by 0xd11a019a70986bd607cbc1c1f9ae221c78581f49 (Yemel#1f49)
Summary
This document details a tested strategy that will help the DAO secure the position of MANA in the MakerDAO ecosystem. It will do so by increasing the collateralized MANA in Maker protocol and increasing the liquidity volumes in decentralized exchanges (DEXs).
Background
MakerDAO , one of the oldest DAOs, provides a significant service to the crypto and decentralized finance space: it’s the DAO behind the stablecoin known as DAI. DAI’s value is backed by different crypto assets such as ETH, USDC, USDT, etc. The MakerDAO community defines DAI as a “decentralized, unbiased, collateral-backed cryptocurrency soft-pegged to the US Dollar.” DAI’s collateral backing, then, is part of the stablecoin’s essence.
In July 2020, MakerDAO included MANA as acceptable collateral for minting new DAI in the platform. This authorization represented excellent news for MANA, since it meant an upgrade in its status as a reserve of value. Users could now take out a DAI loan using their MANA as collateral without the need to sell it first.
Yet, in late 2021, MANA almost got downgraded again in a sudden turn of events. The attempt began with a signal request, a formal proposition for action or change in a specific platform. Signal requests are usually coupled with polls through which the community votes whether accept or decline the proposals. In September 2021, a signal request from the MakerDAO forum presented a plan to remove MANA and some other tokens as acceptable collateral. By the time the polls closed in early October, the initiative had gathered enough votes to offboard and delist many tokens. But MANA, for its part, was spared from the offboarding. Thanks to community signaling, which advised against a downgrade, MANA persisted in the list of acceptable collateral for minting new DAI.
As observed per the cited signal request, the MakerDAO is interested in delisting unprofitable collateral types. The MakerDAO has sufficient incentive to remove the less efficient collateral types. First off, every collateral type has some fixed costs on oracle price feeds. On the other hand, each collateral type brings extra complexity to the team maintaining the project.
In this vein, MakerDAO is interested in seeing more DAI minted with MANA as collateral; otherwise, MANA might be delisted and no longer stand as acceptable collateral. Also, MakerDAO would like to see more liquidity in exchanges between MANA and DAI. They expect such increased liquidity because, if the price of MANA were to drop abruptly, a more liquid scenario would help reduce the risk of liquidating an undercollateralized position of MANA.
Description
The current fee to mint DAI using MANA as collateral is 6% annually.
After conversations with MakerDAO, they might consider reducing this fee to 3% if we (1) reach 10M of DAI collateralized in MANA while (2) increasing the liquidity in DEXs.
There are methodic steps in reaching both goals. Thus, this proposal describes the use of the DAOs Treasury holdings to increase the MANA collateral and liquidity in exchanges — therefore matching the two standards that MakerDAO expects.
As a side note, it’s important to mention that if this initiative succeeds, it will result in a very positive outcome for the MANA holding community. In what would be a significant step ahead, a MANA holder looking to request a loan using her MANA as collateral will find her annual rates cut by half.
Specification
The straightforward way to tackle the dual challenge would be contributing towards liquidity. So, for the sake of examples, let’s say the DAO wants to contribute 5M in collateralized MANA for this cause.
To contribute such a sum, The DAO would need to take some MANA from its treasury and lock it in a Maker Volt. In exchange for it, the DAO would receive 5M of DAI. This is, quite plainly, a loan collateralized with MANA.
Such a loan should be over-collateralized to ensure we don’t lose the collateral in the sudden event of a MANA price drop. Therefore, the suggestion is to do a 3x collateralized ratio. At the current MANA price, that would signify ~6,200,000 MANA, which would, in turn, represent 5M of DAI.
At the moment, we should pay an annual interest rate of 6%. Thus, keeping up with the former logic, it would represent 180,000 DAI. But that’s the worst-case scenario. Since the whole initiative intends to succeed, MakerDAO will eventually reduce this fee to 3%, thus downsizing the sum to half.
Afterward, we should position 5M of DAI + 5M worth of MANA in the MANA<>DAI Liquidity Pool at Sushiswap. Why Sushiswap? It’s simple: it has the deepest liquidity for the pair in any DEX. According to this MANA/DAI liquidity poll (LP), we can expect a return of investment of 2,000 DAI per day. It would not only cover the costs of the loan — but it would also leave a significant margin in net DAO profits.
The previous example, then, would prove successful in achieving the double goal of accruing 10M of DAI collateralized in MANA, all while increasing the liquidity in DEXs.
Conclusion
With a set of strategic steps, Decentraland’s DAO can significantly contribute to securing MANA’s position in the DAI ecosystem, maintaining MANA as acceptable collateral, reducing the loan fees for MANA holders, and improving the liquidity of DEXs.
There is a tested strategy to address this issue, and the DAO suggests we take on it.
Vote
- For: Improve MANA situation at MakerDAO
- Against: Do nothing
- For: Improve MANA situation at MakerDAO
- Against: Do nothing
- Invalid question/options