Let the community decide on a native risk-free interest rate.
Update April 26th, 2022: Moving to a FIP process after a first poll. The majority vote was 3% FSR.
Motivation
In the road to 1B FEI, one main idea was to provide a native risk-free interest rate. This would be a simple stacking contract where Tribe governance decide the rate. A wrapper, ibFEI (or any other name), on top of it could provide a ERC20 compliant token (and most likely ERC-4626 compliant).
Such a decision will have many implications:
Fei will enjoy better supply rates at lending protocol supporting the risk free rate. Currently non-lent FEI sit idle. With a 67% utilization rate and a 3% borrow rate, this lead to a 2% supply rate. If we provide a 2% risk free rate, it would keep the 3% borrow rate but give a 2.67% supply rate narrowing the supply/borrow spread.
Fei could become a key stablecoin for Dex pairs. Dex could integrate the risk-free rate internally or use ibFEI as the stablecoin and have a front-end making the wrap/unwrap. 1inch for instance already does that for DAI/CHAI (but with 1bps rate, no one cares).
This could be integrated by exchanges, making a use case for listing FEI.
Process
Let’s start with a simple community pool then upgrade it to a snapshot (current stage) and finally an on-chain vote when, and if, such an idea is implemented.
What rate for the native Fei rate?
No Fei Native Rate
1%
2%
3%
4%
6%
18%
0voters
Specification
Create a FEI stacking contract with the following parameters:
FEI are minted and added to the stacking contract according to a rate.
The FEI Saving Rate can be updated.
An initial cap of 100M is used and can be updated later.
The MakerDAO Pot contract can be used as an example.
I agree with the idea of implementing a risk-free rate for FEI. Such a figure is critical to the functionality of many high order derivatives such as options (Black-Scholes pricing model), CAPM etc.
Though instead of voting for a static interest rate, I would like to call to attention to my earlier idea: Idea: Fei Protocol Target Rate
Which proposes an policy interest rate based on a basket of external market indicators, and can be transparently reviewed on a regular basis. The rate would be hovering around 3.8% currently. other proxies scuh as DAI’s internal policy interest rates can be taken into consideration aswell, to adjust the rate downward as required.
@cozeno I like your idea of being market driven. You are completely right that a static rate doesn’t make much sense.
Ideally I would see a committee (OA or anotehr working group?) to update rates, maybe based on your model. Maybe in the future get a model as a smart contract with ability to update the rate.
Given the new governance structure; it would make sense to propose to have the new Tribal Council incorporate a financials pod, and one of the new pods responsibilities would be to administer and conduct research to improve the formulas used for the policy interest rate. Eventually, as you mentioned there could be a smart contract which can automatically update the policy rate.
This financials pod can also take on other adjacent responsibilities such as publishing quarterly financials, developing fix interest rate borrowing on various platforms, etc. but this perhaps should be discussed in another thread.
A supply rate makes more sense to me initially rather than a borrow rate. An important thing to keep in mind is that the peg is more important than the rates, and in an under-peg environment it is more important to have a demand side stimulus (high supply rates) rather than a supply side stimulus (low borrow rates)
Targeting the supply rate is a very interesting idea indeed. Though the associated benchmarks and basket of market indicators would have to be changed to reflect that (as they are designed to track borrowing rates).
If the basket of indicators are to be reinvented to provide a reasonable supply rate, it should instead track indicators such as Dai’s DSR, AAVE/COMP supply rates. Tradfi Commercial banks’ deposit rates are price takers and heavily influenced by Fed fund rates, therefore treasuries/prime lending rates still have a place in the basket.
With input from the community, we can redesign such a target supply rate for a CHAI? analogue
A rate updatable by a dedicated pod makes sense as the best approach in the early period. I am interested in the idea of the FSR token being locked up for additional FEI or TRIBE rewards. Long term debt is great for the stability of the peg, and VOLT could allocate here from the PCV.
Converting the idea to a proposal after the successful informal poll.
Moving to last call as well as the idea was already up for discussion for 5 days.
Link to the financial pod proposal that could manage this rate in the future depending on governance decision (governance being always able to change the rate).
one additional detail we might want to include is a supply cap. this supply cap can be large and altered later on but I would be cautious of launching something like this with no cap whatsoever
just pulling numbers out of the air here, but maybe something in the range of $100M-$300M
Isn’t this only really possible in Fuse and not Compound or Aave? You’d need to get ibFEI added there, which means the effective borrow rate would be ~5%.
Overall, I think the idea of adding a native risk-free interest rate is compelling. I’m a little worried that this will be such a powerful tool for peg maintenance that TRIBE holders will fall into a trap of becoming over-reliant on it. Let’s tread carefully here and look to start low and make slow adjustments.