VAI stability fee - a ticking timebomb?

Hey guys,

TLDR. If there isn’t enough VAI in existence to repay all the minted VAI then that feels like a problem.

I’ve thought of a potential problem with the proposed 10% VAI stability fee. Hypothetically for VAI to remain stable in the long term the total circulating supply of VAI needs to equal the total liability of VAI minters. Hear me out:

Hypothetically, lets suppose there is 1b of VAI minted with a 10% APY. In 10 years time there would still be 1b of VAI in circulation, but for all the VAI to be repaid would require >2b of VAI to be purchased. Seems a little bit like fractional reserve at play.

I’ve used a very extreme example just to show that over time the peg can’t remain static here due to that fee. Imagine what would happen if there was some event that required mass release of all locked collateral - not everyone could release collateral. Food for thought.

Just some possible thoughts on alternative solutions - could the stability fee be paid in any crypto (contributing to the reserves). You could argue that the stability fee could be payable in any token other than VAI to ensure that the peg remained in place.

Alternatively some method might be needed to actually mint VAI without collateral - i.e. purchasing with stable coins on a 1:1 basis.

If I am missing something obvious, or if this has been discussed then I apologise :slight_smile:


I would prefer to see the fee under 5%.

Doesn’t matter what % the fee is, if it results in there being less supply than what is owed to the protocol then VAI can’t possibly remain stable in the long run.

yes I thought about this. it might be a problem, but since you can mint vai easily with any crypto there is not that much scarcity . However a supernice solution could be repaying interest in xvs… so we could profit bigtime and also build xvs reserves for the long run

I understand that you can mint vai on request - that’s not the issue.

The issue is that we could be in a situation where there is not enough VAI in existence to clear all the VAI debt positions. Take this to extreme measures to see what I mean. What happens in the scenario when there is 1b in VAI minted, but a debt to be repaid of 2b. Yes you can mint 1b more VAI, but then the position just becomes 2b circulating with 3b in debt… In actual fact this is the classic economic situation we find ourselves in today where there is more debt than money to repay it.

I’ve been thinking about this some more. If the stability fee was a contribution to the Venus reserves then we could run periodic “auctions” where the VAI reserves are sold. That way the circulating supply would remain in parity with the debt obligations. Alternatively after 4 years once there is no more Venus to distribute we could start distributing the VAI from reserves instead as an incentive.

I do genuinely believe that this is an issue that needs to be addressed in advance of introducing a stability fee without considering the long term implications of that fee.

Every bank in the World would also collapse if everyone demanded their money at the same time. It’s an age old issue.
However, with loan distribution APY greater than loan fee in theory there will be enough VIA to repay loans.

The issue here is regarding the matter of stability. If a stability fee is charged in VAI and reduces the circulating supply of VAI, then eventually the circulating supply will trend to zero (*). Clearly that coin cannot retain a stable peg in the very long term under those circumstances.

You can’t argue with maths here unfortunately. Lets suppose after 10 years there is 2b of VAI issued and only 1.5b of circulating supply. That means that there will be approx 850m of assets locked in the protocol in perpetuity… and this number will increase forever.

(*) notwithstanding the fact that more VAI can be minted…

2 solutions to this. One which uses a similar approach to Makerdao’s DAI savings rate. Stake VAI and earn VAI (minted more VAI into supply). This allows controlling temporary circulating supply of VAI in order to fix peg.

Or redirect the interest earned from VAI repayments into a pool for XVS holders to claim from. This will ensure that global VAI debt = total supply at all times.

Also remember that VAI rates can be set to negative (in a negative interest rate environment) if peg goes >1. This is will be an unlikely scenario.

Both suggestions perfectly valid.

I guess we wait for the proposal…