This is a dedicated thread for the community to discuss potential changes to the Compound DAI market. See the main thread for information and analysis of the liquidation event.
The DAI market on Compound has been growing for months as a result of the COMP Distribution; it currently accounts for 309,178 of 427,880 COMP distributed to users.
With 1.56 billion DAI supplied to the protocol, and 1.20 billion DAI borrowed, the Compound Dai market eclipses both the underlying DAI market, the liquidity on exchanges, and the global trading volume of DAI by a vast margin.
The Gauntlet Market Risk Assessment analyzes markets as a function of total outstanding debt relative to daily trading volume–Compound’s DAI market is literally off the charts of any scope considered in the report, which likely contributed to the DAI liquidation event.
The community may want to consider changes to limit the market risk of DAI. Here is a summary of the ideas and levers that have been discussed in Discord so far:
1. Disable DAI’s COMP Distribution
By disabling the distribution of COMP to the DAI market, the incentive to use DAI over another stablecoin like USDC would be reduced, and market size may shift between markets quickly. The COMP Distribution could be re-activated once the market risk has been reduced, or other changes are implemented.
2. Increase DAI Reserve Factor
Increasing the Reserve Factor of DAI would decrease the attractiveness of DAI relative to other stablecoins, but in a significantly less material fashion than disabling the COMP Distribution. Usage of DAI may shift much more slowly.
Reserves would also build more quickly, benefitting the protocol & user-base.
3. Set a DAI Borrowing Cap
Setting a Borrowing Cap would limit the market size of DAI; this would prevent new usage, while preserving the economics of existing users.
A Borrowing Cap could be set relative to the amount of DAI outstanding (1/3 would be 300 million), or as a function of daily trading volume (300%, the high end of the risk assessment, would be 300 million).
This can be implemented with the Community Multi-Sig, which sets Borrowing Caps, without requiring a governance proposal (fast solution).
4. Lower DAI Collateral Factor
Lowering the Collateral Factor would decrease the leverage of users supplying DAI, and the attractiveness to “yield farm” with the asset, but would likely not change borrowing demand for DAI. Alternatively, the Collateral Factor of another stablecoin (e.g. USDC) could be increased, lowering DAI’s Collateral Factor on a relative basis.
5. Supply Cap
The cDAI contract could be upgraded to implement a Supply Cap, which is an alternate approach to limit market size. This would require development resources (slow solution).
All other ideas are encouraged – and the community may decide / believe that the market doesn’t need to be modified. To expedite the conversation, a quick poll:
- Disable COMP Distribution
- Raise Reserve Factor
- Set Borrowing Cap
- Lower Collateral Factor
- Create Supply Cap
- Other Ideas (Please comment below)
- No Changes