Target Rate Feedback Mechanism
There was an overwhelming response to the previous article and many were curious to know how dotBTC maintains its peg to ATH(All Time High) of BTC. We’ll clear all your doubts in this article and explain TRFM(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.
Another important feature of the TRFM is that it can be negative as well as positive. This means that it can deal equally well with dotBTC prices that are above and below the target price. This contrasts with the present situation in which the DSR is at 0% and cannot be lowered further, despite dotBTC remaining above peg. In fact, if dotBTC had a TRFM, having the DSR as well would be of questionable value (and very confusing for users). Further, stability fees could remain at non-zero values regardless of the sign of the target rate, ensuring that the system can still earn risk-premium income while the market overall is driven to resolve the discrepancy between the target and market prices.
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.
At a minimum, three new components would be required to fully implement an automated TRFM in the present dotBTC Credit System:
- a dotBTCUSD price oracle
- a target price calculator
- a target rate controller
The dotBTC price oracle could be spun up using the existing oracle infrastructure; the target price calculator (which takes the target rate as an input) would be a trivial contract similar to the Pot or Jug (in fact, simpler than either of them). The target rate controller is more involved, as it must specify an algorithm for calculating the target rate.
The options for implementing the algorithm that controls the target rate are quite nearly limitless. However, a PID controller is a simple and widely-used process control algorithm that has been explored previously and could be implemented fairly easily on-chain.
Alternatively, governance could set the target rate or even the target price directly, reducing the need for smart contract implementations.In abmprotol there is function called “bull()” which changes the par(target price) if the current price of dotBTC is less than BTC.
