Maker Parameter Impact Analysis
Lowering stETH-B Stability Fee to 0%
This post was originally published on Maker Forum on September 28th, 2022
Introduction
Since stETH-B vault type was launched (May 2022), stETH-A’s exposure decreased significantly while the exposure of stETH-B continues to grow. Given that stETH-B’s stability fee was significantly lowered compared to stETH-A’s (currently 0% vs. 1.5%) this could mean that with vault migration of existing exposure to a cheaper alternative. This way Maker could suffer from revenue cannibalization (besides the direct revenue loss from a lower rate).
There were three key arguments for bringing stETH-B’s stability fee to zero: (i) decrease Maker’s reliance on centralized PSM exposure, (ii) increase Maker’s market share of stETH collateral and (iii) encourage long-term adoption. Meanwhile, estimated lost revenue per year at that time was 220,000 DAI (relevant proposal).
In this analysis, these are some of the questions that we aim to answer:
- How has the stETH total debt per vault type changed since the launch of stETH-B? What about the number of vaults?
- How did debt collateralized by stETH grow compared to overall market trends?
- How much vault exposure migrated from stETH-A to stETH-B since stETH-B’s stability fee was dropped to 0%?
- How much stETH-B exposure has been minted by new users since the drop in its stability fee?
This report is a result of an ongoing research by @Risk-Core-Unit.
Analysis
The chart below shows that from 10 days before stETH-B vault type was launched till now, stETH-A’s exposure decreased from $150 million to $50 million.
Inversely, stETH-B’s exposure has shown a consistent growth, currently standing at $120 million.
This implies that stETH-B’s share of total stETH exposure increased to 70% only 4 months after launch. Total exposure collateralized by stETH has since slightly increased in relative terms ($170 million vs. $150 million).
Number of vaults per stETH vault type shows a similar trend where stETH-B’s vault recently outnumber those of stETH-A:
Even though stETH-A’s liquidation ratio is lower than stETH-B’s (160% vs. 185%) we can see that stETH-A vault owners currently maintain a higher debt-weighted collateralization ratio. This is largely explained by Gnosis’s vault whose share of total stETH-A’s exposure is 60% (currently its collateralization ratio is at 342%).
On the other extreme we have another whale with two vaults — 7 siblings which contributes to more than 85% of total stETH-B exposure.
This means that the behavior of these two whales dominate the below metric across both vault types:
Given a different liquidation ratio across vault types there could be a difference in how actively vault owners manage their vaults. This removes debt as a variable in the analysis and rather treats all vaults equally.
When comparing stETH-A and stETH-B vault management based on event quantity in the last 30 day per vault we can see that distributions are mostly alike, the only difference in stETH-A’s slightly higher third quartile. We excluded vaults that were opened less than 30 days ago to reduce unnecessary noise in the data.
To investigate potential revenue cannibalization we look at individual DSProxy addresses (proxy wallets) and compare their stETH exposure before and after relevant dates.
More specifically, we look at which DSProxy addresses had stETH-A vault activity before stETH-B’s stability fee was dropped to zero, currently have an open stETH-B vault and previously closed down their stETH-A vault. The only exception is 7 siblings whale which has multiple DSProxy addresses that we actively monitor.
We multiply this current stETH-B vault exposure with current stETH-A stability fee to estimate the revenue cannibalization amount (as current stETH-B stability is set to zero).
About $109 million of current stETH-B exposure (90% of total) migrated from stETH-A and also closed down their stETH-A vault. Most (94%) of that comes from 7 siblings whale. This brings an estimated annualized revenue cannibalization to around $1.7 million DAI (with stETH-A’s stability fee at 1.5%). This interpretation includes a strong assumption that exposure would be as high on stETH-A as it is now on stETH-B with the stability fee decrease (which is up to discussion).
Importantly, $68 million of net positive exposure can be attributed to vault owners migrating from stETH-A to stETH-B.
Another interesting view is to split current stETH-B exposure ($120 million) across different vault types that the DSProxy initially interacted with. We can see in the below chart that stETH-A’s amount is aligned with the above cannibalization figure. That means that a DSProxy address first interacted with stETH-A before it eventually interacted also with stETH-B.
Meanwhile, around $8.6 million of total debt (7%) can be attributed to DSProxy exposure that didn’t interact with other vaults before stETH-B. These could be interpreted as users that are new and potentially started using Maker because of zero cost of borrowing on stETH.
All of this brings us back from quantitative analysis to speculation on individual whale behavior and how different governance actions can impact the revenue/risk trade-offs.
Would an individual whale still have $103 million exposure at Maker even if we didn’t lower the stETH-B’s stability fee to zero? If that’s the case, this would bring us additional annualized $1.5 million DAI revenue through stETH-A vault type. This is not a negligible revenue stream. On the other hand, stETH-B is currently the third largest vault type collateralized by volatile assets and contributes to almost 15% of total risky debt. During a bear market when there is excess stablecoin demand (current stablecoin ratio is at 83%) it is necessary to maximize its supply. Lowering the cost of borrowing is one of the key levers that we have to achieve that.
Conclusion
Maker’s debt collateralized by stETH has increased from $150 million to $170 million since stETH-B was launched despite a more than 30% drop in collateral price during the same period (with overall stETH/ETH market shrinking). This is mainly caused by 7 siblings whale minting; whose stETH-A exposure was at its peak at $30 million and has since grown to $103 million through stETH-B. This one user brought most of the net positive exposure of stETH exposure in the last 4 months which would otherwise be net negative, aligned with overall market trends.
To summarize, when evaluating the impact of stETH-B stability fee decrease: from the total of stETH-B’s $120 million exposure, $109 million can be contributed to vault migration from stETH-A (16 vaults) and $8.6 million to new vault owners (43 vaults). The rest used other vault types in the past. The vault migration contributed to $68 million of additional exposure.
It’s important for Maker to establish itself as a long-term solution for lending services with stETH as collateral. Meanwhile, there are many trade-offs that the DAO is confronted with regarding parameter optimization. This analysis showed how the protocol economics are still largely dependent on individual whales. We initialized this research to start a discussion on both direct loss of revenue caused by lowering stability fees and also potentially indirect sources such as cannibalization caused by vault migration. As shown through the data, it’s often difficult to directly attribute vault migration from one vault type to another. Given the importance of this research topic we will continue improving our methodology to monitor migration of exposure across the protocol and (ideally) also cross-protocol. This can contribute significantly in measuring sensitivity of rate setting which ultimately benefits the protocol’s bottom line.
