Proposal to resume governance procedure for raising min coll ratio/fee rate

Background

Proposal to reaise coll ratio was discussed in length at Proposal to raise Min Coll. Ratio for V1 vaults

The community sentiment was generally in favour of raising Coll Ratio to liquidate the looper vaults, with some voiced concern over:

  1. Benefits to the project: The main benefits are that:

    • Resolve the deadlock between the one big H2O holder and one big looper, allow H2O protocol to restart with a clean slate; *Note that full revival of H2O will likely need to introduce safeguard measures to prevent looping activities happening again (this could be done by a dynamic fee/coll ratio mechanism or a strict cap on mintable H2O…TBD).
    • Address the peg issue for H2O and eliminate the constant harm to Defrost reputaiton due to depegging.
    • Restititution for early H2O holders who have already suffered losses by allowing them to recoup partial losses through liquidation. *Note that such losses were precisely caused by the loopers, hence liquidaiton here is a form of restitution.
  2. Integrity: Dramatic raise of Coll Ratio in sudden manner could catch vaulters by suprise and force liquidate vaulters.

    • @crypt0x suggested gradual raise of fee rather than coll rate to give vaulters more time to react;
    • If we are to raise Coll Ratio, should give vaulters enough time to react and exit their vaults. *Note that this may not happen as most loopers would not be willing to exit their vaults as they don’t want to return the profits they made by short selling the H2O.
    • Nevertheless, it does not hurt to roll out plan without any haste and show integrity (no ambush to anyone). It seems this is the consensus among community members.
  3. Ethics: Is it ethical to raise coll ratio and allow H2O holders to liquidate vaulters?

    • IMO this should not be seen as a scheme to hurt vaulters for reasons explained above and in the earlier thread, since these vaulters/loopers are exactly the ones caused this situation and made most profits from it.
    • @Phoenix_Risen pointed out that there is nobody to blame since the protocol design allowed looping activities and anyone would do that.
    • Nonetheless, IMO allowing liquidation here is not in anyway unethical for at least three reasons: (i) the protocol enabled looping and the loopers did profit by swapping their H2O to early LPs, i.e. nowadays H2O holders; (ii) even with liquidation, H2O holders will not be made whole, loopers will likely keep most of their profits; (iii) the one big looper is now stuck with his vaults presicely for his own action.

Situation Now

On Aug 15 team annouced that they’d like to wait out given H2O was sitting at about $0.96, and anyone that wanted to exit positions should be able to do so.

Unfortunately, the peg maintained at 0.96 for only one day. It seems some of the vaulter/LPs exited liquidity and caused the 3crv to fall below 120k, and the peg back to range between 0.86-0.88.

As explained above, personnally this result is expected (most loopers would not be willing to exit their vaults as that would force them to return the profits they made by shorting the H2O). This is now further proved by how things developed.

Next Steps

Given the above, I porpose that we carry out a four-weeks plan to finally resolve this issue with H2O, put it behind, and shift community focus on: (a) V2 products; (b) possible revival of H2O protocol.

  • Week 1: Wait one more week to see if the loopers will buy back H2O and restore peg spontaneously.

  • Week 2: If nothing is improved after Week 1, the community to vote on which approach is preferred for addressing the issue:
    (1) Gradually raise the coll ratio; or
    (2) Gradually raise the fee rate.
    IMO raising coll ratio is better as this will not risk accruing too much interests to these vaults and causing them to become bad debts.

  • Week 3: After a decision is made by voting in Week 2, the community to further discuss and vote on the speed and percentage of raising the coll ratio and/or the fee rate.

  • Week 4: Complete voting and implement. The raise will be done gradually and allow everyone to exit if they want.

Four weeks of time should be sufficient for any active community members to note the event and participate. Further, after the procedures are completed, vaulters/loopers would still have enought time to act if they find that buying back H2O is more favourable to them.

  • Start the procedure to resolve the H2O peg/deadlock issue
  • Do nothing and keep situation as they are

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I wonder what is the endgame for this - H2O peg hovers around at ~0.86, with the looper not acting and all others stuck.

It looks necessary we have a plan for addressing the issue at some point.