Emergency Governance Proposal
The @Risk-Core-Unit is using our authority under the MIPs framework to request an urgent executive proposal to mitigate risks to the protocol.
Proposed Actions
- UNIV2USDCETH-A
- Reduce debt ceiling to 0
- UNIV2DAIUSDC-A
- Reduce debt ceiling to 0
- GUNIV3DAIUSDC1-A
- Reduce debt ceiling to 0
- GUNIV3DAIUSDC2-A
- Reduce debt ceiling to 0
- PSM-USDC-A
- Reduce gap to 250 million DAI
- Increase tin to 1%
- PSM-GUSD-A
- Reduce gap to 10 million DAI
- PSM-USDP-A
- Increase debt ceiling to 1 billion DAI
- Increase gap to 250 million DAI
- Reduce tin to 0%
- Increase tout to 1%
- Compound v2 D3M
- Set bar to 0 (eliminate exposure)
- Aave v2 D3M
- Set bar to 0 (eliminate exposure)
- Governance Security Module Delay
- Reduce GSM delay to 16 hours (value chosen following discussion between GovAlpha and PE - note that arguments were also made both against reduction and in favour of further reduction, this value ultimately was chosen as a compromise solution).
Background
Over the past week, the collapse of first Silvergate and then earlier today Silicon Valley Bank has thrown the banking industry into crisis. In particular, centralized stablecoins may face significant impairment due to their high exposures to impacted banks as well as other potentially at risk institutions. Only the first $250,000 of bank deposits are insured by the FDIC, with the vast majority of stablecoins’ bank deposits representing unsecured deposits to underlying banks. These funds are more senior than bank equity and bonds, but still bear some risk of not receiving full repayment if a bank is closed.
While Silvergate is voluntarily winding down with no reported losses to depositors (uninsured and insured), Silicon Valley Bank has been placed into receivership by the FDIC with the possibility of losses to uninsured depositors. Circle has reported roughly $3.3 billion in exposure to SVB, or a bit more than a quarter of their roughly $11 billion in bank deposit exposure. Certain other banks may also be at risk next week of bank runs and general contagion.
The proposed changes are intended to limit Maker’s exposure to potentially impaired stablecoins and other risky collaterals, while maintaining enough liquidity to prevent DAI from trading significantly above $1 if conditions change, and ensuring there is adequate market liquidity to process potential liquidations of crypto collateralized vaults.
Reasoning for Specific Changes
LP Collaterals Containing USDC
These collaterals are exposed to potential USDC tail risk, and available debt ceilings are not critical to maintaining adequate DAI liquidity. Therefore, it is proposed to reduce debt ceilings (line) for each of these assets to 0 DAI: UNIV2USDCETH-A, UNIV2DAIUSDC-A, GUNIV3DAIUSDC1-A, GUNIV3DAIUSDC2-A.
PSM-USDC-A
The USDC PSM has historically been Maker’s primary liquidity sources, keeping DAI close to target price and preventing price spikes that can interfere with safe and sound liquidation of crypto collateralized vaults. However, under current conditions, excessively daily minting limits put Maker at risk of greater losses in the event that USDC vault faces impairment from underlying uninsured bank deposit exposures.
We are proposing to reduce the gap parameter from current 950 million DAI to 250 million DAI (effectively reducing daily mint limits to 250 million DAI), and increasing the tin parameter to swap USDC into DAI from current 0% to 1%. The increased fee will help prevent excessive dumping of USDC into the PSM, potentially incentivizing users to dispose of USDC via other methods and ensuring it is only used if DAI price significantly diverges upwards (which could be indicative of liquidity crunch from crypto collateralized vault liquidations).
PSM-GUSD-A
GUSD has not faced exposure to Silvergate or Silicon Valley Bank, but they have large uninsured bank deposit exposure which potentially could be associated with at risk institutions (specific breakdown of deposit balances by institution are not provided in attestations). To limit potential losses if Gemini faces contagion risk from their bank deposits, it is proposed to reduce gap from current 50 million to 10 million DAI.
PSM-USDP-A
Paxos has relatively stronger reserve assets versus other available centralized stablecoins, consisting primarily of US treasury bills, reverse repurchase agreements collateralized by US treasury bonds, insured bank deposits (placed through deposit broker networks to remain under FDIC limits), and privately insured bank deposits, with a relatively small portion of uninsured bank deposits per their latest reserves reports. They face relatively lower potential for impairment versus other available stablecoins, but can still provide important backstop liquidity to prevent DAI from trading over $1 target price and impacting liquidation safety in the event of a crypto market crash.
We are proposing to increase the maximum debt ceiling line to 1 billion from current 450 million DAI, increase gap from 50 million to 250 million DAI, reduce tin from 0.2% to 0%, and increase tout from 0% to 1%. This will allow USDP to effectively provide liquidity when DAI trends above $1, while limiting arbitrage opportunities to drain stronger USDP collateral from the protocol in exchange for weaker stablecoins.
Compound v2 D3M
Compound v2 uses a fixed $1 price for USDC. This presents a risk of bad debt accrual and potentially bank runs with cascading market insolvency if the market price of USDC falls significantly below the current collateral factor. We are proposing to temporarily deactivate the Compound v2 D3M and pull all funds (via setting bar to 0 via the MOM mechanism) to prevent exposure to this potential tail risk.
Aave v2 D3M
While Aave v2 uses live oracle pricing so is not vulnerable to the same risk as Compound, the overall risk reward of depositing funds into the D3M are not favorable under current conditions. For this reason we are proposing to temporarily deactivate the Aave v2 D3M and pull all funds (via setting bar to 0 via the MOM mechanism) to prevent exposure to potential insolvencies.
Governance Security Module
It is anticipated that Maker governance may want to make further parameter changes to account for rapidly changing market conditions over the coming days. Reducing the governance security module delay will allow for greater agility. This update should be calibrated to balance desire for quick governance action against the need to maintain vigilance and protection against potentially malicious governance proposals. A GSM delay of between 12 to 24 hours could be considered, at the discretion of the Protocol Engineering core unit.
Timeline and Next Steps
Proposal(s) implementing the above changes are expected to be posted in the next ~12 hours or less. The changes may be split into several independent proposals at the discretion of the Protocol Engineering core unit, to ensure timeline implementation of the most critical updates and overall efficiency and safety. Voters are encouraged to review and support the relevant executive proposal(s) as soon as possible.
Edited by Patrick to update GSM delay value in top-level post
