Redemption Pool: a possible additional use case for DLLR?

General Commons
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In the Zero DLLR Risk meetings we were asked to look for additional use cases for DLLR.

What if we would create a Redemption Pool?

The Redemption Pool makes arbitrage profits on redemptions. Users can deposit DLLR in the Redempion Pool, sharing in the arbitrage profits the Pool makes.

When the amount of redemptions is high, the pool makes a lot of profit, soaking up DLLR, creating upward pressure on the price of DLLR, decreasing the amount of redemptions. If the amount of redemptions decreases again, DLLR will leave the pool, creating downward pressure on the price of DLLR and increasing amount of redemptions again, etc etc

A counterbalancing effect, until an equilibrium is found.

As the pool is competing with third party arbitrage bots, we need to give the pool an advantage so they can make significant profits on each redemptions and soak up a significant amount of DLLR. If we would not do this, the amount of profit per redemptions is only small, the pool would not soak up a lot of DLLR and the counterbalancing effect is lost.

Below is a quick highover calculation.

Suppose the following:-
-redemption fee is set at 0,75%;
-the fee for the Redempion Pool is set on 0%, so per redemption, the pool is making appr 0,75% profit;
-the required rate of return of DLLR providers to the Redemption pool is 3%

SCENARIO A: REDEMPTION RATE PER WEEK IS 1%
Number of LC’s 100
Amount per LC 10.000

Redemption rate per week 1% (1 Lines of Credit out of 100 gets redeemed per week)
Profit per transaction 0,75%
Required rate of return 3,00%

Total annualised profit 3.900 (0,75% x 1% x 100 x 10.000 x 52 weeks)
DLLR in Pool 130.000 (3.900 / 0,03)
% of total 13,0% (130.000 / 100 x 10.000)

SCENARIO B: REDEMPTION RATE PER WEEK IS 2%
Number of LC’s 100
Amount per LC 10.000

Redemption rate per week 2% (2 Lines of Credit out of 100 gets redeemed per week)
Profit per transaction 0,75%
Required rate of return 3,00%

Total annualised profit 7.800
DLLR in Pool 260.000
% of total 26,0%

SCENARIO C: REDEMPTION RATE PER WEEK IS 3%
Number of LC’s 100
Amount per LC 10.000

Redemption rate per week 3% (3 Lines of Credit out of 100 gets redeemed per week)
Profit per transaction 0,75%
Required rate of return 3,00%

Total annualised profit 11.700
DLLR in Pool 390.000
% of total 39,0%

From this quick highover calculation, it shows that if redemptions increase, the DLLR soaked up in the pool rises significantly.

Using the data from Zero Analytics, in the first two weeks in January: 1-14 January.
-total redemptions 237.045, so per week 118.522;
-average amount of ZUSD in this period: 6.236.707;
-suppose an arbitrage profit of 0,75%:
a) arbitrage profit per week 889;
b) anualised profit 46.223.
-if required rate of return of DLLR depositors is 3%:-
a) this would justify an amount of 46.223 / 0,03 = 1.540.786 in the Redemption Pool;
b) 1.540.786 / 6.236.707 = 24,7% of total DLLR.

I don’t know if this is at all technical feasible (arbitrage bot, selling BTC again, etc), but maybe something like this could be an interesting use case for DLLR.

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Very interesting proposal.

It probably doesn’t make sense, but couldn’t the DLLR being purchased by the Exchequer to defend the peg be used for that purpose?

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I think, just like each holder of DLLR, Exchequer can also put their DLLR in the Redemption Pool and share in the profits of the pool if they wanted to.

I just hope the pool attracts other users who want to hold and put DLLR in the pool, so Exchequer isn’t forced to use their funds to defend the peg.

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Thanks @Bjorn - interesting idea. I’d like to understand where the 0.75% profit is coming from.

When someone redeem they are burning ZUSD and redeeming BTC. How do DLLR deposits provide this functionality?
Can you also define what an LC is? What does it refer to?
Finally, can you help me understand why the 0.75% redemption fee implies 0.75% profit?

Thanks.

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My reasoning was as follows:-
-redemptions will take place when the price of DLLR is at a certain point below 1 USD, so users or bots can make a positive arbitrage profit by redeeming DLLR.

If there are multiple users/bots competing, the arbitrage profit will be small, because as soon as a positive arbitrage profit can be made, one of the users/bots will immediately make the redemption.

As the pool competes with these other users/bots, we should give the pool an advantage to other users/bots. Otherwise the arbitrage profit per redemption for the pool will also be very small, and it won’t soak in a lot of DLLR.

That’s the reason I assumed we will give the pool an advantage by charging the pool 0% redemption fee, whereas other users/bots have to pay the regular redemption fee (I assumed it to be 0,75%).

With a regular redemption fee of 0,75% and a redemption fee of 0% for the Redemption Pool, the pool will make 0,75% arbitrage profit per redemption, by redeeming just before the price of DLLR drops to the point other users/bots could make a small arbitrage profit.

So I reasoned, the discount the pool gets on the redemption fee will be equal to the arbitrage profit it makes.

The size of the Redemption Pool can be defined by:-

Amount of DLLR in Redemption Pool = [DISC / RR] x RED
DISC = discount the Redemption Pool receives (equal to the arbitrage profit per redemption)
RR = required yearly rate of return the DLLR providers to the Redemption Pool demand.
RED = annualized amount of redemptions

I don’t know what the best set of parameters and realistic assumptions would be. The community should decide on that.

If we take the data from jan 2023 until feb 2023:-
-annualized amount of redemptions in this period was 4.874.550 ZUSD
(info zerostatistics: cumulative redemptions 1 jan 2023 was 222.716 ZUSD, on 28 feb it was 1.035.141 ZUSD, so total redemptions in jan – feb was 812.425 ZUSD, annualized 4.874.550 ZUSD);
-assuming a redemption fee of 0,75%;
-assuming a discount for the Redemption Pool of 0,75% (Redemption Pool is paying 0% redemption fee);
-assuming a required annual rate of return by DLLR providers is 3,0%.

Amount of DLLR in Redemption Pool = [ 0,75% / 3,0% ] x 4.874.550 = 1.218.637 DLLR

As the average amount of ZUSD in circulation this period was 6.283.222 ZUSD (info zerostatistics: 1 jan 2023 5.953.441 ZUSD, 28 feb 2023 6.613.004 ZUSD), this would be appr. 19,4% of the total amount of ZUSD in circulation.

The larger the amount of redemptions, and the higher the discount for the Redemption Pool, the more DLLR is being soaked in by the Pool, likely lowering the amount of redemptions again, etc etc.

Basically, the discount for the Redemption Pool, is transferring redemption fees from the protocol to the Redemption Pool.

I can imagine the Redemption Pool is complimentary to the Stability Pool.
In a situation with a high amount of redemptions, the Redemption Pool will soak in a lot of DLLR, however the Stability Pool will likely not, as it is likely that users will increase their collateral ratio to prefent being redeemed and thus the amount of liquidations profits will be low. In a situation with a low amount of redemptions, the Redemption Pool will not soak in a lot of DLLR, however the Stability Pool likely will, as in this situation, users will feel more comfortable to lower their collateral ratio and the amount of liquidations likely will increase.

To your other questions:-
-LC = Line of Credit
-DLLR will first have to be transferred to ZUSD before it is possible to redeem. This is the same for every other user/bot.

As I have a financial background, I can only contribute with conceptual ideas, I don’t know if the above is technically possible or too complicated to implement.

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