eIP 9: Promote MKR to collateral tier

  • Title: Promote MKR to collateral tier
  • Author(s): cp287
  • Submission Date: 18.04.2022

eIP 9: Promote MKR to collateral tier

Simple Summary

Proposal includes a batch of changes to the Maker token (MKR) on Euler. These include: promotion of MKR to the collateral tier with collateral factor 0.66 and borrow factor 0.76. Enable cross borrowing of MKR.

Abstract

This is a proposal to promote Maker token (MKR) to the collateral tier on Euler, enabling Euler users to borrow against it. MKR fits the collateral eligibility criteria of a collateral asset. It is backed by a robust oracle on Uniswap v3. It is widely distributed and decentralised. It has relatively high liquidity on numerous decentralised exchanges. Smart contract risk is relatively low. The proposal includes suggested increases to MKR’s borrow factor and enabling of cross tier borrowing. These changes would allow users to borrow MKR in a more capital efficient way. On the upside, adding a new collateral asset to the protocol would increase capital efficiency and provide more utility for users. On the downside, adding a new collateral asset always introduces a degree of systemic risk. In the case of MKR, the benefits outweigh the potential risks.

Motivation

The goal of the proposal is to boost the capital efficiency and utility of the Euler protocol. The current risk factors on the protocol are purposefully restrictive as a part of Euler’s soft-launch in late Dec 2021. Since then, the protocol has performed well against a backdrop of extreme price volatility and a large number of liquidations across DeFi. Furthermore, there have been no reports of any critical bugs on the protocol in spite of a $1m public bug bounty being live for nearly a month. Promoting MKR to collateral status and amending borrow factors is meant to ramp up capital efficiency in a risk-managed fashion on Euler.

Specification

1. What is the link between the eIP author and the asset?

None. The proposer is the independent researcher and has no link to MKR.

2. Provide a brief description of the asset

MKR is the official token of Maker Protocol which includes the Dai stablecoin, Maker Collateral Vaults, Oracles, and Voting .

3. How is the asset primarily used?

MKR tokens is the governance token to define the key parameters of the protocol (e.g., stability fees, collateral types/rates, etc.)

4. Explain why the eIP would benefit Euler’s ecosystem?

MKR is an established asset in DeFi and listing it as collateral would allow users to tap into Euler’s capital efficiency without swapping it for the already-listed collateral assets like USDC, DAI and WETH.

5. Where does the asset trade?

MKR trades on almost every major centralised exchange, including Binance, FTX, and Coinbase. It also has liquid markets on key decentralised exchanges, including Uniswap and Sushiswap.

Consequently, it would allow liquidators to easily offload MKR on various CEXes and DEXes in the event of a liquidation spiral.

6. What are the volumes and market capitalisation?

Market capitalisation is $1.8 billion with $45 million traded in the last 24h.

7. What is the liquidity like in the Uniswap V3 liquidity pool versus ETH?

The 0.3% MKR/WETH Uniswap V3 pool is extremely liquid as it has a TVL of $16 million and, crucially, has full range liquidity.

8. What security/auditing reports have been done?

Maker has been audited by multiple teams of engineers like Trail of Bits, PeckShield and Runtime Verification and has stood the test of time.

Implementation

Expand Table

Contract Method Token Token Name Token Address Updates
governance setAssetConfig MKR Maker 0x9f8F72aA9304c8B593d555F12eF6589cC3A579A2 borrowIsolated:false, collateralFactor:0.66, borrowFactor:0.76

Risk Assessment

Oracle Grading

According to my inhouse research, meaningful attacks on the 0.3% MKR/WETH Uniswap V3 oracle appear unfeasible. The substantial TVL spread across the entire price range is able to prevent both artificially elevated and depressed oracle prices.

MKR have a strong oracle rating on the Euler Finance.

Decentralisation

MKR appears well-distributed amongst different holders.

Volatility

MKR/WETH annualised 30-day realised volatility fluctuates between 80-140%, which is manageable.

Liquidity

MKR is listed on practically all exchanges (both CeFi and DeFi) with most volumes occurring on Coinbase, Binance, Uniswap. Given the depth of liquidity pools and order books, it is unlikely that liquidating users in an adverse scenario will be challenging.

Smart Contract Risk

Maker has been audited by multiple teams of engineers and has been extensively used by key DeFi protocols for pricing for years.

Conclusion

MKR ranks high on oracle security, volatility, liquidity, decentralisation and smart contract risk. I therefore recommend implementing the proposed eIP.

After conducting more research within the risk team, we’ve come to the conclusion that MKR does not meet the eligibility criteria at this moment. Given the limited upside and significant systemic risk stemming from listing assets as collaterals, the probability of Uniswap v3 oracle manipulation must be extremely low.

Given that, we recommend a minimum cost of attack of at least $500 million over 2 blocks on a stable basis, which this asset doesn’t meet yet. This may change, however, as LPs provide more full-range liquidity. We are actively monitoring attack costs and the situation may change.

It’s important to note that because of eIP3, liquidity mining on Euler can be done extremely capital efficiently with any assets, which significantly decreases the utility of listing new collaterals. Essentially for liquidity mining purposes, any asset can be used as self-collateral. Therefore, a more restrictive process for listing collaterals is balanced by the capital efficiency of liquidity mining.

While you seem the main use of the Euler at the moment to be liquidity mining (judging from the last paragraph of your post), I as user would like to be able to use Euler also to borrow some assets for lending my other assets with a large overall position and сonsidering mining only as an additional small initiative.

I understand your position on the risk side, so the Euler is not suitable for this purposes at the moment (i.e. collateral factor for MKR is 0).

Thanks for your explanation.

At the same time I would like to know your opinion on adding MKR to the cross tier, so as not to create another eIP without much chance of being approved.

I wouldn’t say it’s the main use, but at this point it is often the main consideration amongst other users. I completely agree MKR is suitable as a cross tier asset. I would suggest you make another proposal (also eIP 9) for MKR:

  1. Cross tier
  2. BF of 0.66 (0.76 would require a better oracle, while 0.66 is in line w/ similar assets)
  3. Major IR model (same as LINK and UNI)
2 Likes

nice happy to see mkr