Hi folks, this post serves to round up several discussions arising from and after Celoconnect, in person, in small groups, and here on the forum - as well as propose a potential path forward.
In Summary - Proof of Deposit
We have a proposal from @ying_chan and @John.Fletcher to introduce a market determined interest rate on cStables - in the interest of increasing the amount and liquidity of cStables outstanding.
There are many points, but one key concern (present with or without Proof of Deposit) is that cStables carry the risk of de-pegging in a strong crypto downmarket. Proof of Deposit, built on what we have now, may increase the volatility of Celo price and increase the height from which the system may fall.
While technical improvements are on the way to make new issuance easier, it would beneficial if we had rough alignment as a community around launch dates, so that we can coordinate together.
In Summary - Mezcal
We have a proposal from Ocelot (a new ecosystem treasury to which the community can apply for grants) to explore a different approach to consensus that may allow Celo to better specialise in what it is good at.
My recommendation on next steps
1. Proposal of a CGP to add 1:1 backing of issued cStables with USDC in the reserve:
The de-pegging risk of cStables in a crypto down-market is something that has been discussed on this forum before. Recently, levels of cStable collateralization have dropped down around 3X (from highs last year of 10x). Bitcoin and Ethereum and Celo (the main reserve assets) are highly volatile and it hard to predict their price.
At the time of writing, the reserve collateralisation is 5X.
While we are in this position of strength, I suggest that we update reserve allocation rules to include USDC to match, on a roughly 1:1 basis (USD-as-converted), our issued cStable allocation. USDC would be held and managed just as other reserve assets are currently managed (until we find a way to decentralise management of reserve assets).
This does a few things:
- With USDC in the reserve, cStables now plausibly become less risky than holding USDC (or USDT for that matter). This is because Celo stables would be 1:1 backed by USDC + overcollateralised by BTC/ETH/CELO/MCO2. This makes them a better option in a crypto down-market (right now, one would not move to cStables in a downmarket because there is the risk of reserve collateralisation).
- By reducing depegging risk, this opens the option for us to grow cStable liquidity with initiatives like Proof of Deposit.
Potentially, we could additionally provide a guarantee to cStable holders that they would have priority access to the USDC over CELO holders, further building confidence.
The main criticism here is that USDC is centralised. The truth is that USDC (or any cStable) is contingent on a government currency by definition. In the short to medium term, making cStables safe for our community seems a high priority. Today we would be putting 1/5th of our reserve into USDC. Any risks with USDC seem well worth it for safety benefits we bring to cStable holders. Over time, we can swap USDC for CBDCs or other things, but for now I think it’s much better to have USDC than for our reserve to be long crypto and short fiat as it is now. We can add a provision to swap to CBDCs when feasible.
2. Proposal to set a rough schedule for new cStable issuance
For the sake of proposing something concrete, I would say:
July 2022: India
September 2022: Colombia
January 2023: Vietnam
We can always add more later, but why not align on a basic realistic schedule and start with that.
3. Proof of Deposit Grant Funding
Can the PoD team apply to foundation (and I encourage to Ocelot, or both) for funding to do a study? By the time that’s done, maybe we can have #1 in place, which takes away a key concern with PoD right now. Another option is to apply to CCF (that should re-start within 1-2 months, but that’s a bit slow)
There could also be a CGP for an on-chain proposal, but I think the amount for a grant is too small at this stage.
Note: The question of demurrage and whether that is core to CELO and/or in line with PoD has come up. Perhaps a small portion of the grant study can address this matter too with @sep’s input.
I think Ocelot have the funds to do what is needed here. I’m not sure if a CGP is needed to get a test net, but - if so - that sounds reasonable.