The stability fee is 2% per year for all active safes. This supposedly pays for rate setting, rai twap oracle updates, OSM and other automation contracts.
Let us assume that LUSD is RAI’s main and closest competitor for arguments sake. They achieve over $500MM in TVL generating $30MM protocol revenue in less than 2 years with a 0.5% one-time borrow fee (this borrow fee is slightly variable depending on volume but 0.5% is the base and what most users would pay).
Should we assume that the opportunity cost of ‘true’ decentralisation from the ETH/USD chainlink oracle that Liquity piggybacks on for their protocol is >1.5%? Perhaps that is the actual cost, but I think there should be an indepth DAO lead investigation into the possible scenarios of reducing the stabiliity fee.
Outcomes of the investigation would be as follows:
Current runway of 2% stability fee for complete automation at current TVL
Projected new TVL upon reduction of fee at various levels, and the runway of those cases
Recommendations on scaling down stability fee whether that be over many months, immediate, or not recommended
Analysis of current protocol costs to see if they can be reduced (such as slower oracle updates, etc) and their effect on protocol runway
Investigation of various alternative ways to generate protocol revenue to mitigate reduction of stability fee
After talking with Fabio, I propose a 0.5% stability fee.
With the current fee and pinger configuration RAI has a 4 year runway.
Reducing to 0.5% would yield a 1 year runway, with the current pinger configuration and current debt levels. The lower sf should generate more debt and increase runway.
Further, we could replace one of the most costly pingers, RAI medianizer(chainlink TWAP) with a UniV3 TWAP. This would eliminate this cost entirely and provide even more runway.
To continue this discussion I partnered with the DAO’s development team to better understand the flows of RAI vis a vis the protocol’s balance sheet.
To set the stage, I will briefly describe the “business” of the robots that keep the protocol ticking:
Income:
Substantially all of the protocol’s income is generated by stability fees which accrue to a Safe owner’s debt position.
Currently, this fee accrues to a safe at a rate of 2% of the outstanding debt per year, but this has historically varied.
Most notably, this fee is only realized when a safe owner returns RAI debt to his/her Safe. In other words, the protocol is always billing, but rarely collecting.
It is difficult to model fee realization due to the sporadic nature of deleveraging events.
Expenses:
In order to keep essential data current and incentivize orderly operations of Safe activities, the protocol incentivizes third-party users to constantly update key on-chain contracts.
These third parties bear costs associated with making on-chain transactions, and therefore, the Reflexer protocol remits an amount of RAI back to these third parties.
On average, ~900 of these updates and remittances happen every month.
The Reflexer DAO development team has drastically improved upon the efficiency of these updates and competition amongst third parties for these rewards has generally increased.
Current Protocol Balance Sheet
Reflexer’s balance sheet is currently in a very healthy position considering estimated outlfows.
The protocol currently custodies ~522K RAI, which has a market value of ~$1.5M or ~800 ETH
Monthly outflows for the protcol approximate about 6,000 RAI, implying ~7 years of runway with no additional credit to stability fee accrual.
At the current level of minted RAI, the protocol accrues (but again does not receive) ~5k RAI
Through an optimistic lens, the protocol is “more or less breakeven”
Proposal - I believe the DAO has ample flexibility to lower the protocol’s stability fee to a nominal rate - 0.5% - for at least the next 6 months.
I invite readers to review a quick-and-dirty spreadsheet I pulled together with help from the devs to think about these dynamics.