Long term solution to fix (and improve) Defrost for consideration

In discussion in Discord last week, community member Xi’yu made an interesting point of introducing a partial redemption mechanism to dynamically balance the H2O peg, liquidity and MELT price.

Here are his/her rationale:

  • Partial redemption: The vault needs to allow some form of partial redemption when H2O trades at a large discount, and the vault owner is compensated from the premium. This way we aren’t hostage to an AFK looper who’s leveraged 80% of h2o and doesn’t notice its trading at .62.

  • MELT fee for SV vault user: To expand on my previous idea of a complementary sv product that is immune to redemption, i think this should charge an extra fee, but not a ticket. Instead it should have an extra stability fee which is charged in MELT. The vault owner has to top off melt balance to keep their vault unredeemable. The MELT fee is then paid ONLY to LPers depositing 3crv to the liqduitiy. This provides a direct compensation from the SV user to the Crv LPer who are being paid in MELT.

** For the MELT fee, I was envisioning a MELT denominated fee, like the tickets. No price oracle required. Something like normal stability fee + X melt per day per $1k.

How this could work in practice:

  • In an extreme case, MELT price moons and vault holders wont buy MELT to maintain redemption immunity. The vault isn’t in danger of liquidation. At such high prices the liquidity farmers are incentivized to deposit more 3crv and sell MELT.

  • Other end of the stick is MELT tanks, everyone can afford and start buying MLET to pay for the redemption immunity and the platform is more appealing than other leveraged products because of the redemption immunity provided.

  • In the case of afk vaults the MELT fee runs out and they can get redeemed against. Assuming when H2O depegs and trades at 0.62, redeemers can return H2O to these vaults and redeem the vault assets. The returned H2O is given to vault users; Out of the redeemed assets, 62%+0.5% is given to the redeemer, giving them a profit; 37% is given to vault users, making them (almost) whole; the project charges remaining 0.5% as handling fee. In such a manner, vault users does not lose much.

Together these two concepts would fix peg, H2O liquidity incentives, MELT price, and stabilize the economics of the project with explicit relationships while still providing a bespoke unredeemable leveraged defi product.

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It’s clear that the afk loopers are not likely to be incentivized by much. If the loopers can be redeemed against then we can appropriately operate the protocol for the long term.

What do we do about the existing looper(s) that got us here?

interesting. as long as our product relies on active arbitrageurs to maintain peg i think an anti-afk mechanic is a good idea.

i think we can rightly assume they’re not active community members. otherwise we would have shamed them into submission already lol

The one and only thing that can be done with existing loopers and contracts is to raise the fees. It is a simple matter we can vote or discuss separately and should have zero weight on any proposals about future design.