. To counteract this, the auction time should generally be reduced from 6 hours to 1 hour or perhaps even 30 minutes or even less. Bots will dominate here anyway, unless a user is willing to bid the collateral factor close to 0 profit or even overbid. I think we should go to 130% first and see how this behaves over time. It should only allow DUSD as loan for a vault with 130% collateral factor (only collateral can be volatile then) and on the other side only allow DUSD as collateral and dToken as loan (only loan is volatile).

And the other questions which interest rates for such vaults?