Adding Reserve Gift Policy

CGPs/CGP-0048.md

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+---
+cgp: 48
+title: Reserve Gift Policy
+date-created: 2022-02-01
+author: Slobodan Sudaric (@sudarics), Martín Volpe (@martinvol)
+status: DRAFT
+discussions-to: https://forum.celo.org/t/discussion-for-cgp-48-reserve-gift-policy/2771
+governance-proposal-id: [if submitted]
+date-executed: [if executed] <date created on, in ISO 8601 (yyyy-mm-dd) format>
+---
+
+## Overview
+
+Reserve Gift Policy
+
+Following the [initial discussion](https://forum.celo.org/t/reserve-gift-policy/1190) and helpful suggestions by @Patrick, @papa_raw, @Pinitio.com and @sep, we would like to propose the following reserve gift policy to the Celo community. The policy consists of two parts, (i) a gift acceptance policy and (ii) a gift liquidation policy further outlined below.
+
+## Background 
+
+Multiple Celo community members expressed a wish to gift tokens to the [Celo Reserve](https://celoreserve.org/) to express their support as members of the community and to contribute to the stability of the reserve. 
+
+The Celo Reserve backs the Celo-native stablecoins (cUSD, cEUR, cREAL) and consists of a basket of crypto assets, including CELO, BTC, ETH, DAI and natural capital backed assets such as tokenized voluntary carbon credits (in the following referred to as “core assets” and “core reserve”).
+
+Through this proposal, gifted tokens can contribute to the stability of the core reserve in case the core reserve comes under severe pressure, in which case gifted tokens are liquidated and the proceeds are used to purchase additional core assets to stabilize the core reserve.
+
+## Proposed policy
+
+### Gift acceptance
+
+The Celo Reserve accepts and welcomes gifts of mission-aligned community members. All gifted tokens are held in a supplemental reserve that is logically separated from the core reserve. Gifts are accepted into the reserve’s multisig address [0x298FbD6dad2Fc2cB56d7E37d8aCad8Bf07324f67](https://explorer.celo.org/address/0x298FbD6dad2Fc2cB56d7E37d8aCad8Bf07324f67/transactions). A separate gift address may be established in future contract upgrades.
+
+Gifts do not contribute towards the core collateralization ratio of the core reserve. They do not constitute core reserve assets, nor does the decision to include a particular token as a core reserve asset depend on whether the token was a part of the supplemental reserve or not.
+
+While the Celo Reserve welcomes gifts of mission-aligned community members for stability purposes, it should not be misused for token promotion. We therefore suggest that only a subset of the supplemental reserve is explicitly reported in the context of the Celo Reserve (e.g. on celoreserve.org). As an initial step, we suggest a gating criterion of $50K in liquidity across trading pairs that involve either core reserve assets or Celo stablecoins.
+
+
+### Gift liquidation
+
+Gifts can be liquidated without public announcement and without separate governance approval in case the core reserve comes under severe pressure. In particular, gifts can be liquidated to purchase core reserve assets if the core collateralization ratio (USD value of core assets / USD value of circulating supply of stablecoins) drops below a critical collateralization threshold. If the collateralization ratio is above the critical threshold, gift liquidation and/or transfer requires governance approval (e.g., to return unwanted gifts to the sender).
+
+The critical collateralization threshold is initially set to 200%.
+
+In case of liquidation, gifts are liquidated on a pro-rata basis to the extent possible (applying pro-rata may not make sense for gifted tokens without liquidity) until the collateralization ratio exceeds the critical collateralization threshold.
+
+Liquidated assets shall be swapped for Celo and immediately sent to [Celo Reserve Address](https://explorer.celo.org/address/0x9380fA34Fd9e4Fd14c06305fd7B6199089eD4eb9/transactions).
+
+
+## Rationale
+
+Gifts can be a valuable supplementary stability mechanism. This becomes particularly evident in light of recent developments on the broader crypto market which led to a sharp decrease in the overall collateralization ratio of the core reserve.
+
+The gift acceptance policy should incentivise gift-giving without jeopardizing the stability characteristics of the core reserve. Similarly, the liquidation policy should demonstrate to gift givers that their contribution is only liquidated as a last resort mechanism.
+
+The gating criterion of $50k in liquidity serves two primary purposes. On the one hand, it acts as a deterrence mechanism to avoid misusing the Celo Reserve as a “stage” for newly launched tokens (keyword: airdrop) or potentially dubious projects. On the other hand, it also acts as a minimum requirement to contribute stability in a meaningful way (gifted tokens can only contribute to stability if there is a minimum level of liquidity to trade them in).
+
+Gifts that pass the gating criterion could then e.g. be counted towards an extended collateralization ratio that would not only include core reserve assets but also gifted assets, which would likely be valuable information for stablecoin users and could contribute to trust and transparency. 
+
+We suggest an initial value for the critical core collateralization threshold of 200%. On the one hand, the threshold should be as low as possible so that gifts are not liquidated unless absolutely necessary. On the other hand, there is some lead time involved to evaluate market conditions and to execute liquidations, suggesting a higher liquidation threshold to start executing before the core reserve becomes undercollateralized. In light of this tradeoff, a threshold of 200% appears to be reasonable.
+
+It should also be noted that the policy does not suggest always liquidating if the collateralization ratio drops below the critical threshold but only introduces the option to liquidate. This is important to prevent unnecessary liquidations and also mitigates a potential problem of market timing (e.g. market participants building up short positions in gift assets anticipating a liquidation sale by the Celo Reserve).
+
+In case of liquidation, gifted assets are sold on a pro-rata basis to the extent possible. E.g. if the reserve needs to sell 20% of its total gifted assets to boost its core collateralization ratio, then 20% of token A and 20% of token B will be sold. This prevents a situation in which the reserve would need to choose which token to liquidate and thereby potentially disproportionately impact the token’s market price. This assumes sufficient liquidity for token A and B. In case the liquidity of one of the tokens is insufficient to apply pro-rata in a meaningful way, the share of the more liquid tokens is increased proportionally to boost the core reserve.
+
+The liquidation policy can serve as a blueprint also for further reserve management and rebalancing activities. In particular, a similar policy could be explored for the natural capital backed part of the reserve to avoid overly frequent liquidation of tokenized natural capital.
+
+
+## Proposed Changes
+
+This proposal itself involves no code changes or verification.
+
+## Verification
+
+This proposal itself involves no code changes or verification.
+
+## Risks
+
+We believe there are no economic risks associated with the gift acceptance policy as it does not alter or interact in any way with the core reserve. On the contrary, the gift liquidation policy could serve as a valuable last-resort stabilization mechanism.
+
+We believe there might be a risk that unwanted or potentially even illegal tokens are gifted to the reserve. However, this appears to be beyond our control as even without a gift policy, such tokens could be sent to a reserve address anyways.
+
+
+## Useful Links
+
+* [Stability Mechanism Documentation](https://docs.celo.org/celo-codebase/protocol/stability)
+* [Celo Reserve Overview](https://celoreserve.org/)