Target Rate Feedback Mechanism

Definitions

Reference Asset

An asset the system uses to measure value. This is currently the Bitcoin(BTC). Oracle prices must be reported in units of this asset.

Market Price (MP)

The value, according to the market, of one dotBTC against the reference asset. This is measured through, for example, DEX trades,Crypto Exchange price history.

Target Price (TP)

This is the value, in the reference asset, that the system targets for one dotBTC. i.e., if the system is in equilibrium, the target price and market price are equal. This value is also called the “redemption price”. It affects how much dotBTC can be drawn against a fixed value of collateral, and also how much collateral is received per-dotBTC during Emergency Shutdown. The target price keeps getting updated as new ATH gets recorded. It is stored in the par variable of the Spotter smart contract. An example: at a 150% collateralization ratio and a $60000 target price( ATH of BTC at the time of writing), 1 dotBTC can be drawn against $90,000 of ETH collateral. If the target price is changed to $120000, only 0.5 dotBTC can be drawn against the same $90000 of ETH.

Target Rate (TR)

The rate at which the target price is changing, usually thought of and expressed as a yearly percentage. Currently, the Target Rate is rate at which BTC increases. Target Rate stays constant if BTC is in a bear market.

Target Rate Feedback Mechanism (TRFM)

A feedback mechanism that adjusts the target rate in order to equalize the target price and the market price. The rest of this post will discuss this in more detail, but the diagram below gives a basic illustration.

Implications of the TRFM

The TRFM involves a major conceptual shift. This concept has previously been implemented in protocols like MakerDao, but their target price is fixed at $1 . dotBTC still has a peg (the target price) at any given time, but this peg changes based on the target rate. Here’s a hypothetical example of how this could play out in practice: suppose dotBTC initially has a TP and MP of $60,000, and a TR of 0%/year. Then, an extreme market event causes the MP to drop to $54,000. The TRFM activates and sets the target rate to 10%/year to incentivize supply contraction and demand to hold dotBTC . Suppose that after 8 months, the TP and MP are equal again, so the TR returns to zero; now the target price (and also the market price, since we said they were the same) will be ~$60,000.

TRFM Incentives

The ways in which the TRFM creates incentives to equalize the target and market prices are somewhat subtle and worth examining in more detail.

Market Price < Target Price

If dotBTC is trading below its target, the target rate will be set to a positive value. This implies an increasing target price.

Vault user viewpoint

As the target price increases, Vault collateralization levels decrease (roughly, the system is viewing dotBTC as being “worth more” and hence each Vault’s dollar-valued debt is increasing). This incentivizes Vault holders to either buy dotBTC to repay debt (a good deal, since dotBTC is trading low) or to add collateral. Only the former will impact the price of dotBTC and thus the target rate (which a Vault holder would like to see reduced), hence at a high enough target rate this becomes the preferred option and creates demand for dotBTC, driving up the price.

dotBTC holder viewpoint

The rising target price represents and effective savings rate on dotBTC, incentivizing the holding and acquisition of dotBTC . Generally, this comes about because the price Vault holders are willing to pay will increase over time (to avoid loss of collateral), and because one dotBTC will be able to claim a greater quantity of collateral should Emergency Shutdown occur.

Market Price > Target Price

If dotBTC is trading above its target, the target rate will be set to a negative value. This implies a decreasing target price.

Vault user viewpoint

As the target price decreases, Vault collateralization levels increase (i.e. the same amount of dotBTC debt is regarded as a lesser dollar amount by the system). This frees up Vault holders to mint more dotBTC without increasing their liquidation risk, incentivizing a dotBTC supply increase, which should lower the market price. This is functionally similar to a negative stability fee, but note that the system can still collect non-zero fees (albeit in an inflating currency) even with a negative target rate.

dotBTC holder viewpoint

Since Vault holders will be willing to accept progressively lower maximum prices for dotBTC in the future as the target price decreases, dotBTC holders are incentivized to sell their dotBTC to lock in the benefits of the current high market price, and those thinking of holding dotBTC as a store of value are likely to reconsider. There is also the fact that the amount of collateral dotBTC will be able to claim during ES is decreasing, weakening the potential payoff of holding dotBTC if ES occurs.

Implementing the TRFM

Note: this section is intended to address curiosities around how the TRFM might be implemented, and does not represent a proposal for actually doing so–that would require a proper technical design document presented as part of a MIP.

  • a dotBTCUSD price oracle
  • a target price calculator
  • a target rate controller

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