Identify parameters for restoring Redemptions after launch
Opened this issue · 3 comments
In order to allow for organic growth to eBTC's liquidity, it is necessary to disable the redemptions mechanism during the first few weeks post public launch. Liquity went for a 2 week disabling period but they did so because they had to choose an immutable number. This doesn't mean that 2 weeks will be the optimal number for us, instead we should investigate what are the parameters that we should look for in the system and market in order to turn-on redemptions again. We should investigate the reasoning behind the decision made by Liquity and its forks and the performance of their timing. In addition, RiskDAO should be consulted for adivce.
Deliverable: Redemptions mechanism enabling/disabling policy.
Gravita Analysis
According to their docs, they launched with redemptions disabled, then enabled them and progressively reduced their redemption fee as follows:
- Launch: Redemptions are disabled
- 18th of July 2023: 0.98
- 18th of August 2023: 0.99
- 18th of September 2023: 0.995
- 18th of October 2023: 1
Gravitas pays 1 - redemption parameter to the owner of the redeemed vessel and charges a 0.5% protocol fee on top. This means that for example, on July 18th, with a parameter of 0.98, the total fee will be: 1 - (0.98 - 0.005) = 0.025 or 2.5%, which means that the price floor will be 0.975.
The protocol was launched on May 17th, 2023 and redemptions were open on July 18th, about 2 months after. Let's see what happened to the price and liquidity during that time.
Price Analysis
- During the first 2 months, the price remain consistent within the 0.975 and 0.99 mark (redemptions disabled)
- When redemptions were enabled with a 2.5% fee, a stronger floor was observed for about 3 weeks but no major difference was observed afterwards.
- The decrease of the redemption fee to 1.5% didn't seem to have an effect on the price floor, in fact, it decayed further. Since the decrease in fee, the price has been consistent around the -2% mark (today's crash seems to be a CG issue, in reality the price remains above the hard floor).
Notes
- According to their team, the 2 month disabling period was defined almost arbitrarily and mostly to allow users to get familiarized with the mechanics before enabling it.
- Gravita currently has around ~$14m in liquidity on mainnet which accounts for about 50% of their total supply. Arbitraging operations seem to be holding up under this circumstances.
RIskDAO perspective
- The main considerations for enabling redemptions are:
- Total Value Locked (TVL) on liquidity pools to ensure sufficient liquidity for arbitrage.
- The number of CDPs to achieve a reasonable distribution between risky and safe borrowers.
- The same liquidity levels estimated to sustain liquidations through their analysis should suffice (~25% of the total supply)
- Though elapsed time is not the real metric, maybe it is the best as it creates an expectation for an upcoming peg
- If we commit to open redemptions based on TVL instead of timeframe, and price hits 0.95 before the target is reached, it will be very hard to get this target eventually
- Best strategy may be to choose a timeframe based on our TVL capture roadmap and forecasts.
TVL Analysis at Redemptions Enablement
Liquity
- Liquity's hardcoded bootstrapping period ended at
1618821190(Mon Apr 19 2021 08:33:10 GMT+0000) - The total supply was of about 1.2B at the time
- 90% sitting on the Stability Pool
- 917 Unique Troves