| SIP | Title | Author | Status | Track | Created |
|---|---|---|---|---|---|
0066 |
Curtailing Zero borrowing |
Edan Yago (@YagoBit), Tyrone Johnson (@tjcloa) |
Ready for vote |
Contract |
2023-07-26 |
As we expected, Zero has proved to be an extremely desirable product. Zero exists as part of a two-sided market. On the one side are those who wish to borrow against their BTC, and in doing so, issue new DLLR into existence. On the other hand are Sovryn Dollar holders, who create the demand for Sovryn Dollars that are issued by Zero.
As is frequently the case in two-sided markets, one side is much easier to grow early on. In the case of Zero and the Sovryn Dollar, it has proven to be much easier to grow Zero than the Sovryn Dollar. This is due to the fact that Zero is immediately useful to a single individual, whereas the Sovryn Dollar becomes more useful at scale. The Sovryn Dollar is a currency, and like all currencies, it requires and benefits from a network effect.
Growing a two-sided market is a common challenge in the digital realm. There are well worn strategies to achieve this. Please see below post.
Currently the development of the Sovryn Dollar ecosystem lags behind. While we are progressing in developing the Sovryn Dollar ecosystem, we expect it will be a few months until efforts begin to bear fruit. In the interim, this poses a challenge to the Sovryn Dollar peg and causes cannibalization of Zero LoCs through redemptions.
To put numbers on this:
Since the beginning of April, about ~2.1m ZUSD has been borrowed. During this same time period, cumulative redemptions have increased from ~1.3m ZUSD to ~3.4m ZUSD, an increase of about ~2.1m ZUSD. The similarity of these amounts is no coincidence.
To support Zero, our highest priorities are:
- Maintaining the DLLR peg
- Minimising redemptions.
We have seen some success on both these fronts. However, until we begin to see consistent growth in DLLR demand, this progress remains fragile.
For this reason it is proposed that we should curtail new Zero borrowing until DLLR demand shows significant and consistent growth. Given that Zero is permissionless, we cannot shut borrowing down with the current smart contract. Instead it is proposed that the origination fee be increased to make borrowing prohibitively expensive.
In the short term, we can expect to see a significant reduction in protocol revenue, as originations are currently the most significant revenue driver. This short term negative impact is prudent, if it positions us for further revenue growth in the future.
Protecting the two priorities described above, while growing the demand base for Sovryn Dollar is exactly the set up required for this kind of future growth.
This will also allow us to more easily direct borrowing demand to the fixed-interest borrowing product, which will help drive DLLR lending demand.
Existing LoCs will not see any change to their fees. What we expect they will see is a lower chance of redemption.
New users will be unable to open LoCs at attractive rates. Adjustments to the frontend can help make sure they do not create very expensive LoCs in error.
Increase the Origination fee - Floor: 99%; Max 100%
- Updating BORROWING_FEE_FLOOR from 5% to 99%
- Updating BORROWING_FEE_MAX from 7.5% to 100%
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