The iETH price limits were increased in SCCP-18 to support the iETH staking rewards incentives trial. This SCCP proposes to remove the temporary iETH limit increases as iETH has frozen at the upper limit and the new staking rewards contract has been upgraded to allow frozen synths to be purged and recovered from the contract itself.
The upper and lower bounds of iETH are currently pegged to an ETH price of $314.54, with a lower limit of $78.635 and an upper limit of 550.445. These represent an upper and lower bound of 75% from the peg price.
This SCCP proposes to change the bounds to $289.01 and $867.02 with a peg price for ETH at $578.01, reverting the price bands to 50% above and below the peg price.
The issues that affected inverse synths from being purged when they are staked in the Staking Rewards contract has been mitigated by upgrading the Staking Rewards contract to allow the iETH token to be purged and the sUSD to be recovered from the staking contract. The recovered sUSD is then dispersed to the addresses who have staked in the rewards contract.
Therefore the temporary increase of the bounds to 75% can be removed as the trade-offs of increasing the limits to 75% were observed to have increased the leverage and risk to the protocol beyond safe levels.
There is a trade-off present in the iSynths limits, the bounds are intended to ensure profit generated by holding iETH remains close to that of ETH but in the opposite direction. As ETH moves away from the pegged price iETH starts to behave more like a leveraged token, at 50%, the current lower price bound, each $1 of iETH purchased generates $2 of price movement when ETH moves $1. By increasing the limits this will shift to as high as 7x leverage.
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