This all is good on paper but sounds like a huge complication to the message. From a communication and marketing standpoint ZERO should be as easy to understand as possible with as little hurdles to everyone having a use case as possible. That can be saylor holding his 1bn in bitcoin for 20 years or the street kid in Africa wanting to buy groceries from the bitcoin savings of his tiny family business paying back his loan the next week from a side gig he got paid in DoLLaR. All with a fixed small upfront fee for the service. Thats how the marketing get to me currently and its why we see so much interest. Easy in easy out.
Every proposition above takes exactly that away. I understand there seems to be a problem with maintaining the peg and redemption is a huge issue especially when BTC rises and people are left in the dust holding currently nearly useless ZUSD. So I understand to little of the underlaying problem but making ZERO more complicated is not a solution. Putting fees in the end with cryptic hard to understand terms is not a solution. Id even say raise the origination fee to 1% If there needs to be more revenue if that is the problem. Make redemptions as complicated as possible or put a fee on redemptions (scaling our whatever is needed) as this is not a feature a normal Loan holder would need to use. The general structure of ZERO as it stands for an everyday Loan holder should not be different then it is now. Clear, easy to communicate, no research needed. Put 110%+ rBTC in - pay 0.5% - get 100%DLLR back out buy something - pay back to get your bitcoin back based on bittis current price.
I’m leaning this direction as well. We should minimize human governance and manual tweaking of protocol, where possible.
BBF Dynamic Fees: We should see how effective BabelFish’s dynamic fees on stablecoin swaps is before we tinker with Zero core mechanics.
BaseRate: If BBF dynamic fees is in-effective, then I’d prefer we adjust the pre-existing BaseRate algorithm in Zero. Zero already has built in mechanics which increase origination and redemption fees when things get over-heated. We can steepen these calculations so they adjust more rapidly. An algorithmic adjustment is preferred over us manually guessing what the proper origination and fees are.
I genuinely believe these two features can be a reasonable remedy for our issues.
Other Considerations:
Our adoption strategy for Zero is centered around Zero SDK which allowing third parties to integrate Zero. If we add origination fees to the base protocol and start tweaking with the mechanics it squeezes their margins, reduces their economic incentive and gives them more uncertainty about building on Zero. We should prioritize growth and adoption via third parties.
The primary downside to not adding origination fees is we’re missing a big opportunity to add revenue to Bitocracy. We need to maximize revenue to stakers, which increases SOV price which makes everyone happy but more importantly asymmetrically benefits Exchequer’s treasury. This gives us more run-way and ability to incentivize other actions through liquidity mining. I acknowledge this could be a big missed opportunity.
As i understand, your proposing to change it to a variable (who decides, and when to change?) rate that is now payed at the end, vs the beginning? and could you adjust (add/remove collateral, adjust debt, or take more debt) without paying the fee? is this to encourage people to at least maintain some exposure to a line of credit, but could it be gotten around by maintaining a minimum amount of credit/collateral -as of right now the #2 “risky” line of credit has 92.9 rBTC locked up, if they adjusted it down by paying off loan to .01, they would still not have to pay the 12% exit fee because they are maintaining loan exposure. It would not encourage people to move freely in and out of if i understand correctly? Doesn’t the marketing behind Zero kind of give the impression of - no interest. While its not compounding, it still feels like a type of interest payment not knowing how much you are going to have to pay at the end vs. knowing, ok, i have paid the fee up front, I am free to do what i want now.
I agree that instituting a penalty for LOC closure would perhaps complicate Zero from a marketing and adoption standpoint—but only slightly. Early repayment fees are, after all, a fixture among loans of this type the world-over, and communicating that to prospective borrowers could yet be as straightforward as a widget with ‘origination fee (%)’ at one end, ‘early repayment fee (%}’ at the other, and a slider for ‘minimum duration’ linking the two.
Apart from which; Sovryn already operates a ‘traditional’ service lending XUSD for rBTC at only 0.08% origination but variable APY. In choosing Zero over the former, one therefore assumes a longer (or indefinite) time-horizon by default; and this has further inclined me towards the view that deliberately repaying an interest-free LOC, rather than adding collateral, is an act of capitulation philosophically-misaligned to Zero’s use-case, not only as a trailblazing tool for monetary self-sovereignty—which the revised fee-model still accords with—but moreover, as a mechanism for on-boarding long-term, high-value institutional stakeholders, taking their BTC off the open market, and keeping bitcoin-backed Sovryn-dollars in circulation.
At any rate, an overriding concern here is that whilst a repayment-fee (or similar such lever) could, if implemented, still expand or contract in response to market conditions, the window-of-opportunity to augment and stress-test smart-contract functionality is prior to adoption; not once said contract already holds 10,000 BTC.
The way it works is that if ZUSD value goes above $1.10, then anyone can borrow ZUSD at 110% collateral ratio, forfeit the collateral, and sell the ZUSD for more than $1.10 to make a profit. This arbitrage will cap the value of ZUSD at 110%.
You have to take the origination fee into account here, too. Re-doing your math:
Assumptions
Origination fee = 0.5%
Minimum collateral ratio = 110%
For there to be an arb gap, the (max borrow amount * ZUSD price) must be > 1.10. We can calculate max borrow amount for each 1.10 USD worth of collateral at an origination fee rate of 0.5% using this formula, which gives us a max borrow amount of 0.99502.. ZUSD. So the arb opp exists when the ZUSD price is ≥1.1055 (math).
Applying the same logic here:
But what if it costs 12% to take out a ZUSD loan? The required collateral is 110% of total ZUSD debt. But total ZUSD debt = 112% of issued ZUSD, and the arbitrageur only gets to sell the issued ZUSD. So cost of the loan = 1.10 (total ZUSD) = 1.10 (1.12 issued ZUSD) = 1.232 issued ZUSD. That means the collateral cost is 123.2% to defend the peg ceiling.
Your final result is correct. Breaking it down using my same formulas above:
Assumptions
Origination fee = 12%
Minimum collateral ratio = 110%
Again, for there to be an arb gap, the (max borrow amount * ZUSD price) must be > 1.10. We can calculate max borrow amount for each 1.10 USD worth of collateral at an origination fee rate of 12% using this formula, which gives us a max borrow amount of 0.89285.. ZUSD. So the arb gap exists when the ZUSD price is ≥1.232 (math). Let’s call this the “ZUSD arb price”.
Now we have a so-called stablecoin that is pegged between $1 and $1.232. That loose peg directly reduces the usefulness and therefore the demand for ZUSD.
I expect that most users will not interface with ZUSD directly, and those that do (e.g. stability pool depositors) aren’t directly affected by the fiat exchange rate (if anything, they’re happy to sell their ZUSD for more BTC than they would normally receive if liquidations occurred at the same price level). Most users will interface with DLLR, of which ZUSD is only one component. If the price of DLLR goes up higher than the ZUSD arb price, then there’s an incentive to borrow ZUSD and arb the price down to the ZUSD arb price. After that, there is still another option to continue arbing down to the peg target of 1 USD: use Money On Chain to convert BTC into DOC, use Mynt to convert DOC into DLLR, then sell the DLLR into the market at a profit, rinse and repeat until the arb gap is closed.
Money On Chain cannot absorb an infinite amount of BTC so this has its limits. For example currently the max amount of DOC that can be minted is around 8.3 million DOC.
This figure can be found under “DOC - Available to mint” here.)
But it is important to know that this is an option if the DLLR peg breaks upward.
GENIUS!!! Prolly one of the best ideas I have ever seen here. I would actually show up to these meetings. Plus this can generate TRUE viral tweets if amplified by the right influencers. Building a shadow FOMC by Sovryn Individuals…Love it mate.
Agree. Increase the fee at the beginning to that SOV stakers have a reason to stay. Mature people will still consider a 2-3% or 4.9% origination fee as favourable to anything else if the actual interest is indeed ZERO and infinitely. because of compounding effects of any competitor even if they only charge 0.1%
Yes to increase in base rate. We always want to be a lot less compared to FIAT-backed loans, but if they eventually go to solid two digits bc of inflation, we’d leave so much money on the table.
Is there a way to offer a cheaper rate to stakers? It feels like a good idea from a token marketing standpoint, and it is surely a sign of goodwill to stakers.
Maybe like wallets that have greater than (X, say 50,000) of VP get a 0.5% discount, and wallets that have greater than (Y, say 100,000) vp get 1% discount.
I dont know how complicated this would be… or if its even viable, but it sounds nice, plus us stakers could use zero cheaper. Maybe im being Biased.
I was really looking forward to cheap loans… which 2.5% aint bad, but its more than 0.5%
I’d vote yes to an increase in the deferred fee, and I’d like the fee to be a little higher, more like 3/4%; however, I’d also like the current formula of origination fee to remain as is for users who currently have an open LoC.
That seems like a fair way of rewarding current users of the Zero protocol who helped it get to where it is today. Beyond that, a discount to the deferred fee could be applied if users of Zero who stake SOV tokens. With this method, a user does not need to utilise Sov to use Zero, but by doing so, they could get a better deal.
Nexo is a good example here as they use a sliding scale of discount, which is applied as a ratio of Nexo tokens to the amount borrowed. The same thesis could be applied to creating a DLLR savings account, stake SOV and receive a greater interest rate on DLLR savings.
I like that this would give SOV more utility e.g. feels like being a member of a country club. Radiant Capital is introducing this ‘meme’ in their upcoming v2 and I perceive them as leading innovation and being highly trustworthy in the Arbitrum space. It’s in line with the origin story of Sovryn isbeing founded on the mantra that Ethereum is out testnet…
I like your DLLR account discount model for stakers that this would give SOV more utility e.g. feels like being a member of a country club. Radiant Capital is introducing this ‘meme’ in their upcoming v2 and I perceive them as leading innovation and being highly trustworthy in the Arbitrum space. It’s in line with the origin story of Sovryn isbeing founded on the mantra that Ethereum is out testnet…
A few clarifications that I see popping up in several comments in the thread:
The deferred fee is the same as the origination fee. The mechanics are already a deferred fee. The proposal is one of branding.
Any changes to the origination/deferred fee will only impact LoC borrowing that occurs after the change. Existing LoCs are unaffected.
As @666SOV suggests, these changes would require a SIP. So indeed having scheduled meetings would make a lot of sense.
Some people have also suggested giving SOV stakers a discount. This is something we have been examining but would require extra dev work and testing, so is not something that will be deployable very soon.
I’m just seeking clarification on your clarification regarding item 2, if I may.
Any changes to the origination/deferred fee will only impact LoC borrowing that occurs after the change. Existing LoCs are unaffected.
Does this mean that:
A) Existing LoC users that choose to adjust (increase) their borrowing after the change is implemented will still be charged the current rate starting at 0.5%?
Or
B) All LoC borrowing, regardless of brand new or increasing borrowing levels of existing LoCs, will be charged the new rate starting at 2.5%.
