[VRC] Setting the PSM fees and reenabling VAI borrowings

Proposals
1

Rationale

This VIP proposes a set of parameters for the new USDT PSM and enables VAI borrowing with a new borrowing rate.

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 stablecoin to ensure VAI remains valuable and improve revenue generation.

Specification

Modification of this VIP:

  • PSM USDT feeIn (swap USDT → VAI): 0bps (updated 2023-05-05 from 10bps)
  • PSM USDT feeOut (swap VAI → USDT): 10bps
  • PSM USDT `vaiMintCap : 5M
  • baseRate: 2.72% (to be updated when VIP submitted according to the formula)

USDT PSM

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

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.

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 1.001 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 the $55k vUSDT Venus has in its 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 would be a weighted average of borrow rate from other stablecoins proposed on Venus minus a discount. We suggest a 0bps discount to start with. At the time of writing that would lead to 2.72%. The floatRate for price deviation would remain, but we hope it wouldn’t be significant going forward.

We provide a spreadsheet were we track from time to time the market rates and the baseRate that would be derived from (could be automated later on).

Risk Analysis

  • New smart contracts always come with a risk
  • Increasing the VAI borrow rate might reduce VAI borrowings and TVL

Key Discussion Points

  • What is your view on the peg deviation of VAI that is suitable?
  • Would you rather force VAI = USDT (no fees?)
  • Do you have another perspective on how to set the borrow rate on VAI if not linked to the market borrow rate of stablecoin?
4 Likes
2

Is it possible to explain a bit more why VAI going above 1.0010USDT is a particular concern? Thank you.

3

Sure, VAI is designed to be a stablecoin and the best way, in our view, to increase adoption is to be reliable.

If you borrow VAI and sell it when the price is above $1, then you can be happy as you made a profit. But if another person buys VAI when it is above $1 (let’s say to save money) and want to use it (to pay for goods) when it is worth $1, he will take a loss which is unfortunate and lead to bad user experience.

Moreover, if there is a crypto crash, borrowers might want to repay their debt quickly leading to a shortage of VAI on the market which can lead VAI to go way above $1.

Fixing the problem of VAI going above $1 is easy, you just let people to mint VAI for $1 of asset (ideally yield generating so the protocol makes more revenues).

Obviously the range, here 10bps, is arbitrary and Venus community could chose anything between 0bps and a few %.

10bps is, in our view, the best tradeoff. Stablecoins on BNB chain are not at par, i.e. all claim to be $1 but don’t trade 1:1 (but it seems always between 10bps). So being narrower wouldn’t help much. On the other end, 10bps generate revenues for the protocol, yet allowing some people to provide liquidity within this spread.

4

We have one question on one statement in the post:

Could you please elaborate a bit more why you think PSM cannot ensure VAI not going below $1? As PSM is supposed to work and enforce the pegging, avoid big price swings in both directions.

The following are our responses to the key discussion points:

Peg Deviation: Given the current situation of VAI, it is an improvement if the peg deviation of VAI is within 50bps, i.e. the USD price range of VAI to be [0.995, 1.005].

feeIn feeOut:
Given our understanding of the PSM proposal, the initial position of PSM is that there will be USDT PSM vault. Currently the price of VAI is lower than USDT, a rational user will be more likely to swap VAI for USDT.
Thus, we suggest to set feeOut (swap VAI → USDT) higher than 10 bps, then set feeIn (swap USDT → VAI) at 0. By doing this, the swaps in both directions can be more balanced.

On VAI “Borrowing”
Our team really wants to differentiate the two concepts: minting and borrowing. We took the VAI borrowing mentioned in this post as VAI minting. For VAI minting to work better, our team has proposed improvements in VAI minting mechanisms in [IDEA] VAI Minting Mechanism Improvements. Some of our ideas are to isolate the collateral used in minting VAI, a lower CF for minting VAI and restrict asset types that can be used as collateral. These will make the fundamental value of VAI more solid. Will appreciate some of your feedbacks as they are all related to VAI.

Coming back to your idea of adjust the stability up. We think it is a good idea, we arrived at the same conclusion from a different perspective. Instead of looking at the interest rate when the price of VAI is at $1, we looked at the stability fee when the price is near the lower boundary of the desired range.

Take the range [0.995, 1.005] as an example, if price is at 0.995, the stability fee will be 1% + (1-0.995) *225% = 2.215%. This stability fee is not high enough to incentivise return/burn of VAI.

The stability fee model parameters were set up when the price of VAI was far below $1. It is time to adjust them. In addition to increase base rate, we want to propose increase the floating rate as well. [base rate = 3%, floating rate =1000%] seems a reasonable combination. If the price is at 0.995, the stability fee will be 3% + (1-0.995) *1000% = 8%. It is enough to incentivise return/burn of VAI.

The above is our analysis and thinking process. We welcome your feedback, suggestions and discussion. Thank you.

5

If the PSM is depleted (in USDT), then it no longer work so if someone sells 1M VAI, and assuming the current secondary market is what it is today, VAI will go very low. Obviously, the idea is to not get in a place where the PSM is depleted.

On the opposite side, Venus can always increase the ceiling of the PSM and mint new VAIs for each USDT.

The feeIn at 0bps is something we would advise as well but so far the USDT <-> USDC spread makes us wondering what is really $1. Is there a risk we should resell those USDT below $1 in the future? Probably unlikely and even 10bps fees will not make much of a difference. We take this proposal and change the original one.

On the feeOut, trying to extract more fees is taking a risk that a USDT user will not migrate to VAI due to the cost of reverting to USDT. happy to hear more people on that.

Increasing the floating rate is probably a good idea as well but it would be great to hear more from VAI borrowers to get their thoughts as well.

Thanks for your inputs!