Kolibri Governance Proposal #6 - Continuous Increase of the Stability Fee to Reach Peg

You’d be surprised by the amount of people speaking against raising the stability fee to get back to 1:1 peg. I expect all of them to be scared of the dynamic fee
What would be the benefit of using the price from AMM instead of Kolibri’s?

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@murbard / @trolleps I think you both have good points.

In terms of an automated adjustment system, that does seem like an ideal end state (similar to the TRFM in DAI land The Target Rate Feedback Mechanism: An Introduction - Governance - The Maker Forum) since it provides an amount of predictability WRT future prices that can be somewhat easily calculated/modeled (if X, Y, and Z happen, the rate is adjusted by N).

That said I tend to agree with @trolleps that this is something that we shouldn’t implement in the short term due to things like low liquidity, and an AMM pool that is currently of size 1.

Ideally (IMO) some automatic TRFM-adjusted fee is based on some VWAP that’s an aggregate between a number of AMMs in the ecosystem to account for spot volatility or even to account for attacks to try to force rate adjustments by external actors maliciously.

Complexity breeds vulnerabilities and while I’m not keen on doing many gov proposals to do fee adjustments, I could see this TRFM mechanism proposing a vote in some way that is then considered automatically, at least until we can build confidence in the TRFM being able to handle things automatically.

EDIT: doing some more reading I found Stability without Pegs. The time has come for an old idea to… | by Stefan Ionescu | Reflexer Labs | Medium, and I’m curious what both your perspectives are on that.

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Also just FYI to the folks in this thread, we submitted the first adjustment to the timelock not too long ago, and it should be live in ~8h

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The EMA10 of Kolibri is currently at 21%, which is above our 5% threshold.

The Hover Labs team is preparing signatures for a stability fee change of an additional 1% to 4.5%. We plan to inject this 24 hours after our first request at March 10 23:45 GMT.

We will update this thread when the change has been submitted to timelock.

EDIT: Publicly viewable EMA10 data is available here:
https://p.datadoghq.com/sb/e72980047-41e546b0c453a72015620c4d8002646b?from_ts=1614802054474&live=true&to_ts=1615406854474&tpl_var_network=mainnet

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Another 1% raise of the stability fee (to 4.5%) has been submitted in operation hash ooAvUcLyVerfcNqNDngxnZHi76JLVJWvyQgmnYy2ef413c77hvV.

This increase is now in the timelock for 8 hours, after which time any member of the community may execute it.

At current time our EMA10 is 20.83% (+.37% from yesterday).

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The EMA10 of kUSD is 11.82 (-9.01%) since the last stability fee adjustment.

The Hover Labs Team is preparing signatures to continue to carry out proposal 6 by increasing the the stability fee an additional 1% to 5.5%. We plan to inject this 48 hours after the initial request, on or after March 11 23:45GMT.

We will update this thread when the change has been submitted to the timelock.

Publicly viewable EMA10 data is available here:
https://p.datadoghq.com/sb/e72980047-41e546b0c453a72015620c4d8002646b?from_ts=1614802054474&live=true&to_ts=1615406854474&tpl_var_network=mainnet

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Another 1% increase of the stability fee (to 5.5%) has been submitted in operation hash ooK6gdr8s474K8YuF14pzwrUaCMk3EA3qYM59SXhEVDa835KiJz.

This increase is now in the timelock for 8 hours, after which time any member of the community may execute it.

At current time our EMA10 is 13.09% (-7.74% from yesterday). EMA10 Data is available here:
https://p.datadoghq.com/sb/e72980047-41e546b0c453a72015620c4d8002646b?from_ts=1614802054474&live=true&to_ts=1615406854474&tpl_var_network=mainnet

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The EMA10 of kUSD is 15.16 (+4.36%) since the last stability fee adjustment.

The Hover Labs Team is preparing signatures to continue to carry out proposal 6 by increasing the the stability fee an additional 1% to 6.5%. We plan to inject this 24 hours after the last change, on or after March 12 23:45GMT.

We will update this thread when the change has been submitted to the timelock.

Publicly viewable EMA10 data is available here:
https://p.datadoghq.com/sb/e72980047-41e546b0c453a72015620c4d8002646b?from_ts=1614802054474&live=true&to_ts=1615406854474&tpl_var_network=mainnet

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Another 1% increase of the stability fee (to 6.5%) has been submitted in operation hash oo4RvoEE8BXNzfbTtYPe1nK5AYe1Qi1NgN1V95SiL4MKqhucmHz.

This increase is now in the timelock for 8 hours, after which time any member of the community may execute it.

At current time our EMA10 is 15.65% (+2.56% from yesterday). EMA10 Data is available here:
https://p.datadoghq.com/sb/e72980047-41e546b0c453a72015620c4d8002646b?from_ts=1614802054474&live=true&to_ts=1615406854474&tpl_var_network=mainnet

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The EMA10 of kUSD is 12.18 (-2.76%) since the last stability fee adjustment.

The Hover Labs Team is preparing signatures to continue to carry out proposal 6 by increasing the the stability fee an additional 1% to 7.5%. We plan to inject this 24 hours after the last change, on or after March 13 23:45GMT.

We will update this thread when the change has been submitted to the timelock.

Publicly viewable EMA10 data is available here:
https://p.datadoghq.com/sb/e72980047-41e546b0c453a72015620c4d8002646b?from_ts=1614802054474&live=true&to_ts=1615406854474&tpl_var_network=mainnet

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I’ve just learned that the stability fee isn’t credited to kUSD holders, as is usually done in these type of mechanisms. This is a mistake.

The result is that you’re not going to be able to achieve a peg without reducing the circulating supply of kUSD to a minuscule amount.

You might look into updating your contract to ensure that the stability fee accrues to kUSD holders. You can still tack an extra 50 bps on top of that fee to pay for your stability fund and dev fund, but from an economic standpoint, Kolibri isn’t going to work if the lion share of the stability fee isn’t paid to kUSD holders.

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Another 1% increase of the stability fee (to 7.5%) has been submitted in operation hash ooedfWbxvqnp96w2qj3eA3KBjUhzTmdZpQNQhoM9TF3KREE6wjh.

This increase is now in the timelock for 8 hours, after which time any member of the community may execute it.

At current time our EMA10 is 15.65% (-3.36% from yesterday). EMA10 Data is available here:
https://p.datadoghq.com/sb/e72980047-41e546b0c453a72015620c4d8002646b?from_ts=1614802054474&live=true&to_ts=1615406854474&tpl_var_network=mainnet

We discussed a DSR-like contract for Kolibri but it takes time to build and audit.
SAI was able to maintain the peg just fine even without it

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They probably subsidized it directly for a while by buying dai. From a financial standpoint it just doesn’t work otherwise.

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SAI maintained decent peg (0.95-1.05 and 0.99-1.01 most of the time) for 2 years,
I doubt you can subsidize that

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To be fair, it is on mainnet now and stably doing what it’s supposed to without any exploits :pray:
The peg is closer to 1:1 today than when corrective action started. We need QuipuSwap and SEXP along with acceptance on NFT marketplaces, to provide conditions where a soft-pegged asset such as kUSD can start to do well.

Shouldn’t work and doesn’t work are different things, given we have an example of this working (albeit with some support, arguably, assuming conspiracy theory is true).

The thing I find interesting is… what if this does work: kUSD reaches and maintains its peg? What would the possible explanation be from a point of view that this doesn’t (shouldn’t) work?

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History is full of nation-states trying to escape basic financial principles. It works until it doesn’t.

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Imagine two curves, the first one is the amount of kUSD that people are willing to mint for a given stability fee. The second one is the amount of kUSD that people are willing to hold as a function of the stability fee.

If the stability fee is very low, there will be an abundant supply of kUSD as people are happy to mint it. If the stability fee is very high, the supply will be very low. It might not ever be 0 though, there may always be one person willing to mint 0.1 kUSD even if the stability fee is crazy high. So that’s the first curve, and it’s generally going to be a decreasing function of the stability fee.

Now let’s look at the second curve. If the stability fee accrues to the kUSD holders, you may have an increasing curve… some people may be willing to hold it even if the stability fee is 0, just because it’s convenient to hold a stablecoin, but clearly the more stability fee accrues to kUSD holder, the higher the demand to hold it.

If on the other hand the stability fee does not accrue to holders, as is the case in Kolibri, well you will still have some people who want to hold it, but they will be unaffected by the stability fee, so the curve will be a flat line.

In both cases, the supply curve is going to intersect with the demand curve. The stability fee at which they intersect is the one at which the peg will be maintained.

In the case of Kolibri, the stability fee will rise until the supply of kUSD corresponds to what people want to hold, absent any reward. So you’ll have a peg, but the resulting supply will be low. You will have a few users who care about holding it, and a few minters who are willing to mint even with high stability fees. Go ahead and draw them on a piece of paper.

If, on the other hand the stability fee accrues to kUSD holder, the intersection will happen at a lower stability fee and correspond to a larger supply, because as you increase the stability fee, the demand increases which makes the curve intersect sooner.

One last word: because some people are willing to hold kUSD for the convience of it, sometimes the interesection between the two curves is going to happen when the stability fee is negative. This has happened to DAI and the peg broke because it didn’t support it.

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we’re not arguing against it.
we’re just saying for now we can get by without DSR. until we implement it
even though the supply will go down

Sure, I think we might disagree on how much the supply will go down by though.

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