CeloConnect Governance RoundUp and Path Forward

Governance
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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.

In Summary - new cStables
There are a number of forum posts around new cStables (colombia, india).

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:

  1. 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).
  2. 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.

4. Mezcal
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.

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Thanks Pinotio for the roundup. I’m about to head on vacation but when I get back I can post my thoughts on demurrage (and other features) and also on the Ocelot proposal. Short point on the latter: As somebody who was instrumental in shepherding the original Ocelot governance proposal, I feel pretty strongly that this proposal should go through governance, as it is different enough from the original proposal that this should be a community decision.

I have lots more thoughts but will post later.

Thanks Ronin!

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At this moment the Celo Reserve is at 5X, if we introduce the cCOP with an initial emission of US$1.000.000 we don’t affect the collateralization levels. Also if the introduction of the USDC passed and be included in the Celo Reserve, the risk of the backup of the reserve will be reduced.

Personally I think we can introduce the new cCOP Stable Coin to the Celo Reserve early than the suggested above we don’t have to do a big emission, just with US$1.000.000 of cCOP will be enough to impulse the adoption in our country.

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As part of the first proposal to strengthen and maximise the recovery of the value that is represented by a cStable I would like to highlight that as of now a cStable holders have no rights or means to protect their claims. Surely, this is an edge case, but I promise in a scenario when collateralisation levels are low or below 1 we will see a lot of irrational (or rather rational and egoistic) behaviour. Also if the Celo network evolves and cStables become only one of Celo’s features, Celo holders could decide to freeze or deactivate exchange.sol.

And even beyond a mean to protect their claim, I think that rights, responsibilities and rewards of cStables should be reconsidered. I will spin this into a separate thread and add more thoughts if this idea finds agreement.

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UPDATES:

1. New cStables
@sep + all, here is the latest framework I current have in mind based on some discussions:

  1. The target dollar value of DAI in the reserve would equal the dollar value of cStables issued minus the dollar value of natural backed capital in the reserve. If there is sufficient natural capital to cover cStables, then the DAI target would become 0%.

  2. Targets for other reserve assets, going forward, be set as a percentage of the reserves total value minus the value of DAI in the reserve, and set forth as follows:

  • Bitcoin = 29.5% (as already the case)
  • Eth = 15% (as already the case)
  • Celo = 55% (increased from 50% at present)
  • MCO2 = 0.5% (as is already the case)

Movement of reserve allocations towards targets would continue to be managed as currently is the case, which means only if there is sufficient liquidity to make the trades. This means rebalancing will take some time (6+ months perhaps). [For what it’s worth, the reserve is not currently nor may it every be exactly on-target, it floats a bit.]

  • The net effect short term effect of this proposal will be to move a portion (about 20%, based on current reserve collateralisation) of reserve assets into DAI.
  • The medium to long term effect will be for that capital to move into natural capital.
  • The beneficial short, medium and long term effect of this proposal is that DAI or natural capital will provide an added barrier to cStables becoming undercollateralised, which should significantly reduce de-pegging risk in a crypto market crash.

Note that the proposal - in the current form:

  • Ensures that DAI is only temporary until we have sufficient natural capital.
  • Does not impose any new reserve requirements or limits for natural capital.

Although I initially proposed USDC, I think DAI is the more practical choice because:

  • USDC will be perceived as centralised. Note that about half of DAI is backed by USDC, but DAI probably does have better decentralisation properties and regulatory robustness over USDC (even if only because of the other 50% - which is largely Eth and WBTC backed).
  • There is already a target of 2.5% DAI in the CELO reserve, so choosing DAI is a smaller step.

@Nadiem, I note your point on a guarantee for cStable holders and welcome specific language. My current view is that cStable holders have an implicit guarantee because:

  1. Provided Mento keeps operating (which it must according to governance), cStables can always be swapped for their equivalent value in CELO.
  2. Were CELO in the reserve to be depleted, the Celo reserve is obliged to rebalance, which would mean selling other reserve assets to buy CELO.
    So, there is an implicit guarantee that any cStable can be swapped right until the reserve is fully depleted. Of course, if the reserve becomes undercollateralised (due to a crypto market crash), all cStables cannot be paid out in full. Hence this proposal to ensure there is stable backing for cStables and avoid this risk. All of that said, I’m open to hearing how you see things and whether/how to improve this.

All - please provide further suggestions. I’ll aim to bring this as a proposal to the next governance call.

2. Schedule for new cStables
@martinvol , could you kindly provide some input on whether my initial outline is realistic because you’re the key person helping with technical upgrades? I’d also like to bring this proposal to the next governance meeting. Before then, I’ll reach out to those on the Colombia and India post and make sure to get their views.

@0xj4an , I note your recommendation on initial cCOP emission. This is perhaps parameter that can be specified in the new consolidated template/process @martinvol is working on for new cStable approvals.

3. Proof of Deposit
I understand the team is considering channels for grants to move forward some modelling and also code development.

4. Mezcal / Ocelot
I suggest we leave this to the other dedicated thread because there is more than enough rancour there for the whole forum if not the whole ecosystem :joy:.

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I have not done the full research yet to identify scenarios and dynamics that could squeeze cStable holders out of their claims. For me this is just one aspect of a redesign of the rights, responsibilities and rewards of cStable holders. I do not have the time right now to flesh it out. At the same time I do not think this has to be part of the current proposal

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