From the protocol’s perspective, the only two things that really matter are:
- Capital available to liquidate ovens
- Time it takes to liquidate ovens
I’d add that the protocol also has an inherent third goal to be successful in the long run. Because we know #2 is almost instantaneous due to competition, I’d make the educated guess that the extra “slosh” is simply waiting to be utilized for liquidations (along with other frequent use cases like farming and supplying liquidity). For #1, why worry if there’s extra capital - that’s the whole point of holding “cash” aka stablecoins. What we should be measuring is HOW the protocol behaves long-term - XTZ price goes up, protocol is utilized more (increased leverage), and vice versa.
There will be other utility for kUSD as new dapps launch - I think it’s too soon to make this change also because of a lack of advanced dapps for lending and yield aggregation. The direct connection I make for kUSD is DAI (ETH). Don’t think MakerDAO has this mechanism of prioritizing the protocol over regular users.
I think the free market ethos is fine, presumably liquidators can still compete to use the pool to liquidate ovens (and receive the results of liquidation either via pool profit sharing or the reward structure).
Well, so using this logic, the “slosh” is now parked in the Liquidity Pool instead of private wallets. If you push the line of thinking, it comes down to incentivizing users to activate kUSD utility, not park capital at all (either the Liquidity Pool or own wallets). So we aren’t really solving for velocity of money, are we?
I do think that if we privilege the pool we get the same outcome (folks will write bots that target the pool, and not themselves).
But that’s OK now though, correct? Since users will now at least park idle kUSD in the Liquidity Pool vs. their own wallets… I’m not sure why are we distressed with folks hanging on to cash - if anything, there are ample lessons from macroeconomics in the real world to increase the velocity/utility of money. It comes down to incentivizing actions. If we want folks to park idle cash in the Liquidity Pool, then let’s incentivize that rather than giving the protocol an unfair advantage. The reason why I’m superficially against this idea is I genuinely think that this change will affect competition. I can make the anecdotal argument that currently I have some incentive to use and hold kUSD (if I’m a liquidator)… with this change, there may be decreased utility since my incentive [as a liquidator] in the Liquidity Pool is exponentially lower than with my private wallet.
What do you think a reasonable rate should be? I’m not sure how to determine this so I am mostly curious.
In line with my prior suggestions and the ethos of a DAO, the rate could be a parameter which the community votes on. I think a 10% starting rate is a high enough incentive for folks to park the slosh in the Liquidity Pool (especially in order to liquidate large ovens). In fact, a 10% “win rate” is high enough that it will promote competition among users/bots to click the “Liquidate” button - the key being, everyone is pari passu (on equal footing). IMO, the current 1% reward isn’t a high enough incentive for anyone to park their idle kUSD in the protocol. On the flip side, 10% may be too high if/when XTZ price is say $100. So the idea of letting the DAO decide makes sense to me. I suggested 10% since it seems a reasonable starting point given where markets are now.
IIUC, you’re suggesting that private liquidations should receive 90% of profits and 10% of capital. This sounds a lot like a pool with a reward rate of 90% which is incentivized. Is there something I’m missing?
Sorry, I should have used another number to explain this; the 10% here is the same as the 10% reward I suggested for liquidating through the Liquidity Pool, hence the confusion. But yes, your understanding is correct. In fact, I am suggesting the following (assume this “savings” parameter is 7% to avoid confusion):
- When someone liquidates from their private wallet, 7% of resulting kUSD funds a “savings pool” (SP). Liquidator receives the remaining 93%.
- When someone liquidates from the Liquidity Pool, they receive a 10% reward on the overall liquidation value. The remaining 90% is first charged a 7% fee to fund the SP; the rest is spread among Liquidity Pool funders on a prorata basis (the original liquidator gets rewarded again based on their share of the Liquidity Pool).
- Along with the stability fund, I reckon the SP will have enough slosh () to fund a proper yield back to the funders of the Liquidity Pool (another incentive for people to utilize the Liquidity Pool).
Assuming I am not missing anything obvious, I think that this structure gets us to probably the same, if not better, outcome that was originally envisioned with KIP-006. All without impacting competition and redirecting users to Kolibri competitors.