By Scott Lewis and Will Price
With feedback and endorsement of Robert Leshner and EQParenthesis.
As outlined in EIP-7 by AlexL, there are fundamental issues with the current ESD couponing mechanism. Simply put, the risk/reward ratio is not sufficiently attractive to entice speculators to buy and burn ESD for coupons. A stablecoin must maintain its target when sellers emerge, and effective hawkish tools are needed to stabilize the price during periods of weakness.
To achieve these goals, we propose a vision to iterate Empty Set Dollar
Executive Summary:
Key design goals:
- High liquidity for buyers when ESD goes above the target.
- High liquidity for sellers when ESD goes below the target.
- Decreasing Gini coefficient for ESD over time by achieving wider distribution.
- Establish alignment within the ESD community during expansion periods and contraction periods.
The new system will be partially collateralized, rather than uncollateralized. This provides for a robust stability mechanism that is ~10x more capital efficient than current trustless collateralized stablecoins.
ESD supply is expanded by minting and selling ESD on the market when the system is above target. This will be done by a public incentivized function callable by anyone. The proceeds of this sale will be used to fund the reserves, and any excess will be distributed to DAO members.
ESD supply is contracted by issuing Coupons, which resemble zero-coupon bonds for future ESD. Debt is issued with a given maturity epoch, e.g. 270 epochs in the future.
Just like in the current system, this reduces the amount of circulating ESD, with the following advantages:
- ESD is taken out of circulation for a determinate amount of time, as opposed to an indeterminate amount of time
- Redemption is guaranteed, reducing the risk to Coupon purchasers
The fair market value of Coupons (e.g. the required interest rate) are determined via auction, by accepting the highest bid of ESD for future redemption. For example, if 10,000 ESD, 270 epochs in the future are auctioned, the winning bidder may pay 8,500 ESD in the present.
Detailed Mechanics:
ESD assets can be in 5 phases.
- Free (ESD) — regular circulating ESD
- Coupons (COUPON-XXX)- short term ESD denominated debt. Note: the symbol for each debt series will be “COUPON — REDEMPTION EPOCH NUMBER”
- Cooling (ESD-C) — ESD that has been staged to go into the DAO
- Frozen (ESD-F)- ESD that is bonded to the DAO.
- Reheating (ESD-R) — ESD that has been staged to exit the DAO.
ESD DAO entry and exit
When an address elects to transition from free ESD to frozen ESD, they stage their ESD and it enters the cooling phase. Once the ESD-C has waited for the cooling phase to pass, it can transition to the DAO.
When the address elects to phase the ESD-C to ESD-F, they must also deposit reserve assets, on the DAO Share Ratio of reserve assets to ESD-F, with their transaction. Users who join the DAO at V2 inception will be exempt from the reserve asset requirement.
Cooling phase is how ESD enters the DAO. ESD must be staged for 300 epochs before it can enter the DAO.
DAO Share Ratio is a parameter that begins at 100 (reserves equal to ESD) but can be later lowered by the protocol.
If the user does not wish to enter the DAO after the cooling phase has passed, they can Reheat their ESD-C to get free ESD again.
When a user elects to transition from frozen ESD to free ESD, they stage their ESD and it enters the reheating phase.
Reheating phase is how ESD exits the DAO. ESD must be staged for 300 epochs before it can become free ESD. When the user transitions from Reheating to Free ESD, they must add reserve assets equal to the greater of the current reserve ratio OR 20%.
ESD DAO Dove Tools
Doveish monetary policy stops unwanted price appreciation in a currency.
ESD DAO is capable of maintaining a hard upside barrier for the target. Within the DAO protocol there is a “sell over target” function. It is a public function that anyone can call to mint ESD and sell ESD down to a level such that the post-sale uniswap pool ratio is anything greater than 1.005. When the “sell over target” function is called, a small amount of the sale is returned to the function caller (50 USDC). The remaining proceeds of the sale are either 1) sent to the reserve pools, 2) given to the ESD-F holders for withdrawal. ESD-F holders can pull their share of the USDC whenever they choose. 3) a mix of both. The proceeds are directed by the following rules:
1. Reserve Ratio <20% => proceeds go to reserve pool
2. Reserve Ratio >30% => proceeds go to ESD-F holders
3. Reserve Ratio in between 20% and 30% => proceeds split between reserve pool and holders based on gradient from 20% to 30%. For instance, if reserve ratio was 23%, 30% to holders, 70% to reserve pool
Reserve Ratio is the ratio of USDC in the DAO reserves to Free ESD.
Note: Reserve will be in USDC, but we are not making a long term commitment to always using USDC.
ESD DAO Hawk Tools
Note: Hawkish monetary policy stops unwanted price depreciation in a currency.
ESD V2 uses Coupon issuance to stabilize the price of ESD when it falls below the target.
When the epoch TWAP is under 0.995, a new Coupon auction is triggered. The number of Coupons issued is determined by the magnitude of the difference between the TWAP and 0.995.
The ESD principal received from the Coupon auction is placed onto the DAOs balance sheet/ Three epochs after each auction settlement, the “interest” due at maturity is either minted or purchased on the open market, depending on the current market price and the Reserve Ratio:
- If current uniswap price is >1.005, then free ESD is minted.
- If Reserve Ratio is >10%, USDC from the DAO reserves is used to buy ESD on Uniswap.
- If Reserve Ratio is <5%, new ESD-F is minted, the DAO share ratio is lowered to reflect the dilution, the ESD-F bypasses the cooling phase to immediately become free ESD, and that free ESD is reserved for the Coupon holder.
- If Reserve Ratio is between 5% and 10%, the two will be mixed on a gradient. For instance, if the Reserve Ratio is 6%, 20% of the interest will be filled by option A, and 80% will be filled by option B.
Transition from v1 from v2
This transition can be realized through a series of incremental improvements to the current system. The actual incremental steps implemented for the transition will be decided by the community. The specifics are engineering decisions that are best decided separately, but we outline one hypothetical path so people can get a sense of what we are thinking:
V1.1 Create migration for expired coupon to fixed payout debt that will be claimable in the new system immediately prior to the launch of v2.0
V1.2 Implement re-heating periods for the DAO without reserve boost upon exit.
V1.3 Add public function for the DAO to mint and sell ESD over target for USDC and start building reserves.
V1.4 Give users a window to enter DAO before the cooling period is added.
V2.0
- Implement coupon auction system
- Implement cooling period
- Implement reserve contributions for cooling
- Implement reserve contribution for re-heating
- Implement USDC claiming
- Launch DAO
Thanks to Robert Leshner and EQParenthesis for reviewing drafts of this document.
Thanks to {ess}.
