SIP-0075 Reduce Zero Origination Fee

Bitocracy
1

SIP-0075: Reduce Zero Origination Fee

Summary

If approved, this proposal will reduce ZUSD origination fee floor in the Sovryn Zero protocol from 13% to 8%.

Background

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

Essentially, Bitocracy paused the minting of ZUSD by setting extremely high fees to maintain the DLLR peg.

Two months ago, Zero was „reopened“ by setting the origination fee to 13% with SIP-0071. This fee was deliberately set quite high in order to cautiously ramp up the system again and achieve the assumed balance between supply and demand for $DLLR.

Since then several key observations were made:

The total supply of ZUSD decreased from approximately 6.69 million (start SIP-0066) to 4.58 million (start SIP-0071) to 3.85 million (now).

Numbers of LoC’s declined from 150 (start SIP-0066) to 88 (start SIP-0071) to 83 (now).

The total collateral ratio increased from around 372% (SIP-0066) to 530% (SIP-0071) to 604% (now).

From SIP-0066 to SIP-0071 (8/23-12/23), Zero fee revenue was 15k USD. Since SIP-0071 (01/24) Zero fee revenue is 34k USD.

Motivation

Despite reopening Zero, we can still see a decline in the metrics shown above.

Large parts of the excess ZUSD supply has been removed.

The current 10% interest rate of DLLR lending pool also indicates strong demand.

Therefore, we believe it is a good time to make Zero more accessible and to increase protocol revenue.

Individual users should make sure they understand the system and specifically, redemptions.

If significantly more redemptions occur than expected, Sovryn can also use the increased revenue as a safety mechanism to incentivize the holding of $DLLR via $SOV rewards.

Proposed changes

If approved, the origination fee will fluctuate between 8% and 100%.

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

Updating “BORROWING_FEE_FLOOR” from 13% to 8% by calling setBorrowingFeeFloor(uint256)

on the 0xf8B04A36c36d5DbD1a9Fe7B74897c609d6A17aa2 contract

with the encoded data

0x000000000000000000000000000000000000000000000000011c37937e080000

.

License

Copyright and related rights waived via CC0.

8 Likes
2

very much in favor.

would it not make sense to lower to 5%, given that we have had this fee before? gives more of a signal that Zero is open again and makes comparisons easier.

2 Likes
3

I think that would lead to rapid growth and the familiar problems.
We know that 5% was not enough. We know that 13% works. 8% is still relatively expensive, but certainly attractive for some people.

We hope that at 8% Mynt and Babelfish will get bigger volumes as a stress test and are particularly curious about the route arbitrage flows will take. If possible, arbitrage trades should not use zero redemptions, but other routes (=>Babelfish incentive curves).
For this reason, we want to leave the redemption fee at 1% for the time being and not reduce it yet.

4 Likes
4

Bernhard suggested on telegram a fee of 10% instead of 8%! Waiting for more feedback!

3 Likes
5

I feel 8% is reasonable. I would like to see it lower, but I understand the reason for moving slowly.

1 Like
6

Perhaps 9% is the meeting point.

Personally, both figures seem fine to me.

2 Likes
7

Yeah, right in the middle of the new 13% and the old 5% we had before we shut it down.

2 Likes
8

I believe it’s high time we moved away from manual management driven by guesswork and transitioned back to automated parameters management. While it’s more challenging than simply adjusting fees based on vague estimations, it’s far more efficient and worthwhile. This is where the community can contribute significantly.

Several sensible proposals, deserving further discussion, have been shared as comments on this forum thread.

4 Likes
9

Babelfish today announced that Incentive curves were optimized and $DLLR reached its target weight of 49% in the stablecoin distribution. This should have a positive impact on Zero and brings another argument for lower fees.

This SIP is schedulded for vote on Monday, February 5.

5 Likes
10

in favor cap still has my votes

2 Likes
11

I am working on it. Just need more data to work with.

2 Likes
12

pull request to create SIP0075 is completed.

expected tx data input

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3 Likes
13

This should have a positive impact on Zero

How so?

1 Like
14

Thanks for taking this initiative, Sacro.

I have several thoughts on this, not all of which argue in one direction or another. Some things are just related info.

The reduction in ZUSD after the 99% fee is due to a combination of redemptions and loan paybacks. Roughly speaking, these two things were happening at about an equal pace. After SIP-0071 was passed, redemptions jumped significantly.

The continued increase in the CR is at least partially explained by the increase in the price of BTC.

We really don’t know that the bulk of excess ZUSD has been removed. Redemptions were relatively slow, but new borrowing now has meant increased redemptions. This seems to indicate that we don’t have much of a buffer of ZUSD/DLLR being demanded.

The high interest rate on DLLR is probably primarily due to a bullish BTC environment, where people want to take a position on margin. DLLR is one way to do that.

All redemption fees go to stakers, not to the protocol. So the increased revenue can’t be used to incentivize holding more DLLR unless a SIP changes the fee distribution.

I don’t object to the SIP. I do think it will lead to more redemptions. I think we have a responsibility to make users aware of this danger. Unfortunately, the only way this is going to work long-term is if we grow demand to hold dollar value in DLLR. Otherwise, the primary use case will be to trade so we can get a bridgeable, salable asset to convert to USD. In the short run, Zero is a harsh game in which you put your BTC up in exchange for dollars. If you play it right, that will turn out to be a loan you can pay back. If you don’t, it will be as if you sold your BTC for the dollars you needed to spend. That’s not a horrible outcome if you needed cash, but it’s not exactly what a lot of people envision when they take out a loan (and pay a high percentage for the privilege).

4 Likes
15

I agree that we should market the DLLR usage instead of borrowing DLLR with BTC. new users should not use it without understanding the risk.

3 Likes
16

In my opinion, most of the redemptions happen due to arbitrage. Arbitrage Trades are not bad at all- they are the mechanism to keep prices in-line with other chains and exchanges.

It becomes problematic when a Zero redemption is actually the cheapest or most convenient route to conduct the arbitrage trade. Instead of bridging funds, the arbitrage players will just do a redemption. That’s a bad experience for Zero users.

In the past, there was no liquidity to bridge stablecoins from Sovryn to other chains. Arbitrage could not take that route and instead used Zero redemptions.

Now, with Babelfish incentive curves, there is a reward (and cost) for providing and taking bridge liquidity, depending on the balances. This should help with bridge liquidity. In theory, it should be cheaper to bridge stablecoins via Babelfish and conduct arbitrage instead of paying the 1% redemption fee in thee Zero protocol.

We must have a cheaper route than Zero redemptions for arbitrage to happen if we want to reduce redemptions in the Zero protocol.

5 Likes
17

Thank you for the insights and i agree with almost all points! I have 2 comments:

-As you pointed out, margin trades are the main driver for $DLLR demand. We really should get it implemented in the new dapp and not abandon it when the old dapp goes down. I have yet to see a commitment to that from any Core team member. I have yet to see a reaction to this argument at all (other than “It’s a good idea, why don’t we do it?”).

-In my opinion, Increased staking revenue due to Zero reopening makes room for paying some extra SOV rewards to incentivize the holding of $DLLR. We should turn the engines on.

5 Likes
18

Is the concern that redemptions happen at all (because they don’t fit the ‘hodl bitcoin into eternity’ story)? Or is the main concern that the rate of redemptions gets too high if too much DLLR enters the market?

If the main concern is redemptions occurring at all, given the story around it, we should fix the story around it; as redemptions are just an essential component of how the entire thing works.

If the main concern is the high rate of redemptions, why are we not considering actions on the side of the redemption fees again (increasing them to disincentivize redemptions)? Was it that, the higher the redemption fee, the fear is that the more DLLR fluctuates around peg, can someone remind me?

2 Likes
19

@juliomoros helped to decode and validate the input.
Here is the decoded input.

[
  [
    "0xf8B04A36c36d5DbD1a9Fe7B74897c609d6A17aa2"
  ],
  [
    "0"
  ],
  [
    "setBorrowingFeeFloor(uint256)"
  ],
  [
    "0x000000000000000000000000000000000000000000000000011c37937e080000"    <--- 80000000000000000 = 0.08 = 8%
  ],
  "SIP-0075: Reduce Zero Origination Fee
  https://forum.sovryn.com/t/sip-0075-reduce-zero-origination-fee\nReduce Zero Origination Fee Floor to 8%
  ---
  
      ## Summary
      
          If approved, this proposal will reduce ZUSD origination fee flor in the Sovryn Zero protocol from 13% to 8%.
          
              ## Background
              
                Six months ago, the origination fee floor of Zero Protocol was raised to 99% with SIP-0066.
                Essentially, Bitocracy paused the minting of ZUSD by setting extremely high fees to maintain the DLLR peg.
                Two months ago, Zero was \"reopened\" by setting the origination fee to 13% with SIP-0071. 
                This fee was deliberately set quite high in order to cautiously ramp up the system again and achieve 
                the assumed balance between supply and demand for $DLLR.
                

                Since then several key observations were made:
                
                    • The total supply of ZUSD decreased from approximately 6.69 million (start SIP-0066) 
                    to 4.58 million (start SIP-0071) to 3.85 million (now).    
                    • Numbers of LoC’s declined from 150 (start SIP-0066) to 88 (start SIP-0071) to 83 (now).    
                    • The total collateral ratio increased from around 372% (SIP-0066) to 530% (SIP-0071) to 604% (now).    
                    • From SIP-0066 to SIP-0071 (8/23-12/23), Zero fee revenue was 15k USD. 
                    Since SIP-0071 (01/24) (total Zero fee revenue is 34k USD).    
                    
                ## Motivation    
                
                Despite reopening Zero, we can still see a decline in the metrics shown above.    
                Large parts of the excess ZUSD supply has been removed.    
                The current 10% interest rate of DLLR lending pool also indicates strong demand.    
                Therefore, we believe it is a good time to make Zero more accessible and to increase protocol revenue.    
                Individual users should make sure they understand the system and specifically, redemptions.    
                If significantly more redemptions occur than expected, 
                Sovryn can also use the increased revenue as a safety mechanism to incentivize the holding of $DLLR via $SOV rewards.    
                
                ## Proposed changes    
                
                If approved, the origination fee will fluctuate between 8% and 100%.    
                The following change will be made to the Zero Protocol base parameters:    
                
                - Updating \"BORROWING_FEE_FLOOR\" from 13% to 8% by calling `setBorrowingFeeFloor(uint256)`    
                on the `0xf8B04A36c36d5DbD1a9Fe7B74897c609d6A17aa2` contract    
                with the encoded data `0x000000000000000000000000000000000000000000000000011c37937e080000`.    
                
                ## License    
                
                Copyright and related rights waived via [CC0](https://creativecommons.org/publicdomain/zero/1.0/)."
]
1 Like
20

Redemptions have to happen, but should remain as low as possible. Sophisticated users that track their Zero funds can manage redemptions. A redemption hurts much more at high Origination fees than it would hurt at lower Origination fees like 0.5%.
There were some discussions around raising the redemption fee higher, but everyone i talked to was hesistant to raise redemption fees because they want the peg as close to 1$ as possible. Higher redemption fee=looser peg. Most people wanted to bring it lower (0.5% instead of currently 1%).

If we can get a better and cheaper flow inside and out of rsk (specifically, stablecoins / DLLR), i think we would be good and could reduce origination and redemption fee further. My main target would be 2-3% Origination with 0.5% redemption fee.

4 Likes