Maker Risk and Governance Update 6/20 – Patrick O’Donnell
Discussion thread link
First substantive discussion of collateral risk analysis. Brief discussion of recent Governance events — poll and different opinions on stability fee. Dai price has moved down slightly following recent SF reductions, but overall behavior seems to be healthy. Collateral Risk discussion focused on broadly defining aspects of Quantitative Analysis — Expected Loss as a function of default probability and loss given default.
Polling / Voting: Poll favored raising SF by 1% to 17.5%. Executive Vote needs to implement change, needs ~30k MKR as of 6/22
- Governance: previous poll being led by desire to decrease fee, push back from community and vote shifted to raising by 1% to 17.5%.
Collateral Risk — Quantitative Analysis
- Philosophical Goals are to promote stability and integrity of Dai, facilitate responsible growth.
- Operational Goals: Define what risk parameters represent and build models to calculate them, understand weaknesses and vulnerabilities, tie in to decentralized governance process and policy actions
- Strategy: use modular approach, have various perspectives contribute to achieving consensus for policy. At first, use ETH as a “test” for different approaches.
- Inputs: collateral onboarding application (qualitative), trading profile (volatility, volume, liquidity, etc), historical and current CDP distributions and characteristics.
- Outputs: qualitative analysis and risk weighting, liquidity adjustment (and trade-off between liquidation ratio and SF), collateral-specific risk premium. Correlations and portfolio valuations, required capital reserve, debt ceiling.
- Measuring Default Risk: starting point is loss distributions, which are a distribution of possible outcomes and the loss in each scenario. Can probability weight the distribution to calculate expected loss. Involves probability of default (PD) and the amount of loss given default (LGD).
- How to define default — Cyrus views defining a default as when collateral is liquidated, rather than just the instances where collateral liquidation is insufficient. Use LGD to adjust for collateral value exceeding loan in liquidation. In CDP framework, default probability is simply the probability that the collateral value falls below the liquidation threshold (no ongoing payment obligations).
- Expected Loss (EL) = Loan Amt * (PD) * (LGD).
State of the Peg
- Dai has drifted below peg since SF lowered to 16.5%, despite ETH appreciation. Dai price seems to be exhibiting stronger correlation with ETH price, which is reversal of previous behavior (strong ETH>leverage>Dai oversupply>price below peg).
- Dai supply has increased from ~80mm to ~85mm. Several large Dai mints, signs of migration back to Maker from secondary platforms. Collateral ratio has also remained high.
Secondary Lending
- Overall supply on secondary platforms has remained fairly stable since immediate explosion in supply as platforms launched.
- Discussion of impact of secondary platforms on Dai markets, limits of comparing rates across platforms.
Good posts in r/MKRGov
Published at Thu, 18 Jul 2019 01:38:31 +0000
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