MIP.C2-0022: Charging a Stability Fee on Maha Redemptions

Governance Development Proposals (C2)
1

Hey All,

This Proposal will serve to set out, identify and establish the stability fees on redemption of Maha collateral in the Protocol (Product - ArthLoan).

Introduction

ArthLoan on BSC side have added Maha Troves (ability to provide Maha as collateral), along with this Redeem feature was enabled. This allowed a user to redeem collateral

( Maha in this case) by providing/burning Arth. The applicable fees for redemption are redemption fee ( variable based on time of last redeem with minimum of 0.5%) and the other being Stability Fees in Maha , which stands at 0% for Maha Redemption ( this fee can be decided through governance).

The purpose of redemption was to maintain Arth around the peg ( GMU) and the collateral is redeemed against open loans with the lowest CR ( however with a with a partial redemption , CR of a partially redeemed loan will improve and prevent a full redemption)

Read more about it here : Redemptions - ARTH Guidebook

The Issue

It was was noted the the Redeem function was overused by users to an extent that many open loans were having their Maha redeemed against, this was for the dissatisfaction for many who were long on maha. Further it was very difficult to identify an optimal CR level to keep a users collateral safe from redemption. (even positions with CR over 200% had risk o being redeemed against).

The following factors are the reason for the dilemma:

  1. Low TVL on Arth Loan ( Hence a high portion of open positions are redeemed)
  2. Low liquidity in general and on Pancakeswap ( i.e buying 144 Maha has a slippage of 1%)
  3. The Oracle price feed of Maha is which is average tends to be lower than that of Pancakeswap (the only DEX on BSC)
  4. The redemption fee charged by protocol on avg is between 1%-1.5% and fixed value for each trade and buyers/redeemers are not impacted by slippage.

All these facets has been exacerbate by the fact the functioning of redeeming feature was unfamiliar by users , who were unhappy to have a high risk exposure on loosing their collateral and having to maintain a very high CR.

Solution

It was decided to discourage the usage of Redemption function on Maha positions , a proposed 5% stability fee (payable in Maha ) being charged for redeeming Maha collateral. This is currently available on BSC , however will be applicable on polygon chain once Maha Troves are added there. This is a temporary measure to be superseded by subsequent proposal on changes made to stability fee.

Summary

This proposal will calls for the following changes;

  1. Charging of 5% Stability on redeeming Maha collateral
  2. This rate will be also applicable when the Maha collateral redeem feature is made available on Polygon Chain.

Conclusion

It should be reiterated this is a governance given right and only probable solution to control unsustainable usage of the maha redeem function. Further the 5% stability fee was recommended by Steven. Please provide your opinion to discuses further on this and bring this matter for a governance vote.

Thank You

4 Likes
2

This is a good approach and very important, but from my point of view and experience over the last days 5% Stability Fee is not enough. I would be for at least 20% to protect the Maha loans.

There are many reasons why Maha is redeemd. Among others for manual leverage, because the price via the redeem function is often better than on pancakeswap. No slippage and no transfair fees than if you would transfer Maha e.g. from KuCoin via ETH to BSC. However, perhaps the most important reason for the redeeming of Maha is, in my view, arbitrage with Maha.

With 5% fees we can prevent this in the case of small volatility as in the last two days to a large extent (not 100%). With more volatility and therefore larger price differences between Pancakeswap and KuCoin, however, 5% is not enough.

With larger price spikes towards up or down either at KuCoin or Pancakeswap 5% is too little (yesterday it was once 20% difference). So still gives 15% price difference in this case.

So if we expect more volatility on Pancakeswap and KuCoin in the coming days and weeks, then with only 5% it probably wonā€™t be long before all Maha loans are liquidated. From my point of view, the price on Pancakeswap should be better at all times than via the redeem function.

We should protect the Maha loans because nobody who has a Maha loan wants to be liquidated. We should therefore handle Maha as an extraordinary collateral. Because Maha holders are those people who support MahaDAO in the long run.

If we can protect the Maha loans, then the TVL and Maha price will also go up and prevent also resentment among people.

My question would therefore be, what is the argument against 20% fees?
What negative effects would this have?

PS: I think we can hold the Arth peg via BUSD/USDC Loans and BUSD/USDC redeem. For that we donā€™t need the Maha redeem function.

3

Could we make Maha a special collateral in the system as an alternative? The collateral of last resort?

We always disable the redeem function for Maha. It is only activated in case of emergency, when there is no other collateral left in the system to redeem.

This means that Maha loans are basically well protected.
A Maha loan would then only be liquidated in normal operation if the price falls below 110% CR of the loan.

However, if the system is stressed, then the redeem function of Maha can be activated.

We can give our own token benefits over other collateral. I think there is nothing against it. But would bring many advantages for the Maha token and security for the people.

1 Like
4

I think this is one possible solution, but there is a lot of moving parts here that deserves thorough analysis before nominating 5% or 20% (what are these suggested amounts based on?). Essentially this is an arbitrage and slippage issue, but not entirely a liquidity issue (data for gmu feed).

Another way to approach this, which may seem radical at first - is to remove the ability to redeem arth for maha all together. Maintain ability to borrow against maha, add and close loan, but not redeem arth for maha. This way loans are also safe above the CR too.

Or can set it up so you redeem arth for maha, but it steps through busd collateral first, then the busd buys maha off pancakeswap exchange. This way youā€™re not effecting maha loans, and only drawing on stable collateral, to then add buying pressure on maha through dex.

1 Like
5

The redeem function was created to keep the arth stable, and theoreticaly should be used only for arbitrage when arth go below his peg.
And for this reason should be redeemable only against busd/usdc/stablecoins.
The problem in this moment on bsc side is the amount of busd that can be redeemableā€¦is too low. Imho this is the first thing we have to fix
One solution can be to give a reward for the people who take a loan with busd, my idea is to use a portion of the protocol fees and slowly payback loans taken with busd, with this extra bonus people will be stimulated to take loans and in the same time the busd pool for redeem will increase considerablyā€¦and at that point we can disable completely the redeem function against volatile coins and leave only against busd/usdc

Edit: of course for the short term i agree with Michael and LongWay suggestions (to disable completely or raise the fees at 50%)

6

I think this is one possible solution, but there is a lot of moving parts here that deserves thorough analysis before nominating 5% or 20% (what are these suggested amounts based on?).

I donā€™t know how the 5% came together, but my ā€œat leastā€ 20% comes from the fact that the price difference was 20% at some time last Sunday, for example. Between Pancakeswap and the redeem function.

This would mean even if we had 5% fees, it would still be a 15% profit on arbitrage. And arbitrage can be repeated with a few clicks and zero gas costs until prices are equalized.

This means that with these price differences, one loan after the other will and would be liquidated, because it is just that easy.

5% Fees are just about enough to cover a price difference of about 10 cents.

We should therefore remove the redeem function for Maha from the game. If the price on Pancakeswap is higher or lower than on other DEX and CEX, then arbitrage should be done with other DEX/CEX and not via the redeem function. For this, the redeem function for Maha must either be deactivated or the fees must be so high that the price on Pancake is always better than via redeem. But in the latter scenario, we would not need the function for Maha either.

I am therefore primarily in favor of shutting down the redeem function for Maha. Except in emergency situations, as described in the last post of mine.

If this is not possible, I would tend for 50% fees or more. But at least 20%.

7

I thinkingā€¦ 5% + arbitrage bot probably would be enough

8

We should at least wait for leverage as this will increase stablecoin collateral,

Overall I think it will always be an issue when you offer no slippage redeem as an exit option - 5% fee just means the viability of using it is limited to whales with larger volume who can move kucoin price greater than 5%.

It is too early to have redeem for maha option, and a small % fee is only as good as the liquidity and market depth you have on maha pairs. There is not enough protections in place to encourage using maha as loan collateral while it can be redeemed against to game price feed differences and liquidity differences - people want to leverage long but donā€™t want to play musical chairs with their CR position.

20% fee is too high, it reminds me of mahaswap and trying to control price by introducing fees that no one is willing to pay - are we trying to resolve the arbitrage/collateral issue or minimize it? If you want to minimize it, use 5% fee. If you want to resolve it, a 20% or higher fee is so high that you might as well remove maha as redeem option.


There are other alternative strategies to explore too - such as; 1. enabling maha redeem, but instead of targeting the lowest CR position - it reduces proportionately across all open loans. 2. introduce a protection period where a loan against maha can not be redeemed against for 7-days, but can only be liquidated if under the CR. 3. simply route the redeem for maha through a dex - pancake and quickswap. This way there is no arbitrage, what is redeemed then does not effect loans.

e.g.
Redeeming Arth for Maha, does not burn arth and withdraw from loans - it simply swaps arth for maha on dex. This I think is best option as using the ā€˜redeemā€™ function for maha adds buying pressure instead of selling pressure by gaming the non-slippage.

If collateral for stables is too low, route it through the arth-stable pairs on exchange too. At least this way we are not syphoning TVL.

What we are saying here with a % fee instead, is that introducing this is an attempt to equalize the difference, but you have another factor of liquidity and different data inputs that can be exploited still. Add a % fee likely means the same problem continues only with more volatility, not less.

Suspend maha Redeem, route it through a dex swap instead with no burn or claim on loans. Problem solved.

1 Like
9

I disagree. I think we should act as quickly as possible. We can currently see the loans being liquidated, the redemption fees and CR rising at a rapid speed.

I would therefore strongly suggest to deactivate the redeem function for Maha for the time being. Then we can look for solutions.

There are other alternative strategies to explore too - such as; 1. enabling maha redeem, but instead of targeting the lowest CR position - it reduces proportionately across all open loans. 2. introduce a protection period where a loan against maha can not be redeemed against for 7-days, but can only be liquidated if under the CR. 3. simply route the redeem for maha through a dex - pancake and quickswap. This way there is no arbitrage, what is redeemed then does not effect loans.

These are good approaches, but implementing something like this takes a lot of time.

Until we have found and implemented another solution, we must protect the Maha loans.

10

This morning we were already at 9-10% redemption fees. And we have lost 4 Maha loans in the last hours.

An arbitrage bot is probably not so easy to set up as Pancakeswap is the only DEX with Maha on BSC.

11

First off , I too was was not happy when most of maha got redeemed. And off-hand decided that the function was counter-productive.

But we have to look at things holistically, atm we just have limited liquidity and troves. We should take the following into consideration:

  1. We have 3 throve each on Polygon and BSC, with 1 being stable. The team will add more which includes low to medium cap projects such as scallop.
  2. We simply cannot pick and choose which trove/colleterial can be redeemed against as it will create additional strain on other collateral We need all collateral to share the .burden, especially once the team adds troves for the incubated project.
  3. Finally disabling Maha from being redeemed; We have a significant portion of Arth minted through Maha Throves. In a worst-case scenario, will we have sufficient other collateral to cushion the redeem pressure? due to maybe, the farms have stopped. The high slippage and high sell pressure of Arth will push ppl to redeem it from the protocol instead of using DEX/CEX.

As Michael correctly said we have several moving parts,with the upcoming products making the decision making much harder. Hence we need the teams itemā€™s on this as well.

It should be emphasized based on how the protocol is built, the failsafe to protect certain collateral is the redeem fee (algorithmic post mortem fee) and stability fee ( decided by governance) and by default range of 1-5 % based on the general risk appetite. While the range of 5 -20% stability is to be charged for collateral that is at high risk.

So initially given 5% is a reasonable fee which will still make the redeem function usable, while 20% fee will be basically disabling the function but too might not matter for a whale. While the alternative suggestions of Michael and Longway are great, might not be easy to implement. However, I would like to bring to your notice the following.

  1. The team will likely incorporate DEX aggregator within the app , making arbitrage easier.
  2. The fee change proposed in this MIP can be a temperory measure.
  3. In the interest of promoting stable collateral, we could look at nullifying the borrowing fee for that.
  4. With what Marian said, redeem function is to ensure Arth price does not go below the peg. Hence we could have the entire function disabled when Arth is above the peg.

Finally, my radical proposal to maintain Arth around the peg , is to create a pool to collect Arth (Similar to the existing stability pool) but through a flash loan or smart contract, Swap Arth through the in-build DEX aggregator, and have it redeemed against the respective collateral)

However as everyone agrees, we need an immediate solution. The charging of fees is the only way forward. The only decision we have to make is at what rate the stability fee has to be set. The teams insights into this can help us to make a decisive recession.

Hey Steven , the floor is all your .

1 Like
12

Regarding the supposed need for redeeming of Maha to keep the Arth peg:

I am just thinking how the redeeming for Maha will bring down Arth to the peg. The probability that the function will be used for this is enormously low.

There are 100 ways why the redeeming for Maha happens for other reasons and even worsens the Arth peg further.

E.g. if Arth are taken from Loans to redeem Arth for Maha and the Maha is then swapped to Arth on Pancake at the Maha-Arth pair. In this case, the Arth price increases in that pair. From there, the Arth can be used to farm, for the stability pool, pay off Loans or redeem for more Maha (Leverage). Therefore, they never enter the Arth-BUSD pair to lower the Arth price.

Even if it starts with BUSD and ends with BUSD again.

So: buy cheap Arth with BUSD (pancakeswap, the Arth price rises), redeem Arth for Maha (at 2 dollars), sell Maha on pancake for Arth (but here the Arth price rises in the Maha-Arth pair) and then again exchange this Arth on pancakeswap back to BUSD (the Arth price in the Arth-BUSD pair falls). The difference for the Arth (-BUSD) peg on pancake is minimal since you first buy Arth and then sell it again. Since you sell even more Arth on this exit to BUSD than you bought at the beginning (since you have some arbitrage profit on top of that) it pushes the price of Arth down a bit more.

The Arth peg will therefore only come down if you exchange BUSD on pancake into Arth and redeem them into BUSD and again use the same pair (BUSD-Arth) on pancake and repeat the process.

In short, redeeming for Maha are of no use in bringing Arth back to the peg. It rather has the opposite effect.

1 Like
13

So we could conclude that the Redeeem function has enabled to an extent to fulfill its core function. That is to maintain Arth around the peg. However, as a temporary measure, we increase the Stability Fee.

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Stability Fee to be set O/A Maha Redemptions
  • 5%
  • 10%
  • 15%
  • 20%

0 voters

15

Overall, I think this should not of skipped the ideation process before moving to a submitted MIP and voting date.

The feedback is both minimal and instead offering alternative strategies to achieve the same (perhaps better) result. The parameters of 5, 10, 15, 20% are not well supported by mathematical reasoning and numbers - it feels like a ballpark estimation and I think we should hold such proposed changes to a higher standard of thorough evaluation.

At current, we have an alternative strategy that seems more simplistic, easier to implement, easy to understand and no risk of unforeseen problems that can arise from miscalculations with rough fee %.

There is little information to support the particulars of this proposal, or why this fee strategy is suitable. Can it still be gamed by manipulating price feed data and liquidity - the answer is yes it can, and a 5 to 20% fee just means that there is more difficulty in exploiting it, but does not remove the possibility - in fact it makes the possibility one that requires even more volatility to price. When you offer zero slippage and 5-20% fee, then the advantage is in creating a price divergence of 21% or more, which can be done fairly easy.

Once again, what is the issue with removing Maha as a redeem option? This seems like the more simple and strait forward approach that actually solves the issue entirely.

16

@Michael Steven doesnā€™t want to remove redeem function to MAHA, so I guess itā€™s out of the table(pity, though), hence we strive for a MIP with 20% fee - itā€™s not perfect but thatā€™s what weā€™ve got for now.

17

@Michael You are right and most probably agree with you on that. Including me.

We have discussed this many times in the last days especially in the Patrons group. I (we) see this vote on redemption fee for Maha only as a small emergency nail (Small quick compromise for an urgent problem). Depending on the amount of the fees, it protects (especially against Maha arbitrage) a little bit better or not. But there are other reasons and situations where even 20% fees will not help. So the danger for the loans is still there and there will still be further Arth for Maha redeemd.

Basically, most of the people I have discussed with are in favor of switching off the redeem function for Maha. Because the emergency solution with the fees only offers some small protection for the Maha loans from small price differences and the positive aspects (loan security, more TVL, price increase of Maha, no negative experiences with the loans and no negative statements in Social Media etc.) would be very big, if we could really protect the Maha loans (and all other loans too) completely.

According to Steven, turning off the redeem function is apparently not possible for Maha. And as I interpret from his reactions, even 20% fees are already very high for him. But he agrees that we have to protect the Maha loans. (That is my personal impression. But itā€™s best if @enamakel shares his view on this himself also here.)

But there are solutions and partial solutions (among others also from @Marian, @Farhad, @Sebastian and @ultra219). E.G.

  1. Disable the redeem function for Maha (preferred by most).
  2. Maha as last ressort collateral. The redeem function for Maha is only activated if there is no other collateral in the system to redeem.
  3. Disable the redeem function for all highly volatile tokens (except stablecoins). Perhaps with a reward function to open BUSD and USDC loans.
  4. High redemption fees for Maha. We discuss here up to 20%. (From my point of view we could also set this to 99% if no shutdown of the redeem function is possible).
  5. High redemption fees for all highly volatile tokens (except stablecoins).
  6. General shutdown of redeem function for all tokens when Arth is close to peg. So the function is only active when Arth has noticeably lost the peg. (This would be e.g. a good additional solution to fees for Maha. Together with a bot for Arth.).
  7. A redeem safety buffer: Loans with CR between perhaps 110-150% cannot be redeemed. They are safe and can only be liquidated if the CR of a loan falls below 110% due to a drop in price. (Or in emergencies when the system has no other collateral to redeem).

In terms of partial/solutions, it should be noted that some could be done immediately and straightforwardly, while others would likely require extended recoding and retesting.

Maybe in the short term we can offer ā€œa littleā€ more protection to the Maha loans with fees (with 20% or more). In my opinion, however, we should create a solution in the near future that protects all loans from the redeem function. In general, people should not be afraid to take a loan. The only factor for liquidation should be a sharp drop in price that brings a loan below 110% CR.

1 Like
18

So as @LongWay @Sebastian have iterated, the proposed stability fee at 20% may not be the optimal solution. It is the only way out of our current predicament. So the protocol allows us through governance to charge the stability fee of max 20% to address the issue we are facing. So we doing it.

We can relook at this area once other product , mainly leverage function are launched. This will help us gauge how the protocol functions on different faucets.

Once this vote is passed. I believe we will see an immediate improvement in TVL . Further i appreciate the out of box solution all of you guys have provided, which i believe will be instrumental for the team in making improvements going forward,

1 Like
19

So in the interest of minimizing any unintended consequence or any conflict MIP22 may have on any further development of the protocol. This additional clause will be put forward for approval.

The team will reserve the right to change the stability fee as it deems fit after a cliff of a month from the implementation of this proposal, without the requirement of a governance vote. This would be a one time circuit breaker.

1 Like
20

Letā€™s have 20%. I strongly believe it will improve confidence and more people will decide to take a loan. Now as I see in our group ppl donā€™t want to loos precise MAHA and revoked loan.