SIP-35: Skinny Ether Collateral

Simple Summary

The original mechanism for Ether collateral would have allowed stakers to augment an SNX positions with Ether. However, this introduced several issues, including the potential dilution of SNX value capture. This risk was offset by the ability to scale the Synth supply faster and generate more trading volume on sX. So the question was whether the trade off of SNX value dilution in the short term was worth the long term benefits. This SIP proposes a mechanism that avoids this conflict. The key to this solution was combining the proposed Synth lending functionality with the Ether collateral mechanism. The result is a system that augments the Synth supply, enables easier and more efficient access to sX and does not dilute SNX value capture.

Abstract

To mint Synths (sUSD) a user locks SNX and is assigned a percentage of the global debt pool, Ether collateral will allow Ether to be locked to mint sETH. This sETH debt will be excluded from the global debt pool, so for an SNX staker the global debt pool will be calculated as Total Issued Synths - Total ETH backed sETH. This means SNX minters take on the risk of debt fluctuations from ETH backed sETH, this risk is offset by the fact that fees are only paid to SNX minters and not to ETH minters.

There are two fees associated with opening an ETH backed sETH position, a minting fee of 50bps and a interest rate of 5% APR. The interest charged on the loan will be paid to SNX Minters when the loan is repaid.

The collateral requirement for each position is 150%. There is also a supply cap of 5000 sETH and a fixed three month term after which a more advanced version will be launched with variable interest rates based on utilisation rates. The next version will also incorporate other features as required based on the data gathered in the first three month period.

At the end of the three month period any outstanding loans must be paid back, if after a one week grace period a loan is outstanding anyone will be able to send sETH to close the position claiming the outstanding ETH.

Motivation

The addition of Ether collateral to the Synthetix Protocol will allow ETH holders to easily enter and exit Synthetix Exchange. Rather than having to trade Ether for Synths a trader can put up Ether as collateral to borrow Synths and trade on sX, unwinding the loan once they wish to exit the system. This reduces the risk of slippage entering and exiting the Synthetix ecosystem and will greatly expand the potential pool of traders. See this GH Issue for more context on the motivation and trade-offs issue-232.

Specification

EtherCollateral contract

• Requires permision on sETH to mint directly. (upgrade to sETH required)
• Ownable, Pausable
• Configuration
  • interestRate: If updated, all outstanding loans will pay this interest rate in on closure of the loan. Default 5%
  • issueLimit: Maximum amount of sETH that can be issued by the EtherCollateral contract. Default 5000
  • issuanceRatio: Collaterization ratio. Default 150%
  • issueFeeRate: Minting for creating the loan. Default 50 bips.
  • openLoanClosing: Boolean to allow anyone to close the loans with sETH.
  • minLoanSize: Minimum amount of ETH to create loan preventing griefing and gas consumption. Min 1ETH = 0.6666666667 sETH

Functions

CreateLoan() payable function

• Require sETH to mint does not exceed cap
• Require openLoanClosing to be false
• Issue sETH to c-ratio
• Store Loan: account address, creation timestamp, sETH amount issued

CloseLoan() function

• Require sETH loan balance in wallet
• Burn all sETH
• Calculate and deduct interest(5%) and minting fee(50 bips) in ETH
• Fee Distribution. Purchase sUSD with ETH from Depot then call FeePool.donateFees(feeAmount) to record fees to distribute to SNX holders.
• The interest is calculated based on a simple interest over the 3 months period per second.
• Using this formula, the ETH interest on 100 sETH loan over a year would be 100 × (5.0% / 31536000) * time in seconds) - 100 = ~0.5 ETH
• Send remainder ETH back to loan creator address

sETH contract

• modifier to allow EtherCollateral to issue sETH
• (Potential) Subclass type for allowing EtherCollateral contracts to mint this synth
• configuration (or contract resolver) for the EtherCollateral address

Synthetix contract

• sip-33 Deprecate XDR synth from Synthetix
• debtBalanceOf calculation totalIssuedSynths() - EtherCollateral.totalIssuedSynths()

FeePool contract

• FeePool.recordFeePaid(amount) external function to record fees to distribute for the open fee period.
• Synths to notify amount of fees in sUSD transferred into the FEE_ADDRESS (0xfeEFEEfeefEeFeefEEFEEfEeFeefEEFeeFEEFEeF)

Synth contract

• Synths.transfer(to, value) allows EtherCollateral contract to transfer synths directly to the FEE_ADDRESS and convert the amount into sUSD and which is stored in feePool as fees to distribute to SNX stakers.

Rationale

There are several assumptions to the Ether Collateral proposal that require empirical observations of actual market participant behaviour in order to validate. The most important of these is the sensitivity to interest rates of borrowers, additionally demand for ETH denominated loans is somewhat untested. In order to gather data about these assumptions we propose a simple model with a fixed interest rate and supply cap. Both the interest rate and supply cap will be configurable and can be modified by an SCCP. If demand significantly exceeds expectations then the cap or interest rate or both can be modified. If demand is lower than anticipated interest rates can be lowered to ascertain actual market demand. If demand is low even at low/zero interest rates it may be that a modification to the loan denomination is required.

Test Cases

Test cases for an implementation are mandatory for SIPs but can be included with the implementation.

Implementation

The implementations must be completed before any SIP is given status "Implemented", but it need not be completed before the SIP is "Approved". While there is merit to the approach of reaching consensus on the specification and rationale before writing code, the principle of "rough consensus and running code" is still useful when it comes to resolving many discussions of API details.

Configurable

1. Supply cap - 1500 ETH
2. Interest rate - 5%
3. Minting fee - 30bps
4. Max loan limit - 50 per wallet
5. Min loan size - 1 ETH

Copyright

Copyright and related rights waived via CC0.