V2 roadmap has been released and the new product no longer needs creating stablecoin.
All incentives for H2O pools have been stopped, so holders of H2O cannot do anything now. We have to admit, and I beleive team has admitted this by making new raodmap without including the H2O, that H2O vaults are no longer viable product and all users should be allowed to stop holding/using it.
Currently there is no liquidity available for H2O to be swapped back to collateral, because of the looper activities. LP of 3crv are facing deep underpeg against their original deposit. The only way to resolve the issue is to allow H2O holder to repay the H2O debts and obtain collateral of the vaults.
To achieve this, we propose to raise the Min Coll. Ratio to 120% or higher (subject to voting).
- Yes. Raise Min Coll. Ratio to 120%
- Yes. Raise Min Coll. Ratio to 135%
I agree that the looping activities lead to some unforseen circunstances that do not benefit h20 holders, and raising collateral requirements is a possible solution to let h20 holders exit.
Let’s speculate that this passes. Currently, there is more than 14m owed within 5% of the liquidation price. There are practically three things that can happen:
- Vaulters are forced to add more to their staking not to be liquidated. This does not help the peg.
- Vaulters are liquidated and there is enough liquidators that it can actually be done (we have no partial liquidation, so these 3 vaults between 4-5m H2O would need to be liquidated in the whole chunks). This, hypothetically, helps the peg because people would be motivated to buy depegged H2O and use it to liquidate. However, it could possibly happen that we are liquidating someone who is just not periodically checking their stakes. I’m not sure I’m ok with forcefully liquidating someone, even though I think everyone should check the protocol where they stake periodically and if there is enough info on TG, Twitter, Medium, and Discord, our conscience should be clean.
- There is this one large wallet that withdrew around 10m H2O and has it sitting. So realistically, this is the only wallet that could actually liquidate the three large wallets. If they do, it does nothing to the peg. However, this person can liquidate two of the supervaults worth 10m, buy 5m H2O for their stables and liquidate the last one, which would solve the peg issue.
If point 3 happens, we would be back to the peg and only have SuperVaults II that already have the MELT buy-in. That would, in a way, safe the v1 protocol and it might actually get operational. Now of course the question is whether we want to be this aggressive or not. Because the thing is that if v2 has more profitable use for stablecoins that the current “no MELT, just the looped Aave APR” setting for the stakers, the current loopers might want to deloop and use their original stables to put them into the new SuperVaults. That would obviously help the peg as well. And I’m not sure a forcefully liquidate several million dollars staker would be willing to stake again into the protocol. So, as is often the case, it’s a double-edged sword.
Just wanted to say it is not as clear cut as it might seem.
Hi Phoenix, thank you for your thoughts.
First, let me explain why this proposal, if passed, will definitely help with the peg:
The three biggest vaults amounting to $14m H2O is owned by one same address. This address belongs to a looper that contributed the most to the depegging of H2O cuz he/she swapped away most of the 3crv out of the liquidity pool to leverage his farmig position. He can never deloop his position because for now there is not enough liquidity ever for him to buy enough H2O back, so there is no way the peg will solve by itself. The vaults now have to be liquidated unless someone would be willing to sell their H2O off-the-counter to this looper, but I doubt this is ever possible.
You are right that there is one large wallet has around 9m H2O that has the ability two liquidate at least two vaults. BTW, he initially deposited 10m USDT, and was only able to withdraw ~9m H2O. So he is at a deep loss right now.
Also, this wallet is active. I believe it is highly likely he will take action.
So yes, once the proposal passes, liquidation will happen, and peg will very likely be restored.
Second, as for your concern over user retention in V2, I don’t think this is a big issue:
- Loopers dont care about history, they care about profits. If V2 is good and can generate profit/add value to users, there is no need to worry about lack of users.
- There is only one address concerned. Is such one address really so important, that worth to risk continuing the H2O depeg for a longer time, and continously damaging the reputation of project?
- At the end of the day, the looper will not lose anything. He has extracted most of the profits from the protocol (at the loss of other LPs of course) and he is also stuck with his vaults now. With the H2O incentive stopping, the vault owner is not generating any revenue from his $14m position. Liquidaitng his vaults is also helping him to get out of this.
If you truly want to know how looper thinks, we should just pass the proposal, and see how he votes. Being the biggest vaulter there is, I bet he would have a huge amount of $MELT that could singlehandedly impact the voting results.
I couldnt care less about protecting the funds of the wallet that single handedly destroyed the protocol. Fuck him. I propose that we increase fees just until the point of liquidation, and then stop the fees and wait as long as necessary to see them get liquidated by a willing party. Those that cant sell their H2O are due to lose more due to inaction than the large wallet post liquidation anyways.
But on second thought, would getting closer to peg accomplish your goal of being able to withdraw large amounts of funds? Would it not likely decrease liquidity further as the penalty to withdraw on the same amount of 3CRV becomes less steep as less H2O is available in the pool by comparison?
I will need time to think about this before I could consider supporting it.
I highly support this proposal. This one wallet is destroy the whole project.
I don’t think this is good advice. The significant increase in Min Coll. Ratio is unseen in any Defi product of its kind. Raising to 110% or 115% is acceptable. Going up to 135%, the looper lacks the liquidity to deloop even if he wants to.
This only helps liquidators. It is unethical to adjust the parameters of a Defi product just to liquidate others.
I also don’t like it but the truth is that this one wallet practically destroyed the whole v1 of Defrost. Of course, they only used the protocol as it was set but if one wallet holds 3/4 of H2O debt, is not willing to deloop, practically blocks everyone else. And as H2O is not a part of V2, there will always be losers. Now the question is whether we want it to be the small guys, or cut some of the profits this one wallet made (and it’s not even given these three debts will be liquidated as there are no partial liquidations).
I would suggest the following, conditional increase of collateral ratio:
Increase the collateral ratio in all stablecoin vaults (both SV I and SV II) to 110% for a week. If H2O Curve price is $1 at the end of the week, go back to 105%. If not, increase the ratio to 115% for a week, rinse and repeat until at peg. Once at peg. We go back to 105% and reopen the four SV II with reasonable amount of H2O to be minted and restart MELT rewards. This of course assumes that the team would be at all interested in keeping v1 functional and have v2 on the top of it.
Why do I propose this? Because I actually thing that v1 in its current form is not badly set up. It is the beginning of the protocol without the MELT buy-ins to SV II that f*cked it up. If we “restart” with the current setting, it could actually work.
Is there a chance of someone being stuck with the UST debt? Sure. But currently, there are many more H2O holders that cannot effectively trade it back. It’s the risk of any protocol, it’s the risk they’ve all taken (I have no H2O position at all), there will always be losers. That’s how financial markets, and crypto specifically, work.
I know everyone is set on raising the collateral ratio, but I’d prefer we raise fees to force liquidation, assuming its possible on existing vaults, which is why I keep suggesting a fee raise until the point of liquidation and then a pause to give time for liquidators to do their work. It gives time for the players to make their own decisions and seems more ethical than an overnight forced liquidation. My concern is allowing people out of their positions, however, I dont see why this needs to be done overnight. For me, that would spark concerns about supplying to future vaults, where you can instantly lose your collateral just because you didnt monitor your overcollateralized stablecoin position for a week, or were not present in the socials at the time of discussion. A fee raise seems more ethical, and less trust breaking. I’m not sure I want to establish that precedent.
I dont think our goal needs to be to ensure people have an immediate ability to pull their funds, just to ensure they arent stuck there ad eternum. Increase fees to say, 10%, in the meantime, we continue to collect protocol fees, and the large wallets have time to decide on how to proceed without us stealth liquidating them. Forcing liquidations is not going to immediately fix the protocol, so aside from the inconvenience of a few people having to wait to pull from their positions, why should our focus be on a near instantaneous liquidation? We aren’t exactly on a time crunch, things aren’t changing any time soon.
The solution proposed here is solely for resolving the deadlock between loopers and H2O holders, specifically, one big H2O holder who contributed 10m USDT to liquidity and is now lossing 10%; and one big looper who drained the entire Defrost3crv liquidity pool to leverage its farming position. This, by the way, caused the deep depeg and killed the protocol.
This looper owns all of the three biggest vaults. He can never deloop even if the coll ratio is never raised, because there is no liquidity. The lack of liquidity is caused by himself, becuase he swapped away those liquidity. How should others be responsible for this situation?
The liquidators in this case are the early liquidity providers who contributed 3crv and got swapped away by loopers.
The smaller loopers are not exiting their vaults because they effectively made money by creating the vaults and shorting the H2O they minted. With H2O underpeg by more than 18% and coll. raito at 5% only, there is no reason for them to repay and deloop ever. They have long left the platform farming elsewhere, so they don’t care the coll. ratio.
I beleive comparing these loopers with the H2O holders/liquidiators, the H2O holders are the ones made contribution to the project rather than destroying it. It is only ethical to restittute them by allowing them to liqduiate the existing vaults and give an resolution to the current situation.
I am not against raising the fee rate, but TBH project should do this much, much earlier. At this moment, there is little difference between the two options. The only point to discuss is how long a grace period should be given to the vaulters.
Personally I don’t see much difference in the length of grace period, because these vaulters are not exiting not because they don’t monitor project, but because they made enough profits looping and no longer care about the vaults. This can be proved by fact that these vaults remain there even after all incentives stopped.
To be more clear, because H2O is underpeg by 18%, no looper will try to exit their vaults unless if the coll. ratio is more than 118%.
Raising coll. ratio by 10% means a coll. ratio of 115%, which probably is not enough. And this is why I suggest >120%.
We can give a grace period before raise of coll. ratio, if no vaults (or only few of them) are exited, then my points will be proven.
I would stop about “ethics” here. There is nobody to blame. It’s investment. So everyone can do what the platform offers. If I came early enough and knew the platform well enough, I would probably loop my as* as well. We need to set what the aim is and how much time we want to give to the vault holders. From this perspective, it probably makes more sense to increase the fee but I would go more aggressive on it. But I’m still ok with my proposal
Been a month. Anything new here?
I wonder the same, ser. I’ll ask team in the discord. It seems they now focus on V2 development and don’t wanna touch V1 issues.
BTW, please note that I have created a new proposal combining most inputs made by community members here: Proposal to resume governance procedure for raising min coll ratio/fee rate