There are a variety of reasons for the protocol to increase its DAI holdings in the short term. In addition to DAI being the main asset used by FEI’s current peg mechanism, many upcoming FEI initiatives could increase the protocol’s need for DAI (see the four reasons listed here).
One attractive route for the protocol to achieve this is to take out a DAI loan on Maker, Aave, or Compound. Here are some currently available loans:
- Aave: borrow DAI @ ~4% APY, FEI as collateral (min CR=154%)
- Aave: borrow DAI @ ~4% APY, ETH as collateral (min CR=122%)
- Compound: borrow DAI @ ~4% APY, ETH as collateral (min CR=122%)
- Maker: borrow DAI @ 0.5%, ETH as collateral (min CR=170%)
- Maker: borrow DAI @ 2.25%, ETH as collateral (min CR=145%)
- Maker: borrow DAI @ 4%, ETH as collateral (min CR=130%)
- Maker: borrow DAI @ 2.25%, wstETH as collateral (min CR=160%)
These APYs are variable over time, this just shows their approximate recent rates.
Some relevant factors for Fei protocol include:
- Volatile vs stable collateral: Lends collateralized by volatile collateral requires babysitting. This can be undesirable when all on-chain protocol operations need to be automated, and governance has a >1 week turnaround time.
- Opportunity cost: The cost of taking out this loan includes not only the borrow APY rate, but also any reduction in yield that results from placing the PCV collateral into the lending platform.
- FEI vs non-FEI collateral: Related to opportunity cost, it is significantly easier for the protocol to use FEI as collateral, either minting it directly or reallocating from other places.
Based on these factors, the most attractive loan listed above would be borrowing DAI on Aave collateralized by FEI. The protocol also already has $16.42M FEI deposited on Aave. This is enough to collateralize a $10M DAI loan.
Another route to increase protocol DAI holdings is by reallocating PCV assets. This is also being pursued in other proposals. The reason that loans are attractive compared to merely liquidating PCV assets is that it is desirable to maintain exposure to some assets (e.g. ETH), some assets earn high yield (e.g. LUSD), and some assets relate to strategic partnerships (e.g. BAL).
- Mint and Deposit $5M additional FEI into Aave to form a safety buffer, bringing total protocol holdings on Aave to 21.42M $FEI
- Borrow $10M DAI and place into main DAI PCV deposit.
- Yes, borrow $10M DAI from Aave
- No, do nothing