DAO-Owned liquidations using Collaterized Debt Positions

DAO-Owned liquidations using Collaterized Debt Positions

This post aims to delve deeply into the mechanics of implementing CDPs, using wstETH tokens(or Vita potentially) as collateral. This discussion will culminate in exploring the creation of a VitaDAO-owned and managed CDP specifically for ecosystem growth. A CDP vault savior module that automatically adds more collateral to a CDP before a liquidation is processed which prevents that liquidation.

In contrast to traditional CDP models, where positions are liquidated when collateral falls below a threshold, our approach introduces a DAO-owned liquidation mechanism. This mechanism ensures that additional collateral is injected to maintain a sufficiently collateralized state during market downturns, thereby providing a buffer against volatility. Conversely, when the price of the native token appreciates significantly, the DAO strategically liquidates the Vita collateral, using an optimized execution strategy to moderate market impact.

Advantages of this Model:

  1. Risk Mitigation: By actively managing collateral levels at the DAO scale, we can significantly reduce the systemic risk associated with market volatility.
  2. Flexibility and Autonomy: This approach provides the DAO with greater control over its financial operations, enabling more strategic capital management. The DAO gains significant flexibility in timing grants and liquidations. We can issue grants without the immediate need to liquidate assets, allowing us to choose the most opportune moments for market action. This flexibility also means we can proactively take positions, aligning with our spending plans for ecosystem growth and potentially improving financial outcomes.
  3. Market Stabilization: A significant advantage of this approach is the ability to have DAO-owned liquidations. This means that VitaDAO can directly control the liquidation process of wstETH or other assets used(VITA token) as collateral. By doing so, we can strategically liquidate assets in a way that minimizes market impact and aligns with our broader market strategies. This approach contrasts sharply with relying on third-party liquidators, who may prioritize their interests over those of our DAO.

Open Dollar has already built, audited, and launched OD, a CDP-backed stablecoin on Arbitrum. The OD stablecoin is already backed, in part, by wstETH as it is an enabled collateral type. By using an wstETH(or VITA)-backed stablecoin, VitaDAO is granting fixed (rather than fluctuating) value and still experiences the upside in wstETH. Given Open Dollar’s expertise with this particular stablecoin design VitaDAO could gain safe and scalable access to stablecoins with minimal investment.

Implementation:

Open Dollar will integrate Treasury Backed Vaults into our existing stablecoin protocol as a Savior Module. The Savior Module simply adds one more step between a vault being marked for liquidation and it becoming liquidated. This allows the module to pull more wstETH tokens directly from the treasury, and add them to the collateral of the position until it is raised above the liquidation threshold, completely preventing liquidations from occurring. The module would be given an allowance of wstETH tokens by the Treasury to spend, allowing the VitaDAO to completely control and update the bounds of how many tokens can be used at will to pad the existing collateral against liquidation.

Open Dollar will keep the wstETH-backed, DAO-controlled stablecoin at its $1 peg. This would enable the Treasury to retain wstETH’s upside potential while giving out grants and simultaneously grant a more predictable amount of economic value to the grantee. Additionally, in the most optimal scenario, grants to developers to build out the ecosystem should not create sales pressure, and yet in the current state of grants, it does exactly that.

Ask

Open Dollar is requesting a commitment of $800K in wstETH as an initial deposit once the system is completed.

What Vita DAO Can Expect

The Vita DAO can expect an audit of the savior module and a completed research report within 2 months of passing this program. After both initiatives are completed, Open Dollar will implement the savior module and raise the debt ceiling for collateral deposits, enabling the DAO to make full use of the project immediately.

Summary

With an Open Dollar custom-built Treasury Backed Vault, the Vita DAO would avoid paying premiums to builders, more safely access the capital in the treasury, create more value to be distributed, and limit sell pressure through grant programs by using stablecoins in their place.

1 Like

Hard pass for me.

I don’t believe your stable would hold peg, “wstETH” sounds like a rug waiting to happen, real security audits have a year plus backlog last I checked, CDPs are a good way to destroy the DAO treasury, $Vita is not a security, and $800k is way better spent in my opinion funding longevity research instead of investing in unknown crypto projects.

Please check out how the PID controller works to maintain the peg in our documentation. (I cannot attach the link here)

Additionally, you can find a more in-depth research document from the 0xside.quest research team.

Do you have any specific evidence to support your belief that we are unable to maintain the peg, or is it just an assumption?

Also, why do you think CDPs would harm the DAO treasury? The idea is that you don’t actually lock up $800K because you are borrowing stables against these assets to provide grants for research without needing to sell tokens (stETH, Vita).

Also could you please clarify what do you mean by saying that security audit has a year plus? As we’ve just completed the last audit with Quantstamp a month ago.

And the assets are locked in a smart contract, which might or might not give you the assets back. When the contract rugs, you lose the real assets and get stuck holding fake assets. Or in a downturn, you get asked to put more collateral in, and then it rugs.

That kind of risk, plus borrow rates, are negative EV.

You have this one backwards. Assets masquerading as stablecoins need to provide evidence that they hold peg when everything blows up before they can considered a stable.

Except if it’s custom-built, as you claim here:

that custom implementation will also need an audit. I do not believe you’ll get an real audit done within two months. Also, completing an audit and having zero errors are two different things.