AIP#19: Consolidate UST bad debt under treasury collateralised position

Governance Proposals Voted Proposals
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AIP #19: Consolidate UST bad debt under treasury collateralised position

tl;dr: Open a debt position to borrow 7.1M $MIM against treasury collateral and completely repay the bad debt. Going forward, the protocol will aim to reduce this position by 100K $MIM per month.

Introduction

The following proposal is to address the remaining bad debt accrued from the Terra-Luna ecosystem collapse. The majority of the bad debt was incurred from the UST held as collateral. Initially, the protocol faced a bad debt of 12M $MIM, but with AIP #10, the protocol has steadily reduced this to less than 7.1M $MIM.

The protocol treasury (across all chains) is currently valued at approximately $11.7M, which greatly exceeds the outstanding bad debt.

Given how profitable recent farming opportunities have been, the DAO has proposed a plan that ensures we can maximize treasury protocol-owned-farming (POF) opportunities and use the earnings from that to accelerate the bad debt repayment plan and increase operational runway.

Additionally, consolidating the bad debt into a single treasury-collateralised position will allow for better bookkeeping, repayments, and formalization of the debt!

The Proposal

The current proposal is to open a new debt position that is owned and backed entirely by the treasury (eth:0xDF2C270f610Dc35d8fFDA5B453E74db5471E126B). The protocol will borrow 7.1M MIM and will use this to repay all underwater positions in the UST cauldron.

By doing so, the hundreds of bad debt positions would finally be closed and the treasury would manage a single borrow position collateralised with the assets held here (and across other networks as well), at a 0% interest.

While being used as collateral, these assets can also be used in farming opportunities to increase treasury earnings, and contribute to both operational expenses and bad debt repayments.

The DAO would commit to reducing this debt position by 100K MIM per month. This would ultimately mean that more capital can be deployed for yield farming.

Voting

Voting has concluded, and AIP #19 has passed! Check the result here.

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Boss moves by the abracadabra team!!! This is a great way to show the world how $MIM works and helps. Really using magic to make this debt disappear… love it!!:heart::man_mage::magic_wand:

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Nice move again, showing commitment to repay the bad debt reinforces confidence in MIM and the system suggested is actually quite handy.

Financially the stablecoin is fully backed again since the bad debt is now collateralized by treasury assets, and PoF allow to continue yielding revenues to the protocol from these assets.

The only risk I see is, in another market crash event, these assets might be liquidated, what would mean instantly the end of the protocol, since these treasury assets are also used for payroll. What measures have you guys thought to prevent this, is there a way to have access to emergency liquidity to use as collateral in an event like this?

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Rattling off a bunch of thoughts:

$6.4M treasury when you take out mim and spell. I don’t think those can be safely used as collateral here. The MIM should swapped for $USDT.

There is also no way to repay future bad debt situations should they arise if the whole treasury is used as collateral. Seems like we would be opening an incentive to attack the protocol if a nefarious actor can get at the treasury by going after it in its contractually collateralized form.

The protocol needs MIM handy to be able to liquidate positions or you lose the ability to profit in this scenario.

I think it’s an interesting idea, but why not do a smaller borrow like $1.5M and then keep topping up as we repay. Doing the whole treasury doesn’t give us the ability to buy mim on the cheap and repay this position. Something that can be taken advantage of when $mim falls like in the $USDC de-pegging scenario.

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Zooming out…. The protocol is on a clock. It has to acquire vote power or significant POL. It’s hard to commit to vote power when you have debt on the books in what we all recognize as mostly a debt less system.

I’d advise presenting a synopsis of protocol updates before committing to any specific debt commitment.

I’d consider positioning the protocol in cash flow positive territory as soon as possible. (I am in favor of reducing monthly liability expenditure)

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I think its also fair to have enough faith in the financial tools the team uses… would instill faith in others to use the protocol. If the team can pull this off, it would prove protocol reliability and influence others to make big moves as well. Abracadabra.money can handle it… :man_mage::magic_wand:

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MIM has been swapped for USDT, and the rest of collateral is treasury owned!

The idea is to improve the current situation, in the future we will have new and better tools to deal with such a position, but for now, it sounds like the best option to formalise the bad debt, and show the protocol is committed to take care of it.

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Liquidations wouldn’t be possible in the current model.

But remember that, when market indeed crashed, treasury assets have been liquidated swiftly to derisk!

I think this is the first, but not the final step to solve the issue!

1 Like