[VIP] Setting the PSM fees and change VAI borrowings parameters

Rationale

This VIP proposes a set of parameters for the new USDT PSM and change VAI borrowing borrowing rate (but don’t enable new VAI borrowings).

References

Summary

Following our previous post on RWA strategy, we want to propose some parameters regarding the first prong, stabilizing the value of VAI.

Motivation

  • Enforce the peg, avoid VAI going above 1.0010 USDT
  • Increase VAI borrowing cost in line with other stablecoins to ensure VAI remains valuable and improve revenue generation.

Specification

Modification of this VIP:

  • PSM USDT feeIn (swap USDT → VAI): 0bps
  • PSM USDT feeOut (swap VAI → USDT): 10bps
  • PSM USDT `vaiMintCap : 5M
  • baseRate: 4%

USDT PSM

PSM USDT feeIn (swap USDT → VAI): 0bps

PSM USDT feeOut (swap VAI → USDT): 10bps

This will provide a tight enough peg, yet let third parties provide liquidity pools on different exchanges (PCS, Uniswap, …) with 1bps or 5bps fees tiers. The spread is important to provide some utility to VAI (getting a yield from providing LP), decentralize liquidity provision with the users and increase the demand of VAI. Assuming people prefer to use front-ends that don’t integrate the PSM (like PCS), the deviation from the peg will be at maximum between 11 and 20bps which seems comfortable for now.

The lack of fees on minting VAI from USDT will favor expansion of VAI in circulation.

We also recognize that USDT is currently a bit away from USDC and BUSD despite significant liquidity. It is our view that USDT might be traded at a premium/discount to the dollar due to minting/redeem costs. More research is needed to be sure we don’t peg to something that isn’t $1.

The PSM would also provide an outside spread on Binance by incentivizing people to provide a wall order around 1.000 and 0.999 as it could be arbitraged with the PSM (assuming liquidity in it).

We suggest a 5M vaiMintCap (maybe after a very low cap for testing purposes).

We also suggest that the VIP should fill the PSM with 270k USDT from the Venus Treasury.

Borrow module

With the deployment of the PSM we propose to enable VAI borrowings again. While the PSM will disable all possibility of VAI going significantly above $1, it can’t ensure VAI not going below $1. Granted, the 225% floatRate for price deviation is already providing an incentive for borrowers to repay when VAI is far below $1. But at the peg (what we are set to achieve), the current VAI borrow rate is 1% while borrowing other stablecoins is many times more expensive.

The proposed baseRate is proposed to be slightly below other stablecoin borrow rates. We suggest a 0bps discount to start with. At the time of writing, we suggest 4% for the baseRate. The floatRate for price deviation would remain, but we hope it wouldn’t be significant going forward.

If peg is not recovered, we recommend the Venus community to increase floatRate until peg is back in line.

The target is to have a very advantageous borrow rate when VAI is at peg (lower borrowing rate than other stablecoin), but strongly incentivizing people to repay when VAI is below peg.

This VIP doesn’t enable VAI borrowings, this will be enabled in a following VIP.

Risk Analysis

  • New smart contracts always come with a risk
  • Increasing the VAI borrow rate might reduce VAI borrowings and TVL
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We increased the USDT deposited to the PSM from 220k to 270k according to our proposal to not get paid until the PSM is shipped. So this 50k USDT increase is represented by the Q3 payment to Steakhouse that we drop.

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