Reflexer can bleed money? Or is my reasoning flawed?

General Discussion
1

I’ve been trying to analyze how the controller behaves and I have an oversimplified scenario where the system seems to be losing money.

Let’s say we have a proportional only controller and lets disregard the stability fee. The price of ETH/USD doesn’t change, but RAI/ETH (or RAI/USD) fluctuates.

  • time = 0, system is in equilibrium
    market price: 1 ETH = 100 RAI = $100
    minting/burning price: 1 ETH = 100 RAI

  • time = 1, there’s too much demand for RAI
    market price: 1 ETH = 90 RAI, 1 RAI ~= $1.1
    controller reacts by setting minting/burning price: 1 ETH = 110 RAI
    new borrower deposits 2.0 ETH and mints 110 RAI matched by 1.0 ETH of his deposit
    he sells at market price 110 RAI for ~1.2 ETH
    he returns the system to equilibrium and profits 0.2 ETH

  • time = 2, there’s too much supply of RAI
    market price: 1 ETH = 110 RAI, 1 RAI ~= $0.9
    controller reacts by setting minting/burning price: 1 ETH = 90 RAI
    same borrower buys from market 90 RAI for ~0.8 ETH
    he burns 90 RAI corresponding to 1.0 ETH and removes his 2.0 ETH deposit
    he returns the system to equilibrium and profits again 0.2 ETH

So 110 RAI was minted in time=1 and 90 RAI was burned in time=2, now there’s extra 20 RAI floating in the open market, but the total deposited ETH has at time=3 is the same as at time=0.

Am I missing something? I’m still trying to understand the mechanics of this protocol, so please help me undestand if I’m missing something critical.

3 Likes
2

“he burns 90 RAI … and removes his 2.0 ETH deposit”

After burning 90 RAI the vault still owes 20 RAI × χ(t).
With a 145 % collateral-ratio requirement and 1 ETH = 90 RAI

0.32 ETH  =  1.45 × 20 RAI / 90 RAI per ETH

has to stay locked. The borrower can withdraw ≤ 1.68 ETH, not the full 2 ETH, until the last 20 RAI is repaid (or the vault is liquidated).

“now there’s extra 20 RAI floating in the open market”

Circulating RAI is always matched by system debt.
Those 20 RAI are the vault’s outstanding liability; they are fully collateralised and accrue interest through χ(t).

This was interesting to think through. thx for posting