Offloading RAI from Treasury

Overview

RAI currently has a redemption rate of -17.9%, meaning that as of now RAI is expected to devalue 17.9% p.a. DXdao currently holds just shy of 1M Rai ($2.9M) which amounts to just under 20% of all RAI in circulation.

With the above in mind, it’d make sense for DXdao to sell some of its RAI. This proposal suggests selling 700k RAI to the following stable coins:

  • 40% DAI
  • 40% USDC
  • 20% LUSD

For more information about RAI and how the redemption rate works, please see: https://reflexer.finance/faq/

Details

This proposal sends 700k RAI to the DXdao MS 0x9467dcFD4519287e3878C018c02f5670465a9003 to execute the trades. Due to the negative redemption rate, it’d make most sense to move the 700k RAI in one proposal, so DXdao can act promptly avoiding a further price decrease in RAI.

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Thanks @dlabs for this. The market decline has had a knock-down effect on a lot of assets.

Just to provide a little more context. Rai is a stable asset who’s system is not too different than Dai. It is an overcollateralized stablecoin. The big difference is the redemption price is moving, whereas in MakerDAO it’s always 1.00. This is not the market price (Dai’s market price has fluctuated a lot in the past), but is the price at which debt is issued/paid back.

For example, these are the current prices:

The current redemption price and future rate of decline/increase are completely automated through a PID Controller-type system. The system changes these parameters to maintain stability. The lower redemption price is intended to drive the price of Rai lower, because the collateral in the system has declined a lot, so its target price is lower.

Because of this design, Rai was originally thought of as “dampened ETH” because its target price would be affected by the fluctuations in the underlying collateral, but in fact, as Reflexer co-founder Ameen explains in this Twitter thread, is that arbitrages would see the redemption rate that the system was targeting and arbitrage the redemption rate and the market price, so the system’s target price was never reached. This is why Rai has been ‘stable’.

This arbitrage comes from minting Rai at the redemption price and then selling at the market price. Deposit ETH-> Mint Rai → Sell Rai to ETH-> Deposit ETH → Mint Rai. Rinse and repeat. This is being done now, but is still not enough to close the gap between the redemption rate and the market price. There is very little market demand for leverage.

So without more arbitrage, the system is now working more as ‘dampened ETH’ and to maintain the system’s stability, all Rai holders are effectively yielding a -18% right now (the dampened part of this month’s volatility).

-18% on $3m is a lot of lost value, so I don’t think DXdao should wait around for arbitrage to close the loop. Selling Rai at the market price for another stablecoin that does not have a negative interest rate is the simple solution. I like the breakdown that @dlabs presented.

A Couple final thoughts

  • A note on ‘minting Rai’. DXdao has never minted Rai; DXdao purchased its Rai with ETH, so it does not have any Rai debt. This discussion is focused on the Rai in the treasury and the fact that it currently has a negative yield. There is a separate conversation on whether or not DXdao should mint Rai and take on Rai debt.
  • Similar to the discussion on stETH, this represents a decision that makes financial sense but cuts against DXdao’s decentralization mission. Rai is one of if not the most decentralized stablecoins.
  • Should discuss how this proposal would be carried out. Presumably on Uniswap v3. And maybe this should be done over more than one proposal? Given the size, ensuring best execution is important.
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Easy choice here and definitely in favour.

In terms of DXdao’s decentralisation mission, Reflexer and RAI rely on actors behaving rationally and dumping RAI when the market price is considerably higher than redemption price, so still pretty align in one sense.

On-chain proposal to sell RAI now above redemption price could come with a commitment to rebuy RAI once the market price is at or below redemption in the future?

5 Likes