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Governance and Risk Meeting: Ep. 24

Video | Audio

References Person Text
# / 00:02 Richard Brown Hello everyone, welcome to the February 28th edition of The Scientific Governance and Risk meeting. There's a few new developments that I want to call out before we get started, one of those is that, I mentioned this on a call earlier, maybe it's three or four calls ago that there's a long track that we have been developing as we go through these meetings. We've moved from simple push of information to pushing a pool of information to more of a feedback loop to ... and through different steps to actually hitting stages where we're talking about actionable data. And we're actually reviewing the primaries of the system. And coming up with some debate around how those primaries should be changed and that's lead us into, one of our recent meetings where the results of these discussions have caused or initiated new proposals to come in to the ecosystem.
# / 01:02 Richard Brown Which is great. And that was the goal all along. But as we continue to progress, these meetings are going to become more complex. And I think it's time that we start clarifying what the agenda is and how we can make these things as efficient as possible. Make sure that they sort of a hue to the governance principles and the framework documents that Steven was gracious enough to provide us ever so long ago. And that we make sure that we keep the momentum and the velocity up. And so the way that I'm thinking, and this is open to suggestion or iteration, but we start off with clarifying what the agenda of this meeting actually is. We'll take care of any kind of new events right off the top, hand over to Steven to clarify some high level agenda items that the foundation would like to bring to the community to discuss.
# / 01:53 Richard Brown Then we'll bring in guests or presenters to show us some of the data that would inform the discussion that happens afterwards. And then we head into those discussions, where we handle this stuff out and try and make sure that everybody's concerns are addressed or that their insights have been understood. And then if time allows, we'll talk about some of these interesting questions that have popped up in the community over the past week, through Reddit or Twitter. And then I'm thinking that we had some interesting discussions last week. People pointed out that there's sort of two layers to these discussions that are emerging. One is a term, monetary policy, short term management of the peg, which is what we've been dealing with in the last three or four calls. And there's also room for discussion about the longterm vision. So the collateral types, the risk framework in general, what governance looks like. That's a larger discussion. A meta discussion.
# / 02:57 Richard Brown And we should start carving out some time in these calls to address those. And so the feeling is that at some point we might end up doing half and half, but let's revisit that question towards the end of this meeting. And at the end if there's any random questions, we can address them there. So I'll be posting this information in the next Reddit thread about the call where we can get a bit of a debate going and help and hopefully have the community help refine things a bit. So having said that, I've already wasted eight minutes of the call, so I need to speed up. We have some really interesting things happening in this call. We have a new employee to introduce, which I am unbelievably excited about. Then I'm going to hand it off to Steven to introduce the agenda. So before we get going though Cyrus, Cyrus Unesi are you in the house?
# / 03:45 Cyrus Younessi Hey, how's it going? Can you hear me?
# / 03:45 Richard Brown There he is. Yeah, we can hear you, so introduce yourself. Let people that don't know about your Twitter fan, fill us in on what you, who you are and what you've been up to?
# / 03:55 Cyrus Younessi Hey everyone. My name is Cyrus. I'll be working on risk management at Maker. Quick background. Spent seven, eight years trading fixed income securities here in Chicago. After that, I discovered crypto. Spent some time on the investments team at Cumberland mining. OTC crypto desk. Most recently I was director of research and trading at Scalar Capitol crypto asset investment firm, where I explored and studied dozens of crypto projects as well as manage portfolio risk and worked on trading strategies. Academically I have a degree in financial engineering, which is where I've learned some quantitative finance tools. My goal for risk is obviously to maintain the stability of DAI both in the short term and help protect against tail events. Looking at kind of both the quantitative aspects, markets, various risk models as well as the qualitative common sense side of things. Kind of understanding the organizations behind the collateral types. Getting an understanding of where the different risks lie and going from there. Excited to be here, be a part of the team and help Maker succeed.
# / 05:10 Richard Brown I cannot wait, I think that you're like the poster definition of a good get. So I'm really excited about this transition, cool that there's some amazing possibilities for interaction between these calls and the risk teams in the future, which I'm looking forward to. Clarifying, I think that having a really strong presence that can actually show us the numbers and come up with the models and kind of pull back the curtain on things is going to be enormously valuable. So I'm looking forward to. So welcome aboard. You have no idea what's waiting for you, but it's going to be fun watching it.
# / 05:46 Cyrus Younessi No pressure.
# / 05:47 Richard Brown None at all. All right. I think that's the introduction to the new employee. So Steven, if you want it to take agenda for us?
# / 05:58 Steven Becker Sure so the first thing I do want to say is welcome Cyrus. And what we are going to do is pull back the curtain in terms of the models and have a look at how those models work, how we effect them and how we start building out collateral portfolios. So that is the essence of it. And that's where we're going to draw not only Cyrus's experience and expertise, but quite a few folks that are actually on this call as well. We're going to draw on their expertise as well. And come out with very innovative ways of looking at risk management. But the one thing I need to do really sort of jump into now is have a look at the stability fee. And we need to ask a couple of questions. The first one was we changed the stability fee last week.
# / 06:45 Steven Becker Was it in any way effective? Do we have any evidence on that? Do we have enough data to identify that there is something specific to the changes or the trends that are in the ecosystem as a whole? When should the next change happen? My initial suggestion would be probably next week and the manner in which we're going to do it is hopefully reverting back to the previous idea of having everyone in this call come to a certain level of agreement. You can call it rough consensus or not. And then get this onto a governance polling excuse me, on to a governance polling so that we can get full representation from the broader community. Once that polling passes, we immediately go into an executive vote and then past the stability fee change if we need. Now to that point, the other thing we need to try and consider is the extent of the stability fee change.
# / 07:51 Steven Becker Do we do another half a percent or do we do we jump one percent? Something we need to consider clearly. Then the other interesting risk parameter that's getting a lot of attention is the debt ceiling, currently looking at Coinmarketcap or looking at the maker tools that we have, you can see we're hitting on the 90 million, this is the most we've ever had in our history. And considering the debt ceiling is at 100 million, what should we do? Should we extend the debt ceiling? These are the questions that we need to really consider. But before we do, we need to try and inform ourselves in terms of what data we have and what it can tell us. Now, I don't know if Lev is in the meeting, but if not, we can also just start with the foundation risk teams data. And Joe, are you there? Is it possible for you to sort of present the data that we have?
# / 09:06 Joe Quintillian Yeah. Yup, I'm here. I have a couple of things that Lev gave me, so I'm going to give him those.
# / 09:08 Steven Becker Oh, super.
# / 09:10 Joe Quintillian Total credit goes to him and [bobble 00:09:11]. So I will present the, there's a couple things. Here's [ref?] the governance page and this is going to be updated to the second every single time. So on a go forward basis, I'm putting it in right here so you guys can see exactly the graphs that we have. So the DAI Governance. So you can see like the DAI act of addresses has gone up. Percent of the DAI on exchange in terms of trading has gone up. Oasis obviously because of the change we've made, the DAI has kind of calmed down a little bit. Exchange volume there. DAI circulation. The big one I'd say is, this is Powell's which I think is really good. This will be integrated into the governance DAI glitch made. But he came up with it. It's this one out here?
# / 10:22 Richard Brown Joe, can you screen check?
# / 10:22 Rune Christensen Hey Joe, can you share your screen?
# / 10:25 Joe Quintillian No problem. I just put them in the chat too. So I'll share my screen.
# / 10:30 Speaker 5 I think it's just the http://dai.stablecoin.science domain right? Or URL I mean, right?
# / 10:35 Joe Quintillian Yeah, I use the one you put in your Twitter, Chris. There you go. So here's the one that we have on the governance DAI. This one's going to be updated going forward basis. It should update every day after this meeting. So there are the graphs, but it will show you the different readouts, but also if you go to Powell's and Lev's and Chris's, you'll see that nothing's really changed on where DAI is trading. There's been a couple flickers up, but really nothing. I mean, I think there's really nothing has changed. And that's why I'm advocating for the inquiries.
# / 11:36 Rune Christensen I have two questions for you, Joe from the perspective of Frito, right?
# / 11:40 Joe Quintillian Yep.
# / 11:42 Rune Christensen First of all how are your inventory levels now and compared to let's say a month ago? And then secondly, are you seeing that there's generally, are you seeing in terms of like trading desks and so on, like demand for buying DAI are you're seeing like more, or like, I mean [crosstalk 00:12:02] DAI, right? And sort of like the general direction of how that's going?
# / 12:06 Joe Quintillian I see a lot of sales for DAI, our inventories are actually up because at the commented a couple of people that needed to get out for trades, and I have not seen a difference. I've seen on the offer of people wanting to sell that and not, we're talking, not talking hundreds of thousands. I'm talking millions of DAI.
# / 12:28 Speaker 7 Cool. Well one thing did clean up on Coinbase Pro. One week ago it would take about 170 thousand dollars. That's how much capacity was the difference between what it was trading at at 98 cents in change all the way to a dollar. And as of right now, that number is around 63 thousand. So, while the price is still hasn't really materially moved to the amount of supply it would take to move the market has been cleaned out.
# / 12:55 Joe Quintillian I actually, I went on there as part of our drive, I'd drive to keep everything around the dollar 'cause we're finally getting our market making operations back up to normal here. And I drove up DAI. I drove up the DAI USDC price to try to get up there. But you will see over the next couple of days that inventory go away too. But there's also something called iceberg orders that are in there too, which you encounter what you see. Like if you look at it, it's like 500. There'll be show 500, but there'll be another 500 beyond or another 500 beyond that. So are those still the inventories change a little bit, but there's still a lot of icebergs there. But going back to your question, Rune, really no change and that's why I want the increase.
# / 13:45 Rune Christensen Yeah, and so that's [crosstalk 00:13:47]-
# / 13:48 Richard Brown Are you still screen sharing? 'Cause-
# / 13:49 Joe Quintillian Yup.
# / 13:50 Richard Brown Are you done with the presentation?
# / 13:51 Joe Quintillian I am. Yeah, I'm done.
# / 13:51 Richard Brown Rune, did you have a question?
# / 14:00 Rune Christensen Yeah, so I just, I mean, so basically in conclusion, so right now your inventory levels have been way above the target ever since you did the precision on the target, like months back basically. And even though we've done a number of, of stability fee increases, you have seen no impact at all, right?
# / 14:18 Richard Brown No difference. Nope.
# / 14:20 Rune Christensen Yeah, so I think, I mean that's in addition to the fact that we can look at the http://dai.stabelcoin.science, we have a look at the implied price of DAI on decentralized exchanges. And then we can also check out Coinbase and we can see how it's still under priced there. And also that then we have market maker inventory that is kind of like the third type of thing we can look at. Basically it's clear, like first of all it's clear that the stability fee increases we've done so far, haven't had much impact. And also, like my general impression is that we are at this almost breaking point now where, there are people who are starting like who are stopping to use DAI because they feel the peg is to weak, right?
# / 14:57 Rune Christensen So we are right on the edge of ... I mean kind of like kind of like a dangerous feedback loop, right? Where like the weakening of DAI actually causes it to weaken further and we get like a speculative drop in the price essentially. So I, and this has already been discussed quite a bit on Reddit as well, right? Over the past couple of weeks. There's actually a lot of people who are sounding the alarm on this, right? And we were, we discussed this last week as well. And I think like the only thing we can do at this point is we need to make a very drastic stability fee increase, to really show a commitment to actually protecting the peg no matter what.
# / 15:35 Richard Brown All right. Well let's try and put some parameters around that. So we've talked about the 50 basis points on a weekly, on a weekly cadence, and we've seen that that's not providing for guidance to the rest of the community and it's not moving the needle. So do we need to change the rate or do we need to change this step? You feel that's the we need to, it's the actual fee that needs to go up? The rate is fine?
# / 16:02 Rune Christensen So I would say that, I mean, I think like Stephen is, Stephen is suggesting that we should start to do governance poles around this. So we really need to ensure that there is proper decision made by the entire community for this. So first of all, I think we need to increase then sort of the number of votes for what we're doing, especially if you want to, to increase the magnit, like sort of change the, the magnitude of stability, fee changes. And then I think with that, I think it basically makes sense to have this biweekly cadence because today we definitely cannot go out and immediately do an executive vote and try to actually changes the stability fee today. I think what we can do is we can set up a governance poll today and then use that to justify an executive poll and week from now.
# / 16:54 Richard Brown Alright, well that raises an interesting question as well because the governance of polling mechanisms that allow it allows us to have more than one poll. Right? So should we put out one for like a raise it to one percent, raise to two, raise it to three percent and see what the community feels or do we pick a number?
# / 17:10 Rune Christensen Yeah, I think what we do is we one number, like we, we say either do you want to keep it at, well, I mean I think theoretically we should allow people to vote for no change. You know, I mean I think one thing is for sure right is that we here, no one here believes we should stick ... Well, I mean, let's see, right? But I definitely think that there's very little reason to continue with half percent increases. It's kind of a waste of time and sort of a waste of voting energy to some extent, right? But I also believe that it needs to be possible for people to actually, again, it's really a bad like signaling and sort of if someone, like if someone out there actually has data that there's plenty of demand coming or something and it's silly to increase the stability fee now? There should be a way for them to like probably signal that and then, I think theoretically that basically needs to be an ability to vote no to stability increase in a governance poll, right? So we can say that it's not the governance meeting that decided this change. It's actually like decided to do an executive vote for stability increase. It's actually a governance poll that then authorized an executive vote on the stability of increase. So, I think we should-
# / 18:25 Richard Brown But we have some deeply engaged fund managers and analysts on the call. So maybe we can start polling this community at least to see if there's any good suggestions or if they can offer any insight into how they perceive the market in the last week and what they feel a new stability fee would be worth examining? So, I'm actually-
# / 18:47 Rune Christensen Yeah, I think that's a pretty good point, right? Is it like is there anyone who feels like these half percent increases have actually worked? Or people that feel like we should do a more drastic increase like [crosstalk 00:18:59] statement-
# / 18:59 Steven Becker So to start off with that slew of suggestions. My first suggestion is that I think we should do just half the basis point, so half a percent or 50 basis point increase. And here's my reasoning why. It actually has to do with the debt ceiling. I would suggest not to increase the debt ceiling. So therefore it does give a sense that supply will be curtailed. I get the sense that most of the supply we see now are folks getting slightly more comfortable with an increase in the ETH price and therefore creating more DAI. I am of the opinion that the debt ceiling not being moved might be a good data point to the sort of the leverage effect on curtailing supply. But as I said, that's my data point in this. Anybody else?
# / 19:50 Rune Christensen Yeah, I would say, I would argue against that mainly on the basis that there's really been no expectation set that we would use the debt ceiling to con, like for monetary policy, right? So there is a good chance that this also sets a precedent that in the future we will control the, we'll try to control the price of the debt ceiling.
# / 20:11 Steven Becker Oh, hang on a second. I'm not stipulating that the debt ceiling is used as management policy. I'm looking at the debt ceiling in terms of the collateral and the whole system, the system as a whole. It just so happens that that is an externality that we need to consider.
# / 20:29 Cyrus Younessi So I have a question. When we hiked the fee to two and a half percent, did we see an observable effect at that time in the DAI exchange rate?
# / 20:39 Rune Christensen Yeah, but that probably was more caused by the market's turning around. So the thing is when we increase the fee to two and a half percent, it just coincided with the market's starting to really crash. And then when we slashed a fee to half a percent, it just happened to coincide with when the market's turned around. So unfortunately in both cases we don't have any, like there's too much noise to figure out what the effect of the two percent change was basically. Because it was literally a ridiculously right on the turn of the market. In both cases it was quite absurd, actually, that it ended up pulling out like that.
# / 21:14 Alex Evans Yeah, [crosstalk 00:21:15] experiment was gonna be difficult in this environment. One thing that I have a question about is the debt ceiling right now. Is it still at a hundred?
# / 21:22 Rune Christensen Yes.
# / 21:23 Alex Evans Okay. So in which if were to increase, so let's just say hypothetically we increase by one percent, two 50 basis points increases. We continue to see the markets for ETH do well, people create more CDPs, we hit against the debt ceiling, no more DAI is created. Let's see, maybe we observe the market reacting to that with DAI shooting up above the one dollar peg, so there's a shortage of DAI. There's not enough out there. People maybe want to close or CDPs or do whatever with it. Are we being comfortable if we observed DAI trading above doing, you know, one and a half percent decrease again or does that start to seem erratic? I was always thinking like, okay, let's say we raise one percent, we don't see an observable effect but the debt ceiling comes into effect. 'Cause we're only 10% away at this point, right? At 90 million DAI. What are we comfortable doing at that point?
# / 22:23 Rune Christensen Yeah, so I would say that first of all, I think we should increase the debt ceiling because I don't think that there's, like 100 million dollar number is arbitrary and was really set on technical risk and not on market risk. So I said, and this is kind of like the second thing I think, you know, we were talking about splitting this meeting into two parts, right? Where the second part is focused on the longterm risk parameters. So I think there's plenty of room to increase the debt ceiling. But the second thing is I think it's so incredibly important that we really learn to stabilize DAI with interest rate increases, right?
# / 23:01 Rune Christensen So we could, I mean what we could do is we could set the debt ceiling, we could decrease the debt ceiling to date, right? And we could use that to make sure that there's just no CDP. Like you can completely stifle CDP creation right now and, and use that to kind of like try to put a, put a like tick, get the peg and control. But the problem is then we'll always have this, we'll have even less understanding of how to use the stability fee to control the pig with red.
# / 23:31 Chris Burniske So, one thing that I would throw in there though, given how early we are, right? We're gonna be say a bit more elementary with how we control things. And one interesting thing that I find with the debt ceiling is right now we have native demand for DAI building, right? Really in DeFi I would say, and I think we're going to see more of that. And so while that native demand for DAI is building the debt ceiling is a way, I agree to arbitrarily constrain supply, but it's a way to allow us to not have a DAI supply glut while native demand for DAI is building. So it's, I mean I wouldn't see it as a precedent. I would see it more as a representation of where we are currently if the most important thing is making sure that DAI doesn't break too strongly from its peg.
# / 24:29 Richard Brown I wanna make sure that we're all on the same page too, but the reason why we have a debt ceiling and even if that number was arrived at semi arbitrarily there is reasoning that implies that that ceiling is there because in the case of a rapid downturn and the price of Ethereum, we need to liquidate this collateral, right? And if we start raising that stability, I mean that debt ceiling in order to just give us more breathing room, we need to consider that risk. And Steven, correct me if I'm wrong, but were there number calculated to determine what the actual, like the real liquidity of Ethereum is? The cross exchange-
# / 25:06 Rune Christensen No, so just to give the, give the contact of this story. I actually have the actual context where I just said and it was entirely set based on technical risk. So this number, the debt ceiling number was initially set at 50 million based around the idea that this was like, we were thinking about the worst case scenario where the system would get hacked and at the time we were very uncomfortable with launching a system and that security audits, but single [inaudible 00:25:29] has not been formally verified. So this number is entirely focused on the risk of the system getting hacked essentially. So, and the reason why it's a hundred millions because we started at a 50 million, so that was kind of like the arbitrary number we'd already done once. So we just did the same increase with the same number again, sort of without, it was not based around is there any sort of liquidity risks? It was again, like this is how we don't want an infinite debt ceiling because there's some technical risk in the system getting hacked.
# / 25:58 Rune Christensen In terms of like market debt, and anything like that, there's actually been no real analysis into that done in terms of like how much the absolute maximum is where we have to globally settle the system. But just something that's like, I really wanted to drive home, right? Is that the expectation that has always been set is that the debt ceiling is this kind of like technical barrier that protects against, like either against something like a hack or some sort, right? So to prevent a hacker to be able to just like print infinite DAI. And also just like to prevent some sort of freak accident or like irrational behavior, where also just like a ton of DAI is created out of nowhere very suddenly.
# / 26:39 Rune Christensen But what, like ... The number in terms of, especially in single collateral DAI, like the number of that is sort of like this is a maximum limit of the size of the system we will go to, right? That number is not determined by the debt ceiling in that sense, because that number is really at the top like a question of when are we going to do an emergency shutdown of the system? Because there's no such thing as like we set the debt ceiling here and we just decide that that's how big the system will grow because we can't control that because demand will grow however the hell it wants to grow, right? And the problem is if we set the debt ceiling at this big number, and demand just grows beyond that, that just means we have to do an emergency shutdown. We either have to increase the debt ceiling or do an emergency shut down.
# / 26:58 Rune Christensen There's no such thing as like, we set the debt ceiling at this number and then somehow we control demand by doing that. So that's again, why like the debt ceiling is not really a, it should not be viewed in this in this way, as kind of like this policy instrument or really something that helps us control much of the system. Which again, why I think it's just like it would kinda just be the wrong direction to go to try to suddenly change the, just change that fundamental, you know, like the fundamental strategy of how we control the system. Instead of of of talking about the debt ceiling and so on, we need to talk about large changes in Stability fee. And what I think is the easiest thing to go to is that we say we keep this regular cadence, where we go to another number that we've used before. So two percent.
# / 28:07 Rune Christensen And then we can do a governance poll to basically see whether people want to do a two percent race or not do any change at all, right? And then if it turns out that there are a lot of people who apparently are very confident that there's a lot of more DAI demand coming, then we can kind of like revisit and maybe try to do another change or something like that. But I think it's really critical that we do something now and we do, basically this is what's what's been set up for already, right? That we've set the stage that we're going to do more serious changes in the system and we can even do a governance poll forward and we have all the data on our side and so on. And then it's like ... I mean, in reality I would, if I could just change the stability fee, I think it should be four percent change. At least three percent maybe four percent. And I don't even [inaudible 00:28:57]-
# / 28:57 Richard Brown So I just want to make sure that I haven't lost the thread here because we have two things that are happening here. We have an inventory issue, but we're also rapidly approaching a debt ceiling issue. And if we are going to prioritize a change in the stability fee, I want to make sure that I completely understood that that's also going to solve our debt ceiling issue. If it's not, we can't lose sight of these two conversations, right? And it's just feeling that raising this is going to fix our debt ceiling issue?
# / 29:23 Rune Christensen No, so I'm gonna, this point is super important. I'm going to try ... it's very difficult to make this point. Again, but the thing is the whole, the debt ceiling issue is entirely a demand side issue. So the thing that's scary about the debt ceiling is that if at some point demand catches up with the debt ceiling, the peg breaks upwards, right? 'Cause there's more demand for the amount of DAI that's in circulation and there's no way to generate more DAI 'cause we've hit the debt ceiling. So the stability fee doesn't actually do anything about that either because the Stability fee doesn't affect demand, right? This stability fee only affects supply. But what this also means is that while the supply right now it's very close to the debt ceiling because we are in this situation where the market makers have too much inventory and you know the peg is too low and so on the, the demand is actually not anywhere close to 100 million.
# / 30:14 Rune Christensen So this is also the, this is what Steven was referring to in the sense that what we could do is we could just do a small increase now and just let the supply actually hit the debt ceiling. And then if we just wait and we just let it sit there, the debt ceiling, eventually demand should catch up. But that's like, I basically think these are two completely separate issues and they're like, and they're kind of like the ... The debt ceiling issue is on a technical and it's a technical assessment of whether we are comfortable with increasing the debt ceiling further. And then it's a, it's basically a market depth assessment of whether we are ready to do an emergency shutdown of the system when it reaches 100 million dollars in size or whether we do not want to do an emergency shut down at that point and we want to let the system continue to grow, in which case we increase the debt ceiling.
# / 31:05 Rune Christensen But that is really, that is totally separate to this more fundamental problem of we have to figure out how to get the peg under control with the stability fees. And we really can't escape that. Like there's, have to just do these changes until it works. And without that, the fundamental sort of logic of using governance to control the system just fails, right? So I really don't see it as an option to kind of like, let's say, be afraid of doing a lot stability fee increase and then try to do some trick that's not really how governance is supposed to be done. And how the expectations had been set around it. But rather we just have to do a big increase. And again, yeah, we should, it probably the big increase is four percent or something easily, I could see that be the case.
# / 31:52 Rune Christensen If you look at ... There's this interesting articles comparing mega dot rates to other DeFi rates and how everything else is like in the eight percent range. And at least that will be great, but that will be too much of a shock. However, the two percent changes have been done in the past and what we can do now as you can just set up this expectation that there's going to be this regular cadence of two percent increases until we start seeing an effect. Because if we'd start doing two percent increases, there's definitely going to be an effect at some point. There's just no way that won't happen.
# / 32:24 Richard Brown Alright. Well that's a good place to, I really want to encourage the community to start chiming in. So like I said earlier, we have more confirmation here. We have Matthew as well, he's been quite vocal-
# / 32:36 Cyrus Younessi Can I say a couple of things?
# / 32:36 Richard Brown So obviously we now have Cyrus and I was just about to hand it over to you. So go ahead.
# / 32:42 Cyrus Younessi Yeah, so as I understand it, obviously the stability fee is low and it's led to a lot of cheap credit. A lot of people taking out near interest free loans, which is, you know, with the ETH price being low, it's basically allowed a lot of people to go lever up, you know, at reasonably good rates. Now, I think that by increasing the debt ceiling where, without solving the peg crisis, we're accommodating more of this cheap leverage. And so I think the peg needs to be under control first. At the same time, if we hit the debt ceiling before we fix the peg, then we are, risk conflating are our policy tools and work. We're no longer able to evaluate the effect of our fee increase. If we hit the debt ceiling before we fix the current 98 cent problem, then you know, DAI rises and then we don't really know what the stability fees should be. I would say we have to-
# / 33:50 Richard Brown That's obviously` the best case. Sorry. Yeah, I agree that we shouldn't confound our variables or change two things at once because we were not going to get a clear signal from that. But is there gonna to be a situation where we don't have that luxury because we're popular and we're cheap? But you obviously said that were out competing everybody as a credit facility and that might be a problem.
# / 34:06 Cyrus Younessi Right. So I mean I agree with Rune that we should increase the fee somewhat aggressively so that we can kind of fix the 98 cent problem before we hit the debt ceiling. But yeah, if we hit the debt ceiling first, then we're gonna to have to increase it so that we can kind of see what the natural market price of DAI is so we can make further policy changes. Is that correct?
# / 34:32 Matthew Rabinowitz Yeah, Rich, what you were saying a moment ago and, for me personally I kind of dispute the idea that you shouldn't do two things at the same time. I mean I 100% agree with what you're just saying, Cyrus, that you can't have a scenario where you hit your debt ceiling, what you were mentioning earlier about about hitting the debt ceiling. It's no different than lifting up a bucket of water and then dropping it, trying to figure out where it's going to splash. You know, you just, you always want to make sure that thing gets pushed 20% out in the future more than, way more than we're not going to hit it unless somebody takes out some massive CDP. That said, you know, we're in the scenario, we're not in an efficient market, right? I mean, that's really important component. It's rapidly changing. So if we need to increase the rates more than 50 BIPs, then do it.
# / 35:16 Richard Brown Yeah, that's an interesting perspective because this, I've actually given the same speech to somebody in Reddit recently that we're not dealing with the FED here. We're dealing with an enormously a small micro crypto economy that the influences and the confounding variables that control it are completely misunderstood from everybody. So aggressive action is important. I guess the trap to fall into from a technical perspective is you always wanna isolate variables. Perhaps that's not a best practice when it comes to finance though.
# / 35:49 Alex Evans Can I ask a question?
# / 35:51 Rune Christensen Sorry, I just want to make one quick point. Okay. Yeah, go ahead ask first.
# / 35:55 Alex Evans Yeah, so my question was around how the debt ceiling is enforced? Is it, am I understanding is correct, Rune, that's not actually, is it actually enforced that this smart contract way? In other words, let's say this like we're 99.999 or whatever, and I do a [dot draw 00:36:09] transaction to pull out some DAI [crosstalk 00:36:12]. Yeah, but I will create DAI.
# / 36:16 Chris Padovano Yeah, it's happened before, too.
# / 36:17 Speaker 5 So it's only really enforced by global settlement? It's not ... So we can exceed the, and then the question is like the market calls our bluff and are we actually going to go globally settle the system or increase it? So it doesn't sound like the debt ceiling is at all an option here, right?
# / 36:32 Rune Christensen So let me, I think in need to explain a little bit more 'cause I think I may have confused a little bit. So there's a lot of dynamics around the debt ceiling, right? And first of all, it's true that, yeah, once we hit it, it just programmatically means you cannot draw any more DAI until someone else pays down the CDP. So that's one thing. And another thing is, I want to make clear is that if we actually hit a hundred, like if we go to a hundred million DAI tomorrow and, you know, we hit the debt ceiling and the DAI peg is still broken and so on, then absolutely we should not increase it. But the thing is that if another 10 million DAI ... Like the thing is we're at this tipping point right now. We're kind of standing pretty much at an edge, right?
# / 37:21 Rune Christensen And as we could hear from Joe, his inventory is totally full, right? He can't, he has no more capital to buy more DAI with. And there's a lot of other traders out there who are in the same situation. They're all trying to get rid of the DAI. At this point in time, if we saw another 10 million DAI getting basically dumped onto the market, it would really, like it would be an even bigger, it would be almost like disaster at that point, right? Because then it would really be like serious loss of faith in the system. So I'm definitely not ... That's one thing to consider, right? And the other thing is it's not at the moment that the supply hits 100 million debt ceiling and you can no longer draw anymore DAI, that suddenly there's a chance that the peg will break upwards.
# / 38:01 Rune Christensen Like the way you should actually think of it, it's kind of like there's these two kind of like aggregate demand and aggregate supply, right? So like right now, supplies at 90 million. In the foundation prop trading desk inventory, there's something like 15 million DAI or something, right? So at least like demand aquatic, organic demand is at least like 15 million below the 90 million supply number, right? And in reality, it's probably even less because it's a bunch of other market makers out there who also, you know, after sitting with a ton of DAI they want to get rid of, but no one wants to buy it, right? So once the debt ... The thing is once supply hits 100 million, that doesn't cause the price increase, that actually only happens once. Entire demand catches all the way up and then does that, right?
# / 38:51 Rune Christensen So aggregate demand actually it has to exceed 100 million before there's any chance of the peg breaking upwards. So it's definitely not an issue that, you know, like we have to be, we don't have to, debt ceiling's not this like this ticking bomb waiting to happen in a sense that the moment it's hit, something bad happens. It's only when demand catches up. And the good news is that demand is right now the thing that's very low compared to supply. But the problem is that you could, like the reason why I'm against using the debt ceiling as a policy tool is because it's kind of this ... It's not a long, it's not really a longterm solution to some extent, right? Or like, because it doesn't give us an indication of where the right, like what the right stability fee should be in the system.
# / 39:36 Rune Christensen So the problem is that even if we, like let's say we decreased the debt ceiling right now, we would still kind of be in a situation where it's just too cheap and there's just like, it would be this weird instead of it being, you know, like the market was kind of set this weird rate of like the waiting in line to get us out of some free debt ceiling. But anyway, but what we need to find is a better and more realistic stability fee that reflects basically the supply and demand in the market. And I think we just like, I mean, we could theoretically try to increase the debt ceiling or solve the problem with by decreasing debt ceiling or something like that. But it just takes us further away from the fundamental problem that must be solved anyway no matter what. And that really is kind of like, without being able to have a handle of that problem, there's just nothing that we can really get anything done. So-
# / 40:30 Richard Brown Okay, Sorry, Rune. We're at the 45 minute mark. I mean 15 minute left market. And I want to make sure that we leave these calls with a clear understanding of what it is we've discussed and what the next steps are. So I want to take this opportunity to kind of revise or go through the agenda questions that we identified at the outset and ensure that we've actually come to some conclusions on these things and figure out what it is we're going to do with the governance polling next. I think. So the first question on their agenda was, was the last change effective? And I'm going to give everybody an opportunity to correct me if I'm wrong, but the obviously, at least in my mind, no it wasn't effective. And so that leads us to believe that this cadence that we've been on is not moving the needle, it's not effecting the market and it's not acting as far as guidance.
# / 41:14 Richard Brown So we need to figure out how to make a bigger splash, I think. The second question we had in our agenda was do we have enough data to identify a trend? I think from my perspective, and I would love somebody to pipe up and correct me, I don't feel that we're there yet. And Joe, maybe you have some insight? But do we feel that we have a clear trend that we can look at here? Are we still sort of looking for signal in the noise?
# / 41:42 Joe Quintillian I don't see anything, no change at all. So that's why I was [inaudible 00:41:46]-
# / 41:46 Richard Brown Okay, cool. Yeah, I just wanna make sure I didn't misunderstand. So the third question on our agenda was when is the next change going to happen? And, Rune, you spoke to that earlier, that the cadence that we have seems to be all right. You mentioned biweekly, though. Do you mean like every, every two weeks, twice a week, which biweekly he referring to?
# / 42:09 Rune Christensen Yeah, I think what we got to do is every other week we have a governance poll and then every other week we have an executive vote. And we should like, it should be kind of like separate... But the fact is we need to get something done. We need to dramatically increase the stability fee probably by more than two percent but I think if we set it, if we get it, this cadence at a two percent increases, we should be in good shape too at some point hit them. I mean I really think we should try to hitting the point where people start closing CDPS. That's actually unfortunately the place we need to get to it.
# / 42:40 Richard Brown I agree. Go head-
# / 42:43 Chris Burniske So on the stability fee point for a second, I think it would be helpful to think of it in the context of the overall market and Maker as a credit facility, right? Because we want people to close out their CDPs or to go to other places for credit, then we need to make at least for now Maker no longer say the lowest cost credit facility out there. And so it might be helpful instead of thinking of it in isolation, I'm thinking of it relative to the other credit facilities in the market so that we can play that dynamic and maybe people will go to other places to get their leverage or their credit or whatever it may be. And so therefore they'll close out their CDPs or they won't create more.
# / 43:23 Richard Brown Yeah. If the assumption is we're sharing the same customer base, I guess, as the rest of the collateralized, they're a credit facility markets, then we need to approach Compounds rates, I guess is probably the lowest one out there. So that that should factor into the step that we're going to make or the number of basis points we're going to increase. So I guess the next question in my mind is how do we determine what that governance poll is going to look like that we kick off? I'm concerned that we'd be pressured into making that determination in this call. So is it feasible that we take this discussion to Reddit and then we spend the next, you know, 24 hours debating what that poll would look like? Does anybody have any suggestions about that or are we fine with just like kind of in this call deciding that, you know, two or four it's going to be the next governance poll and then we'll see what the reception is to that?
# / 44:16 Rune Christensen I think we should, let's have it, I think it makes a lot of sense to have a discussion on Reddit about it, right? But I think the starting point should be like we've tried in the past, we've done zero point five percent changes in the past and we've got two percent changes in the past, right? So I think we can't like, I think we should basically see is there arguments for why it should be something different than two percent increase because most, what I expect is that no one has any idea of what it should be. The only thing that we have sort of an idea of is that it should be more than what it currently is. So it makes sense to kind of fold back and then just something that's happened before. Just because again, it's like, yeah, I mean it's going to basically be a lot of change for the community, right? So trying to sort of stick just to things that at least have happened before, I think is ideal. So-
# / 45:10 Richard Brown Okay, so we'll take that discussion to Reddit then. The last major agenda item that we had here was, it's really open ended, but it's like, what are we going to do about the debt ceiling? And I'm not entirely sure that I've come back with a summary here. So is the idea that it's our hope that aggressive changes in the stability fee will obviate the need to consider the debt ceiling problem or should we ... Well, actually I gotta throw some of my own suggestion here, sort of a recap. So it feels like we need some data here because arbitrary is a scary word for me. So would it behoove us to actually get some hard data by the next call about exactly what a debt ceiling the market would support and our ecosystem would support and maybe use that to inform this discussion in the future?
# / 45:58 Michael Dunwort If you do it, Rune said if you raise the rates significantly, you're now going to force a lot of upward pressure on buying DAI so and people can pay back their CDPs and get out of the hole from paying a six percent fee. So that's obviously gonna lift it a lot on like in an organic way, which should lower the proximity to the debt ceiling in a more natural way. But I think like that range, like what Rune is suggesting it's such a, it's like multi variance split testing and we're all just throwing darts at, you know, blind folded. There's not enough like statistical significance anywhere to sort of poke its head out about what is the indicating factor.
# / 46:39 Michael Dunwort The probably the most, the biggest indicator that like that you could make a change on is not going to be duration based, which is what we're looking at, you know, periodic changes. Where when time is not what's affecting the metric, it's activity and we've got to discover what that activity is. But in the short, like if we are doing that, I think Rune is spot on that you need to close the range. So all right, we went all the way down to point five percent. Okay, it's not there. Let's go all the way up to five percent or whatever it is, four percent. You get a more healthy indicator. And the byproduct of raising it means you're organically going to push things upwards because people are going to pay back their CDPs. And-
# / 47:26 Richard Brown Yeah, I think that's always the anticipated result. I think that we should also consider it too, that there's going to be some fallout here. So we need to communicate this to the rest of the community that like, hey, surprise, your dirt cheap credit facility is now no longer dirt cheap, right?
# / 47:40 Michael Dunwort That's true and just, I think it's like, I totally agree. One thing I would say that I feel like it, everything is still, you know, everyone's learning multi collateral DAI. This is year one of being public. We're just going to get to a being public with DAI. It's a massive learning curve and that the lessons are only going to get more expensive as the debt ceiling rises, as multi cal, like the stakes are going to get higher and higher. So if anyone is reluctant, you know, just consider that trying this one, it's a 200 million dollar debt ceiling and the markets are more aggressive and different. Consider that. Sorry for the rant. Thanks.
# / 48:24 Richard Brown No, that's good insight. So I'd wanna to make sure that that is sort of representative. So is the general feeling in the room here, for now, that stability fee, short sharp shock, potentially plan for for the next poll and then the next executive vote is going to be the next step before we start considering anything more drastic?
# / 48:48 Rune Christensen I just want to reiterate what I've already said about the ceiling, but like we control the way we equalize supply demand should be with the stability feet led with a debt ceiling, right? And the thing is that if we accept that we are going to, we're going to align supply and demand of the system using a stability fee, that makes a debt ceiling ... Like setting something like, let's say saying that 100 million is our absolute limit in terms of debt ceiling, is the same as saying that if the system reaches 100 million in size, we're going to do an emergency shutdown. So it's just very important that that's the frame for gathering data and sort of making the decision is based around, it's not around like this is the size we want the system to take and then we can somehow control it and make sure it stays at that size because that's not possible.
# / 49:36 Rune Christensen There's only possibility is to shut it down when it reaches that size. So it's basically, it's, it's like, I mean, I don't see it as being dangerous. I just seen as like a waste of time because a lot of people would probably argue, let's keep it 100 million right now. Which I agree with because of the peg is broken and so on, right? But probably once they realized that actually arguing that it's the same as arguing that then if demand hits 100 million, then we shut down the system. And then at that stage it thoughts like the significance of a decision like that has to really be probably considered, right? That actually what you're deciding is you're saying this is where we're going to shut the system down.
# / 50:16 Steven Becker So to that point, which I agree with, that point has a presumption that we are at a sort of robust point, we are at a critical mass where a debt ceiling does take on that very technical definition, but in the manner in a temporal form in the manner of actually considering where we are now to get into where we need to be. There could be a suggestion to the point that's the debt ceiling takes on more than that. It has more to do with the economic constructs and how we bootstrap it as well as the liquidity risks that we facing with respect to just the collateral and how it performs in the economy that we are operating in as well. So, you know, to that end, I get what you're saying with respect to what the debt ceiling should be seen as, but in terms of where we are now, it may take on a broader perspective or broader characteristic. And are we saying that we shouldn't allow for the product characteristic because it can, whilst bootstrapping, get into critical mass help us? Or is it a case of saying we're just going to, we're going to set an undue precedent that we're not going to be able to get away from?
# / 51:33 Rune Christensen I think, from, what I think is the most upon is that we can't be complacent around learning to use the stability for you to stabilize the peg. So, I mean, so I didn't ask ... Probably the easiest is just be like, well let's not even worry about the debt ceiling until we fixed the peg. Which I kind of, like an even if we hit and then if we hit the debt ceiling, which would be really bad and we, hopefully that doesn't happen right then we will keep it there until again, we fixed the peg and only once to peg has been fixed do we start worrying about increasing the debt ceiling. But just once again it's just like, it's very dangerous or not dan but it's more pointless to start discussing 100 million debt ceiling as sort of an absolute target, unless people are willing to commit to doing an emergency shut down once the system reaches that size.
# / 52:19 Richard Brown Alright. So we're dangerously close to the top of the hour, and I know a lot of people have hard stops. So what I want to do with this call, we've identified a lot of really interesting questions, we had a lot of very interesting suggestions, but obviously the debate needs to pile beyond the confines of this call. So I discussed earlier, actually before we started recording, I discussed that we're gonna start, we have a process to get transcripts generated for these calls within 24 hours. We have a summary, some team members who have graciously stepped up to summarize some of the most important points. So I'm going to take those two resources, combined them together, start a Reddit post, and we can continue this conversation specifically from this call. So we'll go over it, I'll outline the agenda items, I'll outline some of the major takeaways that we've determined and then we'll continue the discussion there about what the governance poll is going to look like and the timing on that and started tossing around ideas for a potential new stability fee. Does that sound alright-
# / 53:19 Chris Burniske Real quick, before we move to the Reddit discussion, just one thing from a community member's perspective. I fully agree with all of the conclusions you guys are are making here. And I agree, Rune, that the stability fee rate should be more dramatic but conveying this in plain English to the broader community as to why that's needed when they go on Coinmarketcap and see that DAI is that one point oh one, that's what most people do. Just making sure that that is conveyed clearly as to why this is required I think is going to be really important moving forward.
# / 53:52 Richard Brown Yeah, that's an excellent point. And that's this, I kind of touched on it earlier when I was raised the concern that we need to warn people that were about to compete ourselves out of the market for safety [crosstalk 00:54:01] need to understand why that is-
# / 54:05 Steven Becker Well actually the underlying structure of that is first agreeing on what the DAI exchange policy rate looks like.
# / 54:08 Rune Christensen Yeah, and I think there's these three points, right? There's the implied rate of decentralized exchanges. There is the USDC rate on Coinbase and there's market maker inventory levels and all of these seem to be pointing in the same direction. And then we've also concluded that a small change has no effect. So that's why we should go to a larger change. One last thing I want to say before we leave right is I think we should take the governance discussion to ... Like this was actually an old Subreddit that was made ages ago, but it's "MKRgov" (r/mkrgov) so that we actually have a more, because I'm afraid that people don't really have a like ... I mean I think we should do kind of like cross post to MakerDAO (r/makerdao) but ultimately try to gather the conversation like the most serious conversation in one spot. Because otherwise I'm afraid that, you know, it will not be as easy to kind of like stay focused on that because MKR, I mean I'm probably going to put in here and chat, right?
# / 55:02 Richard Brown Let's play with that idea and see if we can, this is part of a larger discussion we've been having with the governance team about venues where we have debates, how we formalize those discussions on whether we break away now, break away later. So let's talk about it after the call, Rune, and we'll figure out what the best location is for it.
# / 55:20 Rune Christensen Yeah, in general I think at MakerDAO (r/makerdao), I mean it's awesome, right? But MakerDAO (r/makerdao) gotten a little bit noisy recently, I feel so this would definitely be a good opportunity to think.
# / 55:28 Richard Brown Alright. So let's stick a fork in it there. And this was a very energetic meeting. So I'm super happy about that. I'll send out or keep an eye, actually we don't have a push notification system in MakerDAO yet, which we're going to need sooner or later. But I'll keep an eye on the subreddit for a notification about this debate and potential information about where that debate will happen if it's not in our subreddit, and then we can continue on and figure out what the next steps are. Thanks everybody for taking the time. Thanks for all your insights and I'll talk to you next week. Thanks Rune. Thanks Steven. Thanks Rune.
# / 56:00 Michael Dunwort Thank you.
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