Lately I have been pondering the impact of traditional bank and centralized counterparty failures on Decentralized Finance. Given the (likely) instability that exists within traditional finance currently, it has caused me to revisit my take on the role and risks associated with centralized stablecoins in DeFi, particularly with regard to their use as collateral for decentralized stablecoin backing.
In the forum post by SBeem titled “Launch Plan for SILK + Lend” , the following stablecoin vaults and their respective Max LTV’s were proposed for launch:
- IST - 85% max LTV
- DAI - 85% max LTV
- FRAX - 85% max LTV
- USDC - 85% max LTV
Context regarding vault parameters for ShadeLend
LTVs can be adjusted by the governance admin, but they can only be increased, not decreased. The LTVs are intentionally conservative at launch, but will change in accordance with the relative risk of the collateral as liquidity deepens on ShadeSwap.
The approximate range for interest rates will be 0.5%-2% for stable collateral. In addition, a riskier collateral will have a higher target interest rate than a lower risk collateral.
For more information regarding the Stablecoin Trillema and the relative risks and rewards for various types of stablecoins, check out SILK - Stablecoin Trillema & Operation Touch-&-Go (Security, Efficiency, Stability).
Ultimately, in order to facilitate liquidations of vault debt users must be willing to buy distressed collateral in exchange for their SILK. Therefore, users will need to WANT to acquire the distressed assets and accept the risks that come with them.
Taking into consideration the relative risks of the various stablecoin types that we plan to accept as collateral to mint SILK, I believe it is worth starting the discussion about the risks (and rewards) that we, as Shade Protocol community members and SHD token holders, are willing to take on as it relates to protocol solvency. This discussion is not meant to completely discourage the acceptance of centralized stablecoins as collateral backing, but rather stimulate a discussion as to how the protocol could assess and account for the various risks each stablecoin type poses.