Will upcoming Compound governance proposals de-peg Dai?
Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom), Written by LeftOfCenter, published with permission.
Editor's Note: This article comes from
, Written by LeftOfCenter, published with permission.
Recently, Compound, a lending platform due to liquidity mining, has brought DeFi into the spotlight again. Compound’s own market value has exceeded 590 million U.S. dollars, making it the largest DeFi platform. Other DeFi projects on the Internet have brought vitality and vitality. The so-called mobilization of the whole body, as an ecosystem that affects each other, policy changes on one platform in DeFi will also have an impact on other platforms, and after Compound has grown rapidly and become the largest platform in DeFi, its incentive policy to be changed in the near future will also affect other platforms. It will affect other platforms, and even open finance as a whole.
Compound has passed the new governance proposal #11 at 2:37 a.m. Beijing time on July 1st, and the proposal will come into effect this Friday. It is foreseeable that the implementation of this policy will not only affect the behavior of miners on the Compound platform itself. Cyrus Younessi, director of risk at the Maker Foundation, commented that the new governance proposal may even lead to the de-anchoring of the stablecoin Dai, suggesting that the Maker community formulate defensive strategies to deal with it. The discussion initiated by Cyrus Younessi in the Maker community aroused enthusiastic responses, among which DappHub software developer Lev Livnev replied that the change in Compound’s incentive policy will not cause Dai to be de-anchored, at least in the short term, but will encourage miners to supply as much as possible to the same market / Borrowing, and with the current high return rate of COMP tokens, the interest earned/paid on borrowing itself is insignificant.
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Upcoming Governance Proposal #11
The lending platform Compound, which has become popular due to liquidity mining, has passed the new governance proposal #11 at 2:37 a.m. Beijing time on July 1st, which will officially take effect this Friday.
This proposal will solve two existing problems:
Liquidity miners will use flash loans to temporarily change the size of the funds in the lending market, thereby maximizing their profits and obtaining more COMP tokens
Using the generated interest as the criterion for distributing COMP tokens will encourage miners to flock to the currency market with the highest interest rate, and eventually allow Compound to absorb 80% of the total supply of BAT (the total value of BAT assets locked on Compound is as high as 319 million US dollars, while The total market value of BAT is only 391 million US dollars). This is a very dangerous signal, which means that once the price of the token falls, there may not be enough assets to replenish it.
So, how does Compound's new governance proposal solve these two problems?
To address the first issue, the proposal requires at least one external account to call the refreshCompRates function, which means smart contracts are no longer allowed to perform this function.
The solution to the second problem is to change the original allocation of COMP tokens based on accrued interest to be based on loans generated from the agreement, that is to say, the future Compound agreement will be based on the total amount of loans generated in each market. Allocate COMP. According to the new regulations, every time a user borrows encrypted assets from Compound (rather than according to the interest generated), COMP will make a distribution, and the ratio of borrowers and creditors is 50/50.
Previous Allocation Mechanism VS New Governance Proposal #11
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The new policy may make Dai unanchored?
Cyrus Younessi believes that the change of the COMP token allocation mechanism can effectively solve the current high-risk liquidation problem in the BAT and other lending markets on the Compound platform, because the standard for allocating tokens ranges from the interest generated in the market to the amount of borrowing generated. The change will cause the mining behavior to migrate from the highest interest rate market to the lowest interest rate market.
As a rational economic man, in order to obtain more COMP tokens, miners will try to borrow as much money as possible under a certain capital cost, and seek to pay the least interest to maximize the utilization of funds. According to Cyrus Younessi, it is foreseeable that there will be two crypto assets that will be favored by miners in the future, namely USDC and Dai.
According to the interest rate curves of these two tokens, although USDC’s liquidity mining is easier and safer (the price is stable at $1, the supply and potential supply are larger, and the liquidity is higher), the interest rate The lower Dai can maximize the utilization rate of funds up to 98%, which means that compared with USDC, using the same value of Dai to mine Compound can earn more income.
In order to use Dai with the highest capital utilization rate for liquidity mining, the following two mining behaviors will occur:
ETH holders: ETH holders will first deposit ETH, lend Dai, then buy ETH and repeat this operation. However, the risk of this operation will be greater than the previous one. It needs to bear the risk of Ethereum plummeting or the price of Dai soaring rapidly. If the leverage is too high due to multiple cycles, it may also face liquidity risk (if the utilization rate remains at 100%, the Dai cannot be withdrawn). However, miners who only lend Dai with one ETH mortgage can effectively pay off their debts because their wallets still hold Dai, and this operation is still profitable.
In any case, this will lead to unprecedented demand for Dai, which will generate a premium for Dai. To be sure, the premium generated by Dai is not as profitable as lending Dai from the platform to mine COMP tokens, so instead of selling to earn a premium, it is obviously more cost-effective to lock Dai on Compound for mining, which will lead to most The Dai supply is locked into the Compound platform. This could end up destroying the Dai peg and even incentivizing miners to mint more Dai through Maker, creating new supply that can then be used to mine COMP tokens, pushing the Maker debt ceiling to new highs.
Cyrus Younessi believes that once such a situation occurs, it may lead to an emergency shutdown (Emergency Shutdown). Cyrus Younessi suggested exploring other methods for defense, such as setting special leverage ratios such as lower LR (leverage ratio) for ETH or USDC Risk parameters, and even actively participate in the governance process of Compound.
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Short-term Dai will not be de-anchored
But DappHub software developer Lev Livnev (a formal verification researcher who discovered bZx's first attack) believes that the change in Compound's incentive policy will not cause Dai to break the anchor.
According to him, the new mining policy is no longer related to the interest rate earned/paid, but for a money supplier in a specific money market, the income it gets is related to "(total borrowing amount in the specific money market / the specific The total money supply in the money market) × the total amount of borrowing in the market" is proportional; for borrowers in a specific money market, the income they get is proportional to "1/total borrowing in the market". In the case of current COMP yields, it is purely a game of coordination/Schelling point based on the supply/borrow cycle mechanism, with the goal of getting everyone to supply/borrow to the same market as much as possible, and since The higher yield of COMP tokens renders the interest earned/paid on the borrow itself irrelevant.
A Schelling point is the propensity of people in game theory to choose in the absence of communication, either because it seems natural, special, or relevant to the chooser. This concept was proposed by the American Nobel laureate Thomas Schelling in 1960 in his book "Strategy of Conflict". In the book (p. 57), Schelling describes "the focus of each person's expectations is the choice that others expect him to expect to be expected to make."
