May 15, 2022
Last Week Summary & Roadmap
Hi everyone, Séb here. Haven’t written an article for a while, feels good to talk to the community again in here! Have a good read 👍
Introduction
It’s been a very tough week for most people in the space, between LUNA going to 0, $UST depegging, $USDT risking a depeg, and the bloodbath in the markets. But you probably already know.
This has created unprecedented conditions which allowed slightly more than $1m in profit to be realized on the LUNA/USD pair on gTrade.
Due to bad timing, as the BTC/USD crash to $26.7k was happening at the same time, it led to a slight panic in the community, which could have lead to a negative feedback loop if we hadn’t acted immediately.
Therefore, we have paused the minting of the $GNS token by the DAI vault, and have more than tripled the APR on the DAI vault, giving everyone time to digest what happened, and thus preventing any further panic.
The opening of trades was paused for 24 hours because we wanted to stop the minting as soon as possible, so we removed the minting role from the DAI vault. This gave us time to find a better solution (setting the minimum blocks between refills to a near infinite value, making it practically impossible for a refill to happen).
While the external conditions were extremely improbable, we believe there are lessons to be learned. We have discovered that some of the altcoins we were offering were unprofitable to the protocol, as they weren’t liquid enough and therefore gave a significant edge to traders, which was higher than the fees generated from the volume.
Therefore, we have delisted $LUNA, $AAVE, $EOS, $YFI, $CRV, $DASH, $NEO, $THETA, $TRX, $ZRX, $XMR, $FTM, $APE, $SHIB, $BAT, $CHZ, $AXS, $COMP, $ZEC, and $ICP. Please note that they can be relisted in the future if they respect our listing requirements again. Most were delisted because the market downturn reduced their liquidity and market cap significantly. Existing trades on these pairs can always be closed.
It is the most impactful measure regarding the PnL on gTrade, as every positive PnL event happened on either relatively low liquidity and market cap altcoins, or in the case of LUNA, an altcoin with a minting/burning mechanism. We are now much stricter with the fundamental analysis of the assets we list. For example, LUNA with its minting and burning mechanism tied to the UST stablecoin would represent way too big of a risk to be listed using our new requirements.
It is also now clear that we cannot rely on minting $GNS to collateralize the vault, as it can start a potential death spiral every time. The problem is that when we need to mint $GNS to refill the vault, people can start potentially selling $GNS, which makes it harder to refill the vault, which potentially leads to more minting, etc.
It is as if we were putting $GNS in the vault to collateralize it, which we need to sell in order to refill it. Since it is visible to everyone, it is almost guaranteed that some people would try to anticipate it, and that more $GNS would need to be sold in the end to refill, simply because there is currently no incentive for people not to sell at the start of a minting period (and thus no incentive to keep the token price elevated so that the protocol could raise capital through minting to refill the vault).
Therefore, the solution is not to rely on $GNS, but to rely on additional $DAI, which we were already doing, but not enough due to relying on minting. This means increasing the overcollateralization ratio to at least 130% so that we can easily stomach 30% drawdowns, even after the optimizations we’ve done for the profitability of gTrade.
In the long-term, we can even keep raising this ratio, because the higher it is, the less chance there is that the vault becomes uncollateralized again. This is real collateralization because the DAI is there and we can use it. It is an insurance fund against drawdowns.
Note that it is not a problem if the vault is temporarily undercollateralized as it is currently, because we have been refilling it with about $2m per month from fees and negative PnL, which means it will be overcollateralized again.
Major conclusions
- We must be extremely strict with the altcoins we decide to list.
→ At least top 100, good liquidity (= max open interest), no fundamental risk (eg. LUNA mint if UST depeg). - We must monitor the above conditions in real-time.
→ Be very aggressive about reducing max open interest or even delisting pairs. - We cannot rely on the minting mechanism to collateralize the vault.
→ Always a potential death spiral effect.
→ Replaced by a much higher overcollateralization threshold.
→ Stop relying on GNS/DAI LP anymore for overcollateralization, only DAI instead. Way more liquidity efficient, and allows us to send a significant percentage of LP incentives to single-sided $GNS staking.
Actions taken so far
- Removed unprofitable and risky pairs for the protocol.
→ Existing trades can still be closed. - Monitoring PnL and liquidity in real-time for all pairs listed.
→ Stronger methodology and automation. - Adapted all max open interests and spreads based on monitoring.
→ Significantly lower max interests due to the correction in the market.
→ Higher spreads on most pairs, but particularly altcoins. - Collateral closing fee increased from 0.3% to 1%.
→ Higher fee on high collateral and low leverage trades.
→ Additional inflow of $250k per month for the DAI vault. - Reduced max collateral per trade from 75,000 DAI to 50,000.
→ Based on updated vault balance. - Increased overcollateralization threshold from 110% to 130%.
→ 3 times more robust to drawdowns long-term.
Medium-term Roadmap
We were planning on deploying to Arbitrum in May. However, it is now much more urgent to optimize and tweak a few parts of the architecture.
This roadmap should keep us busy for the next few months.
1. $GNS single staking pool
Use a significant part of the LP incentives to reward long-term holders, since we do not rely on GNS/DAI LP anymore for collateralization.
→ Multiplier points on rewards proportional to how long one stakes (or similar mechanism).
→ Gets a share of current LP closing fees (revenue stream #1).
→ Could receive DAI rewards that replace the burn above overcollateralization threshold (revenue stream #2), because it would probably better incentivize long-term holding compared to burning.
2. Potential migration to Uniswap v3 liquidity
Potentially speeding up the roadmap for protocol owned liquidity by about 5x. A very powerful technical improvement (more liquidity efficiency).
→ About 5x less capital required for the same slippage.
→ Requires much less incentives due to higher capital efficiency.
→ Makes protocol owned liquidity roadmap much faster.
→ Allows sending all LP incentives to $GNS staking much faster.
3. DAI vault adjustments
Making the DAI vault even more resilient to drawdowns, and giving a strong incentive to keep staking longer.
→ Only PnL going through the vault, stop burning the collaterals (decreased drawdown risk).
→ Multiplier points on rewards proportional to how long one stakes (or similar mechanism).
4. Arbitrum deployment
Going on an optimistic rollup is the best strategic move we can make in terms of adoption, until zk rollups are live.
→ Stop missing traders or stakers because we are on Polygon only.
→ More volume and revenue for the protocol in the medium-term.
5. Potential adding of a funding fee
From the traders’ feedback we’ve had, most of them would be happy to pay a significant funding fees if it allows for lower leverage and/or more pairs to trade.
→ Either pay the other side with it (incentivize delta neutral), or just remove it from trade collateral over time on both sides.
→ Would not need to charge funding fee at every leverage or on every pair, could be low leverage only and more volatile pairs.
We haven’t decided anything yet regarding the potential funding fee, we’re going to ask for more traders and community feedback.
Conclusion!
Regardless of external conditions, we are never going to stop building and improving the protocol.
We will get through this outlier event stronger than ever. 💪
The positive PnL events are fixed, the incentives of every protocol participant will be significantly better aligned with the best interest of everyone in the protocol, and the DAI vault will start getting much more robust over time due to the increased overcollateralization threshold.
We are proud of the way the community is handling this short-term volatility, and thank everyone for being part of this project. We are very honored to have such a genuine community, and do not take it for granted. Thank you.
