The Tally Newsletter, Issue 19

February 22, 2021

The Tally Newsletter, Issue 19

Welcome back for issue 19 of the Tally Newsletter, a publication focused on all things decentralized governance. We’ll keep you updated on key proposals, procedural changes, newly launched voting systems, shifting power dynamics, and anything else you need to know to be an informed citizen. 

This issue covers recent advances in governance automation:

  • Reflexer launches non-pegged stable asset RAI 

  • MakerDAO expands use of instant access modules

Plus a roundup of key proposals and protocol news from the last week!


Reflexer Launches Non-pegged Stable Asset RAI

TL;DR: The RAI system uses a feedback control mechanism to stabilize token value without a fixed peg to USD.

After months of development and anticipation, Reflexer labs has released RAI on mainnet.

RAI is intended to have a stable price, allowing users to benefit from holding an asset with dampened volatility or borrowing to lever up their exposure to ETH. But unlike other stablecoins such as MakerDAO’s DAI, RAI is not pegged to a specific reference asset such as the US dollar, instead floating freely as a function of supply and demand.

In many ways, RAI is a reaction to perceived shortcomings and flaws within MakerDAO’s DAI stablecoin system. Following the March 2020 market crash, DAI traded consistently over $1 as the demand for holding a stable asset exceeded supply from borrowers seeking leverage.

With the standard solution of reducing borrowing rates failing to solve the problem, Maker ultimately decided to aggressively onboard new assets, including centralized stablecoins and wrapped cryptocurrency. Onlookers were concerned that this would reduce DAI’s decentralization, as centralized collateral could potentially give outside entities leverage over the system. Additionally, this conflicts with long term goals of governance minimization, as potentially corruptible human input is needed to evaluate new collateral assets and select appropriate risk parameters.

RAI takes a radically different approach to maintaining stability. Borrowing from MakerDAO’s specification for a “target rate feedback mechanism”, RAI uses a perpetual funding mechanism to incentivize buying or selling. 

Whenever the price of RAI is trading above the system’s price target (currently around $3.13), the target itself is lowered. Over time, the funding rate effectively transfers value from RAI holders to RAI borrowers, incentivizing minting and selling to bring the peg back in line. In cases where RAI trades below the price target, the process works in reverse with the target rate gradually raised to incentivize purchasing (increasing demand) and loan repayment (reducing supply).

The funding mechanism is theoretically sound, but defi users’ attraction to newly listed tokens has kept RAI trading consistently above target in the few days since launch. The excess demand may also be caused by unconfirmed but widely anticipated liquidity incentives for participation in the RAI ecosystem. 

Based on current 8-hour funding rates of -0.033% (shown in the RAI stats page), RAI borrowers are paying an effective annual interest rate of -28%. 

While this level of negative funding will likely subside as the RAI supply grows, it points towards a key tradeoff within the system between decentralization and scalability. RAI supply is constrained by the value of ETH able to serve as collateral, while alternative debt backed stable assets such as DAI can benefit from a much broader collateral base. Over time, this could lead to a structural RAI supply shortfall, which would drive consistently negative funding rates and declining RAI value versus USD.

RAI parameters are still controlled by the Reflexer Labs team. But as the system matures and gains deeper liquidity, the goal is to progressively decentralize and then eliminate human influence on the control mechanisms. But with MakerDAO well on its way to implementing some of the system’s key changes, including the capability for negative funding rates, RAI will have stiff competition in its goal of becoming a decentralized “money god”.

MakerDAO Extends Instant Access Modules to More Assets

TL;DR: Expanded instant access modules automate day to day management of debt ceilings. 

Over the past year, MakerDAO’s list of approved collaterals has grown from just two assets (ETH and BAT) to over 20 individual assets. This expansion in the collateral base has helped Maker meet parabolic DAI demand, while also diversifying risk among potentially uncorrelated assets. But at the same time, it has greatly expanded the governance overhead for managing risk parameters such as debt ceilings and interest rates.

The debt ceiling instant access module helps MakerDAO meet this challenge, by allowing any Ethereum user to update an asset’s debt limit within predefined, governance controlled bounds. Over the past month, this functionality has been expanded from the original ETH-B vault type to cover nearly all of Maker’s supported assets (Uniswap LP and stablecoin vault types are excluded for the time being). 

In addition to reducing the frequency of parameter change votes, instant access modules also allow for the debt limit to more closely track current debt exposures. This is particularly important due to Maker’s oracle security module, which delays price updates by 1 hour to give time to respond to critical failures or faulty data. Capping borrowing capacity limits Maker’s losses from sharp and sudden asset price falls. 

While Maker currently empowers a working group to recommend interest rate changes based on risk and competitive considerations, the pace of adjustments needed in a bull market are beginning to present challenges. Just this week, the working group made its first mid month adjustment proposal since inception last year. Rate changes are primarily driven by shifting debt exposure, so linking interest rate adjustments to the instant access module may be a natural progression for MakerDAO’s governance automation. 


In Brief:

  • Alpha and Cream suffer defi’s largest exploit to date, $35 million lost to hack:

  • Aave AIP-10 adds support for xSUSHI:

  • Compound proposal 38 (adjusting BAT and ZRX collateral factors) fails to meet quorum:

  • KyberDAO considers switch to inflationary token economics:

  • Yearn voting to extend multisig authority:

  • Balancer votes to continue gas reimbursement program and increase rewards for GNO and AAVE:

  • Pool Together and Radicle launch governance tokens:


Thanks for joining us for issue 19 of the Tally Newsletter! We’ll be returning to our regular schedule of Wednesday releases this week, so keep eyes out for our next issue. 

In the meantime, be sure to check out the Tally governance app, and join us on Discord for the latest updates!

Best,

Nate, Tally

Anything we missed? New developments or protocols you’d like to see covered? Drop us a line at newsletter@withtally.com