EIP-16: Split coupons into (1)Deposit + (2)Yield so that expiration only applies to the (2)Yield, (1)Deposit is returned at expiration

Current situation :

Currently coupons expire after 90 epochs(30 days), this penalty encourages coupon purchasers to delay purchasing coupons till the last possible epoch before debt is wiped out and a return to 1. This encourages behaviour which is suboptimal including;

  1. A large quantity of coupons are purchased in the final epoch when it is
    highly likely that the protocol will return to 1.

  2. Coupons are highly risky therefore the premium is priced quite high, currently the highest premium is over 50%. Leading to large expansions during contraction.

  3. If coupons do expire, there will be a reduction in ESD holders. Holder growth is a metric we want to grow and not reduce.

Proposal Summary :

Split the coupon into two parts;

  1. The deposit is the amount of ESD that you lock for the duration of the time under TWAP 1.

  2. The yield is the amount of ESD that you will redeem when TWAP goes above 1.

The only part that can expire is the yield, after 90 epochs. When that happens, the deposit is returned to the holder.

Details for discussion :

Debt Ratio/Debt Premium - Now that the deposit is no longer under threat, it seems the risk profile significantly decreases on the coupons. I suggest reducing debt ratio down to 10%, with a max 20% premium.

For existing coupon holders, we would split it into a deposit and yield based on the max premium.

6 Likes

Not a bad idea in general.

I think many people will agree with one thing: people who buy coupons when the TWAP is close to $1 should not enjoy a high premium as those who buy coupons when TWAP is much lower than $1. Something needs to be done to address this.

1 Like

Re: changing max debt ratio/premium, risk of total loss is lowered with this proposal, but there are still potentially large opportunity costs (e.g. high-yielding farms) with losing access to your ESD when you burn for coupons.

If we lose the risk to the ESD spent on coupons, we lose the only sink we currently have for excess ESD.

How would you propose we contract the supply if not via coupon expiration? Or do you have an argument for why it never needs to contract?

1 Like

From a code perspective it would be great to keep the current curve. I think it would be reasonable though to reset the debt quite low on commit, as it’s impossible to predict what the “market rate” would be after this change. It’s intuitive that it’d be lower, but that could be anywhere from 3-50%.

1 Like

Supply contraction happens already when coupons are purchased, since that ESD is taken off the market, only to re-enter the market when TWAP > 1.

I haven’t seen a compelling reason to permanently expire coupons, since presumably there is an expectation of future expansion at some point.

2 Likes

So effectively no permanent supply reduction or a mechanism for it?

1 Like

I believe the move to v2 would also do away with permanent contracting and this is a step in the same direction.

With a risk-free coupon similar to v2 (albeit giving up opportunity cost of yield on ESD) the demand on coupons from long term ESD holders will be much higher while still giving coupon holders an incentive to push TWAP to profit from expiring yields.

1 Like

Seems like its implemented now: [Proposal] 15: Split Coupon Underlying by emptysetsquad · Pull Request #17 · emptysetsquad/dollar · GitHub

Looks good, seems like giving up the opportunity cost of yield on ESD is enough risk (on top of ESD exposure risk), though still keeps the cap on yields.

I think something like this can still work great with the coupon auction stuff here: [Proposal] 17: User Defined Coupon Expiry w/ FPSBA by cinquemb · Pull Request #16 · emptysetsquad/dollar · GitHub which would allow the market to find the min/max clearing yield (vs the fixed yields now) on coupons, while limiting downside to how much esd was burned for the coupons (not the amount coupons themselves).

1 Like

If this will be voted and approved, will it start once the current debt cycle ends ?