Reduce the STBL collateral factor to 0% in phases

Proposal Discussion
1

Proposal

Reduce the STBL collateral factor from 80% to 0% in phases listed below. This change doesn’t impact the collateral factor of STBL-USDC LP tokens.

Proposed Reduction Schedule
Date - Time: Collateral Factor
5/31/2023 - 12PM EST: 70%
6/15/2023 - 12PM EST: 50%
6/30/2023 - 12PM EST: 25%
7/15/2023 - 12PM EST: 0%

Rationale
STBL can get de-pegged from $1 for an extended period of time. Moreover, an unlimited amount of STBL (up to the hard-coded platform limit) can be created instantly. This new money can then be used as collateral with the $1 hard-coded value. The combination of the above two facts breaks various lending protocol assumptions, which can lead to bad debt and unhealthy state. This is a risk for all users no matter if they ever use STBL or not. The proposal aims to remove this specific STBL risk from the lending protocol and for its users.

Right now STBL only represents ~222k of collateral and applying this change per the Algofi team’s opinion should be relatively easy.

Q&A

  1. How is STBL de-pegging different from USDC de-pegging?
    Unlimited amounts of STBL can be created and re-used instantly, whereas that’s not possible with USDC, which makes it a much more severe issue. Moreover, the chances of STBL de-pegging are strictly higher as STBL depends on USDC for its pegged value.
  2. Why does the STBL-USDC LP tokens collateral factor remain the same?
    For these LP tokens for every STBL a USDC should be provided, which works as a speed bump, and makes the severity of the de-pegging issue for LP tokens close to the USDC de-pegging. Alternatively, depending on its feasibility, the collateral factor could be cut in half to be consistent with the generic collateral formula.
  3. What if instead of $1 the live price of STBL used in the lending protocol?
    The reliability of an asset price depends very much on the depth of the order book. The STBL liquidity pools are tiny for this purpose. Moreover, using a non-constant price may complicate both sides of the lending protocol.
  4. How is it not an issue with DAI?
    DAI has 50+% of its reserves in USDC.

Staging Post
Temperature Check Post
Algorand Forum Post
First Report

2

for anyone reading this here: its about STBL2 and not STBL on V1

1 Like
3

I hope that it is clear enough that I follow the proposal route based on the AlgoFi founders agreement on the change. If this path doesn’t lead to the desired minimum change to remove the risk to the Algofi users I have to unfortunately go back to the escalation route to appropriate entities and authorities.

1 Like
4

so you dont actually care what the DAO decides?

1 Like
5

I’m part of DAO and an Algoffi supporter but NO in this particular case as a user and Algorand investor. I don’t want to see a stablecoin incident in the Algorand ecosystem.
This change is the result of a couple months engagement with the Algofi team following the original bug bounty report. For the record, many important decisions, similar to blocking USDC deposits during the USDC de-pegging, happened without any DAO approval. There are probably other small and large decisions that are made at the code level that are not easily visible to the community. So, applying this change is not unprecedented. Whether that should be the case or not and when everything only goes through the DAO approval is a good debate to have but beyond the scope of this proposal.

6

my last comment on that topic: have you ever thought that you just might be wrong? were you able to convince anyone?

1 Like
7

At minimum, the Algofi foudners have agreed on the change, so the answer to your question is YES.

8

thats just a lie. they just said let the DAO decide because the conversation wasnt going anywhere with you

9

That’s not. They asked me to update the schedule and had a specific opinion on it: to reduce the total execution time from 3 months to 1.5 months.
@jaclarke @pcolella

10

i hope they can comment on that here, but from my point of view and reading through the whole mail conversation: again that doesnt mean they support it. in the end they have to allow such a discussion and they need to propose a schedule that works for them if it passes, thats kinda their job

1 Like
11

Sorry if this is a dumb question - I am no financial expert - but if someone had a goal to damage the ecosystem and was not concerned with immediate profit, couldn’t they could empty out the STBL2/USDC pool right now with only $4MM, and only $300k for STBL2/ALGO? What would happen?

I’m guessing STBL2 price would crater/depeg and STBL2 interest rate would skyrocket , and theoretically this would cause people to buy STBL2 from the pools, driving STBL2 back up. But I wonder if we have enough liquidity in the ecosystem (and courage in the face of turmoil) to bring things back to equilibrium when things are so locked down with governance. What are the ramifications if it can’t? Is this where the $1 peg becomes dangerous?

I saw a few weeks ago that STBL2 dropped under 0.99 USDC and stayed under for a couple of weeks, was wondering why liquidity wasn’t coming in to correct that. Granted it was just at 0.985 so maybe that wasn’t far enough to attract enough people.

Finally, can anyone ELI5 why this proposal is harmful, if only $200k is currently dependent on STBL2 for collateral as OP has pointed out? There was a lot of back and forth in the temperature check about why OP is wrong, but it would be nice for those of us who are not experts to have one simple clear explanation what the downside of the proposal is.

Thanks.

1 Like
12

Bro - Stop lying to get your proposal being accepted

13

There are no dumb questions when you ask nicely :grinning:

I am no financial expert - but if someone had a goal to damage the ecosystem and was not concerned with immediate profit, couldn’t they could empty out the STBL2/USDC pool right now with only $4MM, and only $300k for STBL2/ALGO? What would happen?

This video on AMMs is a good primer. But tl;dr you can’t really buy out the entire $4M pool without moving the price of STBL2 in that pool. It will get more expensive to buy out the USDC as you buy more until more liquidity appears. So it costs much more than $4M to do that.

I’m guessing STBL2 price would crater/depeg and STBL2 interest rate would skyrocket , and theoretically this would cause people to buy STBL2 from the pools, driving STBL2 back up. But I wonder if we have enough liquidity in the ecosystem (and courage in the face of turmoil) to bring things back to equilibrium when things are so locked down with governance. What are the ramifications if it can’t? Is this where the $1 peg becomes dangerous?

So let’s say that the person above didn’t care about the money and they decide to cause a divergence in the USDC/STBL2 pool price. The STBL2 price would go up, but also the STBL2 interest rate would go down. Some people who are long STBL (holding it for interest) will want to sell because of opportunity cost. Others as you said, will see an opportunity to mint STBL2 for cheap (since the interest rate is low) and sell it for the inflated price. This is arbitrage. If there isn’t enough liquidity, the spot price will depeg. But STBL2 itself will not have depegged because it is still backed by $1 of assets for each STBL2 token. Eventually borrowers of STBL2 will get liquidated as their interest debt grows or they will buy STBL2 to pay off their interest. Either way, the existing positions require new new liquidity to appear eventually. Eventually can be an undefined period of time though.

One of the valid points brought up in this discussion, is that if STBL2’s spot price is depegged for a very long time, it might make sense to adjust the value it has as collateral in lending rather than let it be always $1.

Finally, can anyone ELI5 why this proposal is harmful, if only $200k is currently dependent on STBL2 for collateral as OP has pointed out? There was a lot of back and forth in the temperature check about why OP is wrong, but it would be nice for those of us who are not experts to have one simple clear explanation what the downside of the proposal is

STBL2 isn’t a large form of collateral now but the goal is for it to be. Shutting it down removes this avenue of growth for the protocol. In the long run, the expectation is that STBL2 will be cheaper than USDC to borrow. USDC has to be backed by real dollars held by Circle while STBL2 can be instantly minted by anyone with valid collateral (ALGO, USDCa, ETH, BTC, etc). STBL2 is therefore much more elastic than USDC and can better adjust its volume to the size of demand for dollars in the ecosystem. The tradeoff, is that holders of STBL2 can’t instantly cash out STBL2 for real dollars. They are dependent on either USDC liquidity or collateral liquidations in order for liquidity to exist to swap STBL2. OP believes this is a fundamental risk. I believe this is a feature, not a bug.

Algofi is very similar to a bank, like SVB. When SVBs customers ran the bank, they had more demand for withdrawals than cash (plus equity) on hand and they became insolvent. A similar situation in Algofi isn’t possible, there simply won’t be enough liquidity to sell STBL2 and holders will have to wait until there is, rather than Algofi declaring bankruptcy. So by holding STBL2, the risk you take is that you may not be able to withdraw when liquidity is low. The reward for taking that risk is the interest you get by just holding it as collateral. Given USDCa doesn’t have that risk, in the long run I’d expect it to have less market share than STBL2 because it should be more expensive to borrow.

2 Likes
14

Thanks @pescennius for the comment.

OP believes this is a fundamental risk. I believe this is a feature, not a bug.

Yes I do believe this (the lack of enough liquidity for both borrowers and suppliers when they want to exit) is a fundamental problem, however this proposal doesn’t attempt to address this problem. This proposal’s only goal is to remove the contagion impact of STBL instability to the much larger and more important product of Algofi with thousands of users.

Shutting it down removes this avenue of growth for the protocol.

This is one of the smaller benefits of STBL compared to being a more available and cheaper medium of exchange (as a claimed benefit). People can still collateralize STBL, when paired with USDC, which also improves the overall STBL+USDC liquidity.

At the end there are always trade-offs, however the risk here is enormously higher (given its impact wouldn’t be limited to Algofi but would damage the whole Algorand ecosystem) than the maximum potential reward with all the optimistic assumptions.

1 Like
15

@sam171921 at this point I’ve decided to vote against your proposal. I haven’t been convinced of your thesis that there is a systematic risk. I absolutely could be wrong, but I was not convinced. This is my last comment for now on this topic until new information presents itself. I appreciate your enthusiasm and I appreciate that you have kept the conversation completely respectful, as that is something I value about not only the Algofi community but the general Algorand community.

I’m part of DAO and an Algoffi supporter but NO in this particular case as a user and Algorand investor . I don’t want to see a stablecoin incident in the Algorand ecosystem.

You are free to lobby above the the DAO. However, I think the dev team overriding the decision of the DAO is unlikely unless they are fully convinced of the risks you have proposed. Some will be very upset if that happens ,but I’d want to hear the dev team explain the risks so I can better understand it, before being upset that they overrode the DAO vote. I’m still open to the idea that my analysis was wrong.

However, if the team also rebukes your attempts I’d hope you’d be willing to walk away from this discussion. I can empathize with feeling like you aren’t being heard, especially when it comes to stablecoin risks. I DCA into a Tether short position for similar reasons. However, at some point you can’t save people from risks they can’t see. I’d recommend you sell your BANK and short STBL2 and go on with your life if you can’t get any traction on this.

1 Like
16

I also appreciate your involvement with the discussion.

If I understand correctly you agree with the de-pegging risk, however suggest a different solution, which is considering the actual STBL price. I’m not against that but as it is explained in Q&A that’s not an option right now.

Moreover, I didn’t see a strong argument for the proposal downside given the trade-offs mentioned above.

To be clear, I don’t plan to walk away from this discussion. I have already spent tens of hours because I’m concerned about this issue. For the record I called out the Luna issues four months before its collapse with an exact scenario and everyone in that community just dismissed it as it is obviously no-problem. My plan will be to escalate if the concerns are not resolved through regular means.

17

If I understand correctly you agree with the de-pegging risk, however suggest a different solution, which is considering the actual STBL price. I’m not against that but as it is explained in Q&A that’s not an option right now.

Feel free to repeat it but I don’t recall an explanation for that

Moreover, I didn’t see a strong argument for the proposal downside given the trade-offs mentioned above.

Well the DAO clearly disagrees given the vote.

To be clear, I don’t plan to walk away from this discussion. I have already spent tens of hours because I’m concerned about this issue. For the record I called out the Luna issues four months before its collapse with an exact scenario and everyone in that community just dismissed it as it is obviously no-problem. My plan will be to escalate if the concerns are not resolved through regular means.

I mean I also saw flaws in Luna but I gave up trying to convince people (mostly friends IRL) of that and just shorted UST. If you are right, you’ve done your duty by pointing it out. Its up to each of us individually to recognize that risk and act accordingly. Again, I have no issue talking to the dev team. But if that fails what other channels do you have? At some point, escalation crosses from participation and discussion to harassment if the DAO, the dev team, an any other relevant stakeholder is not interested.

1 Like
18

Feel free to repeat it but I don’t recall an explanation for that

What you wrote in one of the above comments:

One of the valid points brought up in this discussion, is that if STBL2’s spot price is depegged for a very long time, it might make sense to adjust the value it has as collateral in lending rather than let it be always $1.

Well the DAO clearly disagrees given the vote.

Is it the strong argument for downsides?! The ask in this proposal is very limited in its impact on STBL. Or, is it an argument that works in a court after something really terrible happens?! I don’t think so.

If you are right, you’ve done your duty by pointing it out. Its up to each of us individually to recognize that risk and act accordingly.

I’m doing this by skipping all STBL issues and leaving it to its actual users, assuming that they are informed. The only goal here is to isolate the lending protocol from the STBL issues and more importantly the whole Algorand ecosystem. I don’t think it is a difficult argument to understand.

19

What you wrote in one of the above comments:

Oh then I don’t think you were right

Is it the strong argument for downsides? The ask in this proposal is very limited in its impact on STBL. Or, is it an argument that works in a court after something really terrible happens? I don’t think so.

Court, where does litigation factor iin here? You presented your case, people who read it had the opportunity to vote, they voted no. So most of the stake felt the risk/reward of your proposal was not worth it. Either/both because they didn’t feel the risks you presented were material or because they felt the cost to the protocol was too high when weighed against those risks.

The only goal here is to isolate the lending protocol from the STBL issues and more importantly the whole Algorand ecosystem. I don’t think it is a difficult argument to understand.

Its not that its difficult to understand, its that people don’t agree with you and have voiced that. But now youare phrasing this as if there is is risk to the entire ecosystem? Nothing you’ve raised indicates that something like a double spend would occur? If you are referring to systematic financial risk within Algorand’s DEFI ecosystem that is always possible, its not up to you, the foundation, or anyone individually to stop that because we’re unregulated. If we all choose to gamble it all on a ponzi, that’s our perogative, we’ll just lose all our money. Isn’t that one of the goals of a decentralized finance?

1 Like
20

Oh then I don’t think you were right

Are you walking back from what you wrote above? It is good to clarify which part mismatches my understanding.

where does the litigation factor in here?

When/If something goes wrong at scale people who run the platform, mostly the Algofi team would be responsible. These things (STBL de-stabilization and the lending protocol failure) won’t matter until they matter and when they matter nothing else matters.

But now youare phrasing this as if there is risk to the entire ecosystem

Yes, there is a serious reputational risk. We had the relatively small tinyman incident, and myalgo just recently. Any Algofi incident would be way more damaging to the whole Algorand ecosystem.