This SIP proposes to put in place the following action plan that unwinds part of the negative ETH skew (currently at 230m$):
Create a DAI/sUSD with the following parameters:
c) 100m sUSD
The DAI wrappr will enable graceful unwind of the negative skew by market forces or willing participants with the following strategy:
a) Mint sUSD with DAI or acquire it from the market if it is a cheaper option
b) Buy sETH with sUSD
c) Swap the sETH to ETH
d) Swap ETH to DAI
e) Go back to step(a)
At a later date, when the LUSD Supply catches up with the demand on Ethereum, in another SIP, the following can be implemented to unwind the DAI:
a) Buy LUSD with with DAI
b) Mint sUSD with LUSD
c) Burn the sUSD to release the DAI
d) go back to step(a)
The negative implications from the current negative ETH Skew on the debt pool are as follows:
- The negative ETH skew requires that snx stakers take out short ETH / long BTC to hedge their debt which is an unpleasant un-intuitive experience.
- The decrease in snx price has resulted in a significantly larger portion of the debt pool on the ethereum network is originating from the ETH wrappr. This results in increased leverage position which exposes stakers to significant price volatility and requires around 2x the amount of active debt in order to implement an effective hedge.
- The upcoming debt-pool synthesis will result in snx stakers on optimism needing to hedge their staked snx and account for the implications noted above.
Replacing the wrapped ETH with a stablecoin will lead to a much more stable debt pool, requiring less effort on minters for managing their debt. Although it would have been preferable to utilize LUSD as the stable-coin of choice to grow the protocol, unfortunately the supply of LUSD hasn't kept up with market demand given it's persistent premium, while the urgency of taking action to counter the the negative ETH skew is significantly larger as debt-pool synthetis and SNX-V3 nears.
Key Risk Factor:
Key risk to consider is that by backing the debt pool with DAI/LUSD, the protocol takes on the contract, credit and censorship risk (DAI) associated with the Maker and Liquity protocols. However, given that the LUSD/DAI is locked on L1 (as opposite the optimism) the credit risk is significantly more manageable as it can be unlocked atomically for liquidations purposes.
Furthermore, it is important to denote that the censorship risk is temporary, as the parameters of the DAI wrappr will be adjusted by reducing the
burnFeeRate and the capacity to zero to gracefully unwind it in favor of LUSD.
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