MIP-2┃Adjust WETH minimum collateral ratio

Improvement Protocol (PIP) Approved PIPs
1

Summary:

The goal of this proposal is to adjust the WETH minimum collateral ratio (MCR) on Ethereum, Polygon and Fantom.

Context:

Until now, Mimo has been conservative in its management of collaterals and minimum collateral ratios (MCR). This has made Mimo inefficient and uncompetitive compared to other protocols. We believe that by having active risk management we can increase the efficiency of the protocol and become more competitive.

Rationale:

WETH is the wrapped version of ETH, the native currency of Ethereum blockchain. WETH is currently the most decentralized erc-20 token in the world.

We propose to adjust WETH minimum collateral ratio on Ethereum, Polygon and Fantom. To do this, we conducted a risk assessment of the WETH on each blockchain independently. We have based our risk assessments on the Aave’s and Euler’s risk framework with their methodology:

Below are the results of risk assessments on each chain:

  • Ethereum:

1325×118 8.28 KB

  • Smart contract risk: A

The WETH token on Ethereum was launched in September 2017. WETH is the wrapped version of ETH, the native currency of Ethereum blockchain. WETH is currently the most decentralized erc-20 token in the world. WETH has generated more than 99M transactions.

WETH contract: 0xc02aaa39b223fe8d0a0e5c4f27ead9083c756cc2

  • Counterparty risk: A

The process to wrap ETH is permissionless. Anyone can trade ETH with the relay smart contract to get WETH. Similarly WETH can be unwrapped to get the ETH back. There are currently 506k WETH holders on Ethereum.

  • Market Risk: B+

WETH on Ethereum has a $13B market cap, one of the highest market cap and trading volume of erc-20 tokens. Furthermore the price is pegged to Ethereum’s as it is redeemable for it. For this reason we consider the risks of WETH mitigate by ETH.

  • Polygon:

1323×116 10.2 KB

  • Smart contract risk: A-

The WETH token on Polygon was launched in January 2021. WETH is the wrapped version of ETH, the native currency of Ethereum blockchain. WETH on Polygon is the bridged version of WETH on Ethereum. The bridge used is the official Polygon bridge. WETH has generated more than 144M transactions.

WETH contract: 0x7ceB23fD6bC0adD59E62ac25578270cFf1b9f619

  • Counterparty risk: A

The process to bridge WETH use the official polygon bridge who is controlled by a ⅖ multisig. The multisig doesn’t have the possibility to deposit/withdraw funds from contracts. There are currently 1.15M WETH holders on Polygon.

  • Market Risk: B+

WETH on Polygon has a $1.1B market cap, one of the highest market cap and trading volume of mrc-20 tokens. Furthermore the price is pegged to Ethereum’s as it is redeemable for it. For this reason we consider the risks of WETH mitigate by ETH.

  • Fantom:

1323×116 9.94 KB

  • Smart contract risk: B+

The WETH token on Fantom was launched in February 2021. WETH is the wrapped version of ETH, the native currency of Ethereum blockchain. WETH on Fantom is the bridged version of WETH on Ethereum. The bridge used is the Multichain bridge. WETH has generated more than 3.7M transactions.

WETH contract: 0x74b23882a30290451A17c44f4F05243b6b58C76d

  • Counterparty risk: A

The process to bridge WETH uses the Multichain bridge which is controlled by a threshold distributed signature algorithm based on secure multi-party computation (SMPC). This algorithm enables the generation of a set of private keys on independently run nodes and then a corresponding public key will be produced through distributed computation.

The application of the algorithm in the cross-chain interconnection of digital assets is a decentralized way to handle digital assets safely and effectively.

There are currently 17k WETH holders on Fantom.

  • Market Risk: B

WETH on Fantom has a $260M market cap, one of the highest market cap and trading volume of frc-20 tokens on Fantom. Furthermore the price is pegged to ETH as it is redeemable for it at 1:1 ratio. For this reason we consider the risks of WETH mitigate by ETH.

Following results of these risk assessments we propose to adjust minimum collateral ratio (MCR):

  • Ethereum: 125%
  • Polygon: 130%
  • Fantom: 130%

Means:

  • Human resources: If the proposal is approved, this will need transactions to update minimum collateral ratios.
  • Treasury resources: There is no treasury cost.

Technical implementation:

  • Update contract which manages WETH minimum collateral ratio on each chain.

Voting Options:

  • Accept the adjustment of WETH MCR’s
  • Abstain
  • Against the adjustment of WETH MCR’s
  • Accept the adjustment of WETH MCR’s
  • Abstain
  • Against the adjustment of WETH MCR’s

0 voters

3 Likes
2

Hi everyone,

Regarding this proposal,

I would like to make a first formal remark: rather than “inefficient and uncompetitive”, I would have preferred to read “very (perhaps too) cautious and less attractive”. What do you think?

Basically, lowering the minimum guarantee ratio is undoubtedly a lever to attract users, knowing that the time is right when BTC and ETH are at their lowest point in a year.
But in order to be more efficient and competitive, would it be possible to provide a variable ratio, adjustable to the price of the collateral, which would allow the protocol to maintain the solidity it was intended to have at the beginning and which would make the difference in the long term with competing protocols?

Postscript:
I could not indicate this after the vote on the MIP-1┃DAO Multisig Election 1 proposal, so here I would like to thank all those who voted for me :smiling_face_with_three_hearts:

2 Likes
3

Thanks for your comment,
we have based our risk assessment of the minimum collateral ratio, largely on the liquidity, volume and volatility of the token.

Changing the minimum collateral ratio of a token based on its price does not make sense. Moreover, dynamically changing the minimum collateral ratio would lead to unpredictable liquidations for users.

4 Likes
4

Well, expressing my reasoning in a few words is not ideal for making myself understood.
I will try to rephrase it.

When BTC is at 30k and ETH at 2k, there are fewer buyers and users of these crypto-currencies than when they are at 60k and 4k respectively, this is a well known phenomenon of crowd psychology.

Lowering MIMO’s minimum collateral ratio makes the incentive to mint PARs more attractive, but makes the protocol (somewhat) less robust by the ability of a sudden sharp drop in price to reduce or even negate over-collateralisation (I’m not questioning your analysis of the risks, I understand they are seriously considered and remain under control, I just want to point out an obvious fact).

Currently, BTC and ETH have rather low prices (according to their historical growth curve), and lowering their ratio is less risky than when prices are high: they are statistically less likely to fall by 50%. Whereas when they were at their historical highs, the drop was fast and sharp.

The idea has several notions,

  1. Not necessarily to make the ratio proportional (which would indeed be confusing), but perhaps to consider steps known in advance based on your studies
  2. Do not consider being forced to vote on a “panic proposal” to avoid a number of accounts with a ratio < 1 being too large to be liquidated (systemic risk).
  3. Incentivise users who minted when the collateral price was low to strike again (helps to increase the number of PARs minted and revenues).
  4. Prevent new users to too mint,attracted by Defi and insufficiently informed about the risks of being liquidated when prices are high (limits the weakening of the protocol by the arrival of the “crowd”)
  5. To ensure the robustness of the protocol and demonstrate its long-term pre-eminence by sticking as closely as possible to the economic efficiency and competitiveness sought.

But perhaps this is a flawed reasoning, what do you think?

2 Likes
5

But in order to be more efficient and competitive, would it be possible to provide a variable ratio, adjustable to the price of the collateral

I agree with @JeanBrasse on his previous answer :

  • A dynamic minimum collateral ratio will inevitably lead to unpredictable liquidations for users, and this is not what we are looking for…

  • Price is not a good value to measure, volatility, volume, liquidity, etc. are metrics much more important.

  1. Do not consider being forced to vote on a “panic proposal” to avoid a number of accounts with a ratio < 1 being too large to be liquidated (systemic risk).

The last point I mentioned just before is the very reason for these adjustment proposals, they are not “panic” proposals.

  1. To ensure the robustness of the protocol and demonstrate its long-term pre-eminence by sticking as closely as possible to the economic efficiency and competitiveness sought.

We agree on this point.
Let’s not forget that these proposals aim at the perenity of the protocol.
And despite these adjustments, we remain competitive.

2 Likes
6

The vote started May 31th at 10AM CET and finish June 7th at 10AM CET.

https://snapshot.org/#/mimo.eth/proposal/0x1d4f7c39c3abf34ae388e3e4ddf9214bde7e1d988dc2c3205450b7cc6b2b90c6

3 Likes
7

Yes @starny,
“A dynamic minimum guarantee rate will inevitably lead to unpredictable liquidations for users, and this is not what we are looking for…”
That’s why I clarified my point:
“1. not necessarily to make the ratio proportional (which would indeed be confusing), but perhaps to consider tiers known in advance based on your studies”
And, while “price is not a good value to analyse” (we are still talking about the most voluminous and liquid crypto stocks, and perhaps the least volatile), its history informs and I also believe it teaches… to be more cautious at the top than at the bottom, right? (if my reasoning seems perhaps simplistic, it is common sense, it seems to me)
This is why I would like to ask if it is possible, with the analyses that the team has done and determined precise criteria, to anticipate right now a revision of the collateral ratio when the collateral will be higher (and/or more fragile) in order to avoid suffering the improbable that takes everyone by surprise (follow my gaze).
But I understand that this is not on the agenda.
Regarding my point number 2, I don’t mean at all that the current proposals are panic proposals, I mean that my point number 1 could avoid being forced to vote under pressure for emergency measures to raise minimum guarantee ratios in the event of a crash.
But perhaps I am expressing myself badly.
At the moment, I obviously agree with the MIP1/2/3/4 proposals, and I just want to contribute to the discussion by looking at the situation in the configuration we had from November 2021 onwards, in which case a higher minimum guarantee ratio is more protective: Knowing now what ratio to implement in different situations would be strategic, I think.
I hope that a watch is active and that a review is planned regularly.
So fearing unpredictable liquidations by applying a different ratio in different situations and planned in advance seems less dangerous to me than a ratio fixed once for all situations, that’s my opinion.
And I have the impression that these crucial subjects are already decided and do not excite users…
But thanks for the interesting discussion

1 Like
8

We will update the collaterals on a regular basis (no set date) it is something we will do, but we can’t know how to anticipate it in advance.

for example, let’s say that Matic decreases its marketcap by 10, that its volatility becomes too high etc… we will have to change the parameters according to the data we will have at that moment, we can’t know in advance what Matic will do in the future

So we can’t prepare in advance an adjustment without data, especially if we base on a “high” and “low” price as you explain… it’s purely speculative and depends on each one: I find the Doge overvalued, but it can still go up… so to base on a price is clearly not ideal.

We work with volatility, volume, marketcap, etc. which are much easier data to interpret than a price

4 Likes
9

With over 77M votes from $vMIMO holders, MIP-2 proposal was approved at 99%.

WETH MCR’s will be adjust to:

  • Ethereum: 125%
  • Polygon: 130%
  • Fantom: 130%

Results: Snapshot

2 Likes