The current coupon premium curve, which is used to calculate the premium offered on coupons as a function of debt ratio, is not adequtly meeting the current market conditions. This proposal is a result of converations wiith eqparenthesis and attempts to address this issue. The concern was originally raised in “ideas” under the topic “Premium Pricing”.
The current curve used is f(x) = k ( (1/ (1-x)^2) - 1 ) with k set at 1/3.
The curve starts at zero, and asymptoticaly approches infinity as x is raised from 0 to 1.
This fits the stated criteria in the white paper, of offering zero premium when debt is zero, and offering ever higher premium as ratio of debt to net supply approaches 100%.
In the future we like to consider a function that includes variables in addition to debt ratio, such as outstanding number of coupons, price, volatility, cummulative distribution fucntion, and so on, to accurately reflect the price of the underlying derivative, as projects like Keep3R start providing the reliable relevent oracles on chain.
For the sake of simplicity, on the immediate term, we are only suggesting the following modifications to “steepen the curve” and accelerate contracton cycles:
- Change K from 1/3 to 1.
This will raise the premium faster.
- Lower Max Debt Ratio from 35% to 20%
This will cap the premium at 56%
- Cut the debt in half to ease any potential premium shock, upon commit.
Keep in mind this was the result of of a group discussion, and all the ideas are not mine. Thanks to those who contributed. We are open to additional suggestions.