SIP-0071: Free Zero, Free Markets, Free Individuals

SIP-0071: Free Zero, Free Markets, Free Individuals

Summary

If approved, this Proposal will reopen ZUSD minting in Zero protocol with a 13% origination fee floor.

The goal is to bring back a functional two-sided market,

restore user confidence in the system, and generate more revenue for Bitocracy stakers.

Background

Four months ago, the origination fee floor of Zero Protocol was raised to 99% with SIP-0066.

Essentially, Bitocracy paused the minting of ZUSD to maintain the DLLR peg

and minimize ZUSD redemptions.

During that four-month time period, several key observations were made:

  • The total supply of ZUSD decreased from approximately 6.69 million to 4.58 million.

  • Approximately 1 million ZUSD redemptions took place.

  • Around 1.08 million ZUSD credit repayments were made.

  • The total collateral ratio increased from around 372% to 530%.

  • The 90-day moving average daily revenue dropped from 0.03667 BTC to 0.00938 BTC,

a reduction of approximately 74.4%.

Motivation

We see that the demand and supply market of ZUSD has reached an equilibrium point.

There were only around 50K ZUSD redemptions that took place in November.

The excess ZUSD supply has been removed.

The current 14% interest rate of DLLR also indicates strong demand.

Therefore, it is a solid time to restore a functional two-sided market where

individuals can take the trade of minting new ZUSD with the risk of getting redeemed.

All Defi Protocols are confidence games. Bitocracy is a private entity that issues private currencies backed by BTC.

Therefore, it is important to consider public optics and present the platform as reliable and trustworthy.

Reopening ZUSD minting will generate more revenue for Bitocracy stakers.

The market will revalue the SOV token to a higher price.

With high transaction fees in the Bitcoin network and upcoming halving,

the price signal of the SOV token will be the best marketing to bring new users to the Sovryn platform.

Why 13%

The number we have chosen is close to the current interest rate of DLLR but not too high that speculators won’t pay.

The number should be lower than the interest rate of DLLR simply

because minting ZUSD requires more collateral (average 530%) to maintain without significant redemption risk.

The number is derived from the golden ratio.

5 * 1.618^2 = 13.08962

The 13% fee will significantly restrict the growth of the ZUSD supply but not be too high to stop the growth completely.

Proposed changes

If approved, the origination fee will fluctuate between 13% and 100%.

The following change will be made to the Zero Protocol base parameters:

  • Updating “BORROWING_FEE_FLOOR” from 99% to 13% by calling `setBorrowingFeeFloor(uint256)`

on the `0xf8B04A36c36d5DbD1a9Fe7B74897c609d6A17aa2` contract

with the encoded data `0x00000000000000000000000000000000000000000000000001cdda4faccd0000`.

License

Copyright and related rights waived via CC0.

If you would like this SIP to be put to the vote, please delegate VP to the following address.

0x8131522029063A1BD334017cc1a969C55367DFE2

7 Likes

If nothing more it is a competitive rate compared to the fixed interest rate of the other pools. If you select a good redemption room of at least 2000% you shouldn’t need to close your line of credit.

It will also stop people who just want to hurt the protocol with redemptions because they will be paying an upfront cost and probably will seek better yield than to be attacking the protocol.

It is obvious redemptions will happen but as long as levels maintain at current levels it should be fine.

And the option to close it down in case 13% doesn’t work will continue to be present.

Let’s start the voting already

3 Likes

I think the reasoning behind this SIP and the shown numbers are well thought out.
I have no further suggestions and support this SIP.

3 Likes

I think this is interesting and worth considering. I understand the choice of 13% for the current origination fee, but I don’t understand why that should be a floor. Why shouldn’t it be tied to the redemption rate? If the redemption rate shrinks to nearly zero, shouldn’t a formula be used that allows the origination fee to go down as well?

2 Likes

There are three variables that affect the origination fee (issuance fee) and redemption rate in the Zero Protocol.

  • REDEMPTION_FEE_FLOOR
  • BORROWING_FEE_FLOOR
  • MAX_BORROWING_FEE

quoted from Zero’s codebase

Redemption and issuance fees are based on the baseRate state variable in TroveManager, which is dynamically updated. The baseRate increases with each redemption, and decays according to time passed since the last fee event i.e. the last redemption or issuance of ZUSD.
The current fee schedule:

Upon each redemption:

  • baseRate is decayed based on time passed since the last fee event
  • baseRate is incremented by an amount proportional to the fraction of the total ZUSD supply that was redeemed
  • The redemption rate is given by min{REDEMPTION_FEE_FLOOR + baseRate * RBTCdrawn, DECIMAL_PRECISION}

Upon each debt issuance:

  • baseRate is decayed based on time passed since the last fee event
  • The borrowing rate is given by min{BORROWING_FEE_FLOOR + baseRate * newDebtIssued, MAX_BORROWING_FEE}

The redemption fee and origination fee are somewhat tied together with baseRate.
The baseRate is decaying at a factor of 0.99 per hour.

In the 5% origination fee (March 25 ~ July 30), about 2.32M ZUSD was minted. It is fair to say that Bitocracy is the price setter in the market of decentralized BTC backed stablecoin. There was too much demand for ZUSD, and the built-in price adjustment mechanism did not work effectively.
In our current situation, I don’t think we should set the origination fee floor close to the redemption fee floor. If the origination fee floor is 1%, an excess supply of ZUSD will be minted. It should result in DLLR depeg and redemptions given the small DLLR holders base (current 225).
As I said, If approved, the origination fee will fluctuate between 13% and 100%.
If there are too many loan originations in a short period, the fee will jump upward to restrict the excess supply of ZUSD.

2 Likes

Perhaps it is a joke, but I didn’t understand what the golden ratio has to do with things?

From fundementally, as I have commented elsewhere, I think we should seek to avoid previous mistakes. There is a basic question - is there any level of redemptions which we consider to high? I think we should have an established answer to this question. If the answer is yes, then we should have a threshold to reduce issuance before we reach that level. it should be a rules based system - with far less active managment and arbitrary decision making.

4 Likes

I feel the origination rate should fluctuate between 1% and 99% maybe we start at 13% suggested (although, I would rather see 10% because it’s more aesthetic, and reasonable)

But no reason to lock us at a 13% floor. As Yago suggested, a good solid number basis to change the origination/redemption % would be nice.

Either way, I’m in support of this SIP and I applaud your ambition. It’s nice to see someone giving a shit.

1 Like

It’s possible that the transparency of redemption risk could increase the level of redemption that we consider too high.

I’ve seen you speak a couple times on this topic. (Being clear on redemption risks)

It makes sense to protect LOC’s by stopping originations, but the greater understanding Loan holders have of the the risks, the less we should have to worry about their LOC being redeemed.

That being said, what do you suppose the level of redemption is before intervention?

I’m not technical enough to understand whether this could be automated.

1 Like

*Puts SIP editor hat on

A few SIP editor notes:

  • I have given the SIP a new number. See reason given here. Please update the SIP number in the thread title and main post to match.

  • I saw that the SIP vote was started. This implies to me that the SIP has been finalized and is no longer a draft. So I removed “DRAFT” from the title of the thread and changed the status on GitHub from “draft” to “Ready for vote”.

*Takes SIP editor hat off

1 Like

Regarding the SIP: I’m glad to see the proposal and thank @capitalist42 for raising it. At this time I don’t believe the underlying issues that led to SIP-0066 have actually been sufficiently solved. Back in July, in response to a question asking what specific metrics we should use to determine when the origination fee rate should be lowered again, I wrote:

Bitocracy can ultimately choose to update the parameters again whenever it wants to. I have my own threshold for when I think it will be ok to lower the origination fee rate floor to a point that makes borrowing practical again:

  • To lower the borrowing fee rate floor: there must be 7 million USD in liquidity between BabelFish (fiat) and Mynt (DOC). That’s 3.5 million for the XUSD and DLLR LPs and another 3.5 million for new loans that may be generated after borrowing is re-enabled.
  • After re-enabling borrowing, the origination fee rate will be raised to 99% again every time there is less than a total of 2 million in liquidity between BabelFish (fiat) and Mynt (DOC).

Looking at the numbers today, I still think these targets make sense. And we’re still quite a ways away from the 7 million USD liquidity target. Currently there’s only ~875,000 in non-DLLR liquidity in BabelFish, which represents ~32% of the total liquidity in BabelFish. OTOH there is still about 3 million in DLLR + XUSD LP which could look to cash out at any point in time, draining the liquidity, and leaving only one way out: redemptions.

The Sovryn community needs to do more to support demand for DLLR before lowering the origination fee rate again. We need to see significant (multiple millions) in inflows of liquidity from people converting fiat stables or other assets into DLLR. We need to see more devs building apps that give DLLR more utility, more ways to hodl and use DLLR. We need more circular economy and less dumping DLLR for BTC or fiat (which depresses the DLLR price and incentivizes redemptions). Success on these fronts will create the right economic conditions for hitting the targets referenced above, clearing the way for Bitocracy to lower the origination fee rate again.

There’s no easy way around this: either the community finds strong demand for DLLR, bringing in the needed liquidity for DLLR to grow, or there’s no use lowering the origination fee rate and encouraging DLLR issuance except to lure in suckers borrowers to get their collateral redeemed so that stakers can earn origination and redemption fees… at least until people get smart about it and abandon the protocol altogether.

The proposal currently only addresses the supply side of the market (by encouraging more DLLR issuance) without doing anything to address the demand side (which is where the deficit has been and remains today). The DLLR market remains severely imbalanced. I therefore oppose the proposal.

5 Likes

For some reason, I thought the SIP that was submitted was for Sacros “Proclamation” proposal, not Capitalists SIP 1850 (free zero).

I’ll wait until front end is fixed so I know what I’m voting on.

2 Likes

You’re right, I see on Discord that Sacro says that it’s his proposal that is live. Sorry for the confusion. Updated my post.

2 Likes

It will also stop people who just want to hurt the protocol with redemptions because they will be paying an upfront cost and probably will seek better yield than to be attacking the protocol.

Yeah. They have to pay the Bitocracy stakers first.

It is obvious redemptions will happen but as long as levels maintain at current levels it should be fine.
And the option to close it down in case 13% doesn’t work will continue to be present.

I prefer a higher fee than a complete shutdown.

Let’s start the voting already

LFG!!!

1 Like

Perhaps it is a joke, but I didn’t understand what the golden ratio has to do with things?

No. The truth is that things grow in a spiral pattern: NDA, fingerprint, wave, plant, hurricane, galaxy, stock markets and BTC price.

Somehow the golden ratio/Fibonacci sequence acts as the upper bond for things in nature. The Fibonacci Retracement Levels are one of the most well-known in technical analysis.

We also have a golden ratio multiplier to identify the overgrowth of BTC price.

From fundementally, as I have commented elsewhere, I think we should seek to avoid previous mistakes. There is a basic question - is there any level of redemptions which we consider to high? I think we should have an established answer to this question. If the answer is yes, then we should have a threshold to reduce issuance before we reach that level. it should be a rules based system - with far less active managment and arbitrary decision making.

I agree that we should have a rule-based model to decide the price to set to slow down or reduce the ZUSD issuance rate. I will consider it too high if the redemptions volume per month is 5% of the total ZUSD supply.

However, there are problems that people ignore: price and free markets.

With over one year of on-chain data, the fee was priced way lower than the market clearing price.

Chart of ZUSD Supply with 200 days moving average and 1.618 multiplier

Chart of ZUSD Origination Fee Rate

Timeline of Zero Protocol

  • The Zero Protocol was initialised with 0.5% REDEMPTION_FEE_FLOOR,0.5% BORROWING_FEE_FLOOR and 5% MAX_BORROWING_FEE on 2022-06-15.

  • ZUSD was added to Babelfish XUSD aggregator on 2022-06-15.

  • 5.9M ZUSD supply at 2023-01-01.

  • The amount of ZUSD in the BabelFish aggregator has reached ~92% of the total balance of stablecoins. Babelfish governance decided to pause the ZUSD deposit on 2023-01-19.

  • DLLR and DLLR/RBTC pool public launch on 2023-03-16.

  • 2.5% BORROWING_FEE_FLOOR and 2.5% REDEMPTION_FEE_FLOOR on 2023-03-16.

  • 5% BORROWING_FEE_FLOOR, 7.5% MAX_BORROWING_FEE and REDEMPTION_FEE_FLOOR on 2023-03-25.

  • 1% REDEMPTION_FEE_FLOOR on 2023-05-17.

  • ZUSD loan origination paused with 99% BORROWING_FEE_FLOOR on 2023-07-29

  • Babelfish Balancing curve on 2023-08-14.

  • DLLR was added to Babelfish and migrated ZUSD to DLLR on 2023-08-18.

Economics Problem in Zero Protocol

The ZUSD’s market consists of demand for decentralized stablecoin(USD) backed by BTC and supply of ZUSD. If we rephrase the market in the following way, then we may understand the problem the protocol is having.

  • demand for cheap USD loans
  • supply for USD liquidity to serve the loans

Like any businessman, to handle demand and supply mismatch, the Sovryn core team decided to impose a waiting list to limit the number of users and open it up to the public later. In hindsight, this approach did not really help with the demand and supply mismatch problem.

The situation is quite common in daily life. When the price is set below the “market clearing price,” it will result in excess demand or shortage. In our case, cheap USD loans are no more—complete shutdown of ZUSD loan origination.

For example, in Japan Tokoy, if you want to have nice top 3 ramen (tabelog), you need to get up at 7 am, wait in line for 1~2 hours to get timeslot assigned, wait for your assigned timeslot and then pay about 1200 Yen (~8.16 USD) for the ramen. The problem is that I am willing to pay 30 USD to have the best ramen. In economics, we call it queue-rationing, a form of non-price completion used by sellers to deal with excess demand. Customers actually ended up paying more than just 1200 Yen for their ramen.

Back to Zero protocol: For the first half year (until 2022-12-31), the cumulative ZUSD loan origination reached about 7.5 million. The origination fee spiked to 1.3% in 2022-12-22. But it came down quickly. Then we started to see redemptions. The cumulative redemptions reached about 0.2M in 2022-12-31. The supply of ZUSD increased significantly with a 0.5% fee rate. It was mainly characterized by the XUSD/DLLR depeg and USD liquidity draining in Babelfish. Those were the first signs of a shortage of USD liquidity to cover the line of credits in the Zero protocol. Even with a 2.5% ~ 5% fee rate, the excess demand was still in the system. While borrowers paid low prices (0.5%~5%) for their USD loans, a group of borrowers also paid the indirect cost (by having their

In summary, the queue-rationing approach will result in an externality (indirect cost to the group of people) when managing demand and supply mismatch. In the case of Tokyo ramen, customers have to pay for extra 2~4 hours (time cost). In our case, as a whole, ZUSD borrowers ended up with more than just the loan origination fees.

Based on what I read, @yago and @light are going with the queue-rationing approach. (correct me if I am wrong)

For the sake of discussion, the approach is defined as follows:

  • price the origination fee well below market price
  • excess supply of ZUSD / excess demand for cheap USD loan build-up
  • system overload with ZUSD supply; redemptions volume over 5% of total supply per month;
  • raise the origination fee rate to 99%; shutdown the loan origination
  • wait for the system to clear out the excess supply of ZUSD
  • repeat step one

I personally prefer setting the price close to the market clearing price because the free markets will find ways to clear out the inefficiency/mismatch, which will manifest in externality/indirect cost.

MARKET ALWAYS WINS!!!

4 Likes

I feel the origination rate should fluctuate between 1% and 99% maybe we start at 13% suggested (although, I would rather see 10% because it’s more aesthetic, and reasonable)

The initial rate in my head was 10%, too. But it is better to be safe than sorry.
I would like the fee rate to fluctuate between 1% and 99% in the long run.

But no reason to lock us at a 13% floor. As Yago suggested, a good solid number basis to change the origination/redemption % would be nice.

I have no intention of locking the floor at 13%.
I agree with Yago that we should have a rule-based system to make decisions on the parameters.

We have three possible paths forward:

  • Lower the fee floor to well below market rate (0.5%~8%)
    • actual functional two-sided market
    • excess supply of ZUSD will increase significantly
      • it requires more demand for ZUSD to match the overgrowth of ZUSD; it needs more app support, partnership support, etc.
    • it also needs a strong inflow of USD liquidity to handle the borrower’s USD liquidity; unfortunately, the TVL of Babelfish is falling from 6.32M to 2.69M this year.
  • Lower the fee floor close to market rate (10% ~ 15)
    • actual functional two-sided market
  • keep the status quotes
    • Wait for the Sovryn core team or others to build out the app to drive demand for ZUSD/DLLR, air swap, and magical partnership. But wait! It has already been nine months since we discovered the excess redemption issue. It will probably take six more months. :slight_smile:

      • wait significant (multiple millions) in inflows of ZUSD liquidity
5 Likes

Looking at the numbers today, I still think these targets make sense. And we’re still quite a ways away from the 7 million USD liquidity target. Currently there’s only ~875,000 in non-DLLR liquidity in BabelFish, which represents ~32% of the total liquidity in BabelFish. OTOH there is still about 3 million in DLLR + XUSD LP which could look to cash out at any point in time, draining the liquidity, and leaving only one way out: redemptions.

I would agree with your analysis of the liquidity requirements if I were proposing to lower the origination fee floor to 5%. But I am not.

The Sovryn community needs to do more to support demand for DLLR before lowering the origination fee rate again. We need to see significant (multiple millions) in inflows of liquidity from people converting fiat stables or other assets into DLLR. We need to see more devs building apps that give DLLR more utility, more ways to hodl and use DLLR. We need more circular economy and less dumping DLLR for BTC or fiat (which depresses the DLLR price and incentivizes redemptions). Success on these fronts will create the right economic conditions for hitting the targets referenced above, clearing the way for Bitocracy to lower the origination fee rate again.

We all know development and partnership take timeeeeeeeeeeeeeeeeee.

The 13% rate is possibly close to market clearing price that will benefit the circular economy inside the Sovryn and Babelfish.

  • There will not be a significant excess supply of ZUSD.
  • Slow, consistent, and organic growth ZUSD supply.

There’s no easy way around this: either the community finds strong demand for DLLR, bringing in the needed liquidity for DLLR to grow, or there’s no use lowering the origination fee rate and encouraging DLLR issuance except to lure in suckers borrowers to get their collateral redeemed so that stakers can earn origination and redemption fees… at least until people get smart about it and abandon the protocol altogether.

I guess I was one of suckers got lured by the promise of Sovryn and Zero protocol … ;(

There are another other way. The middle way. The balanced way.

Again, I am not proposing a fee floor of 0.5% or 5% to lure the borrowers to get their cheap USD loans.

The proposal currently only addresses the supply side of the market (by encouraging more DLLR issuance) without doing anything to address the demand side (which is where the deficit has been and remains today). The DLLR market remains severely imbalanced. I therefore oppose the proposal.

I will have to disagree that 13% fee rate is encouraging more ZUSD/DLLR issuance. This proposal also addresses the public image of redemption-mode-only stablecoin. Average users will not hold DLLR (just look like another BUSD)

At the current state, I don’t agree that the DLLR market is severely imbalanced but relatively close to a balance point.

  • much lower redemptions volume (only $50607 USD this month)
  • the last redemption was 2023-11-16
  • about 2.7% of ZUSD in the DLLR lending pool; the current 7.88% lending rate of DLLR; the current 15.75% borrowing rate of DLLR;

I will agree that the DLLR market will remain severely imbalanced if the following conditions are true:

  • low origination fee rate (0.5% ~ 8%)
  • no new usecase of DLLR
  • no new strong demand for DLLR
  • no significant (multiple millions) in inflows of
    USD liquidity
5 Likes

How is this a functional two-sided market? How does setting the origination fee rate at “market rate” (which isn’t really market rate, if you intend on keeping your LOC open for more than a year) address the demand side of the market for DLLR?

DLLR can still be both minted and redeemed. Remember that there are currently two stablecoins in the DLLR basket: DOC and ZUSD. It remains possible to mint DLLR with both DOC and ZUSD. What is not possible is to mint more ZUSD right now without paying a very high price (99% origination fee).

Average users will not hold DLLR (just look like another BUSD)

If anything, DLLR is safer to hold than ever right now because the peg has been more stable now than at any point in the past. This FUD about “average users will not hold DLLR” is totally unfounded.

At the current state, I don’t agree that the DLLR market is severely imbalanced but relatively close to a balance point.

  • much lower redemptions volume (only $50607 USD this month)
  • the last redemption was 2023-11-16
  • about 2.7% of ZUSD in the DLLR lending pool; the current 7.88% lending rate of DLLR; the current 15.75% borrowing rate of DLLR;

The peg has been stable. That is true, and was indeed the intention of pausing borrowing. Evidence that SIP-0066 is achieving its intended affect. This is good! But we still have millions of DLLR in overhang that is just waiting to either be repaid or redeemed, and we don’t know which will happen first. This is the imbalance I’m referring to. I will quote the figures again:

This is a misphrasing of what I said :frowning: I made a tongue-in-cheek comment about future borrowers being suckers if the origination fee rate was lowered to make it appear that new issuance would be economically sound, even though in reality it would pretty quickly result in chronic redemptions again due to the liquidity imbalance. Even if new borrowers come in at very high collateral ratios, to avoid getting redeemed and feeling like suckers, all this does it push the problem off onto existing LOC holders with lower collateral ratios. And just when they’ve gotten a chance to breathe easy, now you want to push them into pvp mode again?

You gave an analogy earlier about a popular restaurant, and suggested my strategy is a “queue-rationing” approach. You defined it as:

This is not my approach. My approach is:

  • Price the origination fee above market rates (to account for long-term 1+ year borrowers)
  • Engage in activities to build organic demand for hodling DLLR and using it in circular economies
  • If we notice that liquidity is running low (I have proposed 2 million cumulative between Mynt and BF) then raise origination fee rate floor to 99%
  • Lower again after liquidity is restored

To return to your analogy: Bitocracy allowed the Zero restaurant to become so full with customers that the kitchen ran out of food, and everyone was packed into the dining area shoulder to shoulder. An extremely uncomfortable, unsafe state of affairs. SIP-0066 closed the front door to prevent new customers from coming in and exacerbating the situation. The back door was still open so people could leave, relieving some of the pressure. Enough people have left that now there is some breathing room, and the chefs have been able to get some food from local markets to serve the customers still in the dining area. But there’s still a shortage of food and dining space compared to what the ideal dining experience would be. So we need to wait until either more customers leave through the backdoor, or more food and chefs arrive to meet the demand. We might even need contractors to knock out a wallet to expand and make room for everyone. But we are certainly not ready yet to re-open the front door.

I urge the community to maintain focus on rebuilding liquidity and building up demand for hodling DLLR and using it in circular economies, not one-way dumping for BTC or fiat. We have made good progress, we should keep it up. And we can revisit the decision the lower the origination fee rate when the available liquidity better matches current and anticipated demands.

5 Likes

Is marketing being done to bring people to DLLR? We were told by a few community leaders many months ago (perhaps weeks after zero was shut down) that “we suspect DLLR demand to increase exponentially over the coming months”.

What is the “community’s” role in “rebuilding liquidity”?

4 Likes

Why would lowering origination lead to redemptions in the same way it previously did? Specifically, we have yet to test lower lower origination fees on Zero while BabelFish dynamic curves have been implemented. It’s worthwhile to explore since the variables have changed.

If we lower the origination fee, then borrowers will mint ZUSD and bridge out via BabelFish which pushes more funds into the Reward Manager. In-turn this gives BabelFish more flexibility to increase the bridge-in incentive to bring in more dollar liquidity and create equilibrium.

The reason BabelFish has not been super effective (imo) is because we have not pushed enough pressure through the pipes.

5 Likes

We are working on Ensigna. We are small but eager to help :grin:

2 Likes