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Risk #5 - 8/9/2018

Introductions
  • Rich, Steven
Recap:
  • What is the Stability Fee? Why are we raising it?
  • Policy Tools
  • Benchmarking rate against other market rates, still competitive
  • Governing dynamic is supplemented by the Policy tool
What are the aspects we must be vigilant of when we’re interacting in the Dai economy. If we’re going to pledge collateral, what is the most important part of the collateral that could be concerning?
  • The volatility
  • Recourse is settled in the secondary market
  • The more volatile of the underlying collateral, the more collateral needed to back those loans

Initially, considering intra day volatility. Getting larger and more narrow bands The volatility stems back to the exchange’s order books and their bid-ask stacks.

How challenging is it to get insight into the organizations running tokens?
  • It will be very difficult, largely research from the outside.
  • These things are complicated for now. There’s a lot of information and too little information available.
  • Research the organization directly? Would be ideal, but is naturally challenging
What are some of the qualitative things that we’ll be considering in newer potential collateral types?
  • Team: core team and advisors
  • Community: very important, sentiment about the project. Representation about the feeling for that project and distribution of that representation
  • Technology: security review
  • Market (SWOT) review: what competition and outlook
  • Business models: what are the potential revenue streams
We would select risk parameters based on how transparent the project is and how deep our analysis and understanding is able to cover. Correct?
  • Yes, risk numbers are calculated without the qualitative assessment, but would be adjusted based on qualitative assessment
  • Largely based on public information

Due diligence will ensure the collateral type doesn’t have strategic bias.

How far will different teams diverge in their assessments? How do we address the differences presented?
  • Not sure if teams will be aligned or not. The more point of views, the more confident we can be in the function
  • Need a critical mass of teams to use a weighted average. It will depend on the number of teams in the beginning as to how to handle those situations.

Liquidity Risk - the essential piece of our interest, the trading profile for an asset HFT exist to exploit liquidity risk in the market. Token ABC might be trading at 9000$/day and liquidating 3000$ of that will move the market against you. Balance between time and cost when attempting to liquidate

With respect to the exposure, liquidity, volatility risk, if the market for a particular collateral type contracts significantly, what mechanisms are available to adjust based on the new risk profile? (After the collateral has been accepted) Do Makers need to accept new proposals or are there more dynamic tools available?
  • Need to be able to restrict the debt ceiling with haste. Would be adjusted in the next executive vote
  • Emergency vote can be held in the case of potential catastrophic risk exposure
What is our desire to bring in more traditional collateral types? Where they might have different liquidity profiles, ancillary to the smart contracts
  • Debt ceiling serves a major purpose through recourse in the secondary market
  • Not all collateral will have good price discovery and robust markets serving them and that doesn’t fit our trading profile needed to satisfy the liquidity risk
  • Gold futures or gold spots, what are the potential recourse issues to retrieving the collateral and satisfy the liquidation needed on a secondary market
It will be a defining factor when presenting collateral types to show the potential liquidity risk and depth of liquidity. Recourse is paramount.
  • How do I go about exchanging the asset that was used for collateral and another preferred asset types (i.e. fiat, ether, etc)
  • Some collateral based assets will have less recourse and we won’t be willing to take those risks on
  • There are a good amount of REITs and RE tokenization efforts being pushed forward. How do we analyze those collateral types?
Are we setting a stamp of approval on a particular collateral type? A credit rating, per say?
  • Our acceptance of a collateral type might have an impact on price, which people may anticipate (speculate on)
  • The projects we’re looking at adding would probably not be impacted by any change in price from inclusion in the portfolio
  • It still alters the opportunity set given to that group of investors (opening them up to new potential exposure opportunities)
With respect to correlation risk, is the stability fee meant to optimize the set of collateral types so they are sufficiently diversified?
  • Now we’re starting to look at the collateral portfolio like an investment portfolio and we want to leverage that diversification to our benefit
  • When we create diversification benefits, we will use that as extra buffer rather than adding in additional collateral (debt ceiling)
How do you measure (risk) within the system how well were diversifying assets in the collateral portfolio?

What is the basic risk disposition of the MRT (Maker Risk Team aka Risk Team Zero) to never have a MKR dilution event and possibly leave some money on the table or to have an occasional MKR inflation which is offset by a higher MKR burn rate?

  • We want to consider overall volatility of the portfolio.
  • The overall value might change in the portfolio, which is fine, but we don’t want to see it moving rapidly
  • The mechanisms built around the system need to be fluid: broad set of CDP creators, distribution of Dai holders, liquidations smooth
  • Look at the auctions for collateral —> large set of users vying for the unspoken collateral