SILK collateral centralization

Shade's Products
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The first thing I want to say is that I’m not trying to spread FUD here, all I want is to stir up discussion.
I believe discussion is the only thing that will move us forward, security, decentralization and antifragility are what we should care about.

In this post, I will very often refer to SILK - Stablecoin Trillema …

Introduction:
The mission of decentralized stablecoins should be to create an antifragile system, one that is resistant to the decisions of the governing authorities, if it were not so we could use centralized stablecoins that have multiply better properties in other aspects.

For hybrid stablecoins like DAI or USDX that are/were partially collateralized by other stablecoins ( DAI → USDC ) ( USDX → UST ) we could see a correlation with the collateral drop

Problem:
In the first few years we have been promised a maximum of 50% collateralisation in centralized stablecoins ( I think even that is too much, but I would be ok to accept it )

The reality is that as of today more than 70% of SILK borrowings are collateralized by centralized stablecoins.
Only number that is below 50 is the percentage of collateral, but this does not play such a crucial role, collateral can be uploaded even without a loan

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If government or any other entity came in now they would be able to send the collateral for 70% of the loans to 0 ( have fun with liquidations )

Why did this happen?

Max loans are shifted once and in bulk, instead of being shifted dynamically
This causes loans to pile up around a few assets in between what others are not at their limit

Max TVL for decentralized coins is 45%
LIKE WTF?! This is a fucking joke ( sorry for vulgar words )

Solution:

I think there is no doubt that SILK is more centralized than decentralized, I might even say that it is a wrapped USDC with one difference and that is the price

here is my proposed solution:
( this is the exact thing I want to discuss, I don’t have a patent on the right solutions )

  • Temporary suspension of SILK issuance against USDC and USDT

  • Change in contract ( if possible ) so that no more than 50% of SILK can be issued against centralized coins

  • Creation of additional vaults ( only for decentralised assets ) with a higher Max TVL, for example 75% ( possibly the interest on this vault can be increased )

Let’s discuss !

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Welcome to the forum!

My understanding of this based on a discussions with fellow Spartans and Shade devs, is that it will start out with a higher degree of reliance on centralized stables (what you have observed). As the product matures, the reliance on centralized stables is supposed to go down. It’s possible this has changed, but I think the Shade team still is looking to decrease the reliance in centralized stables as the product matures.

The same observance could be made about the project as a whole (or really most crypto startup projects). The project is currently centralized. As the DAO comes online and the project matures, the plan is to increase the decentralization.

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I’m totally fine with that, but what was addressed was a maximum of 50% centralization of SILK

And yesterday 70% SILK was released compared to USDC and USDT, that’s something alarming.

Not to mention that the demand and hunger for SILK is huge in the market, but the Shade team ( I hope it wasn’t purpose ) is throwing the decentralized assets a curveball by allowing loans up to 45%, but people are still borrowing.
Imagine how much SILK could have been minted against decentralised coins by now if the limit was higher than 45%… 2x as much? 3x as much?

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Greetings Jiricepelka.scrt,

I wanted to follow up on this post because it deserves a good response - personally, I would have loved to follow up on this sooner but amidst the noise of launch I was unable to carve out the time to properly respond.

First thing I would like to start with is the LTVs on volatile assets (such as stkd-SCRT) why are the LTVs so low? Simply put, the more aggressive the LTV the deeper the available liquidity needs to be to ensure that as collateral gets liquidated SILK is still able to maintain its promise of overcollateralization. The lower the allowable LTV, the more collateral is backing SILK on said vault which buys time for liquidations to occur on said asset that has more volatility and less liquidity. Acceptable minimal LTVs are based on 2 standard deviations worth of price volatility on assets. As assets show less volatility, LTVs can be expanded within the risk framework. @ChristianA is a great resource if you want to learn more about the risk framework used by ShadeLend.

A good example of an excellent risk framework which explains a lot of this logic is one used by Mars Protocol:

Now, onto SILK boostrapping. Currently, there is ~$3.8M worth of value backing SILK in overcollateralized vaults. ~41% of this $3.8M is from USDT + USDC.

Please note that in SILK - Stablecoin Trillema & Operation Touch-&-Go (Security, Efficiency, Stability) the target is 40% collateralization from stables for SILK in year 1 to improve adoption. As such, we are actually quite close to hitting this target 40% target. When you made this post initially, we were only 24 hours into the initial launch of SILK. Now that things have settled, we are in a much better place with decentralization.

However, Y2 of operation Touch & Go pushes towards SILK only being 30% backed by centralized stablecoins. As such, we are looking to rapidly onboard other decentralized assets (stay tuned for this) as we continue to expand the offerings on ShadeLend.

We appreciate your input and concerns about SILK decentralization - my only feedback would be that SILK needed a little bit of time to settle and the story has only just begun.

-Carter W.

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Regarding TVL I agree that it can’t be 90% for example, anyway 50% ( or as it used to be 45% ) TVL on stkd-SCRT as the main asset of Secret Network ( the thing that powers the whole Shade ) seems really low to me

I understand the concern about loans not having to be liquidated if the liquidity in “Earn” runs out ( just an idea, at that point it could still be automated using liquidity from the Shade Swap, maybe it could be interesting to create something like stkd-SILK → alternative to bLUSD )

Anyway, since stablecoin loans are already “favored” on the TVL side, it would make sense to make them disadvantaged them somehow, for example on the borrow fee/interest fee.
In addition to bringing additional funds to Shade’s treasury, it may also deter some people from stablecoin and instead go for decentralized collateral

If you look at “Borrow” now you will see that stablecoin collateral is again at practically 100% capacity among what decentralized collateral is not.
Centralized collateral is simply currently favored over decentralized.

I would also recommend looking at how Harbor handles this with CMST which offers multiple vaults for a single asset, the bigger max TVL = bigger interest rate

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Curious if there is any considerations being made to add tokens like BTC, PAXG, Tether’s or Circle’s EURO pegged stablecoins (perhaps Circle’s will be natively available), and or Mitsubishi’s YEN pegged stablecoin (if/when it becomes more widely available) given SILK’s basket composition includes BTC, gold, the EURO, and the YEN?

Also, I was reading posts about SILK’s new methodology, and was curious if CPI and PPP data from the IMF is being used as I couldn’t find any citation for the data source and I remember the original SILK white paper noted that GDP data from IMF monthly reports were going to be used. And am I correct in assuming headline CPI figures are being used rather than core CPI?

On a somewhat related note and just to ramble a bit, I found it interesting that the CAD was chosen over the AUD. While Canada ranks just above Australia on almost every economic measure, the fact that they are so close on such measures, there seems to be a rather strong qualitative argument to be made that Australia’s tilt to East (particularly in terms its economic relationship with ASEAN countries and its increasing role as a ‘hub’ in the San Francisco System of bi- and multi-lateral security/defense agreements in Asia-Pacific), and the weight of the US economy on Canada’s, would give greater importance to the AUD being in SILK’s composition basket rather than the CAD.

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We are working on getting more decentralized assets on Lend. This was already planned and will just come slower than anticipated. We definitely want to get PAXG, stETH, ETH, and BTC on the chain. We just need strong partners to make the products available over IBC. Some assets also require some proper screening before being listed on Lend.

As for SILK basket, that is a good question. The only answer i have to that is that asset came out on top of other fiats when we take into consideration GDP. IMF data was considered during silk composition building, and next would be considered if the peg composition is changed.

The one thing that’s really good for SILK is that the peg can be migrated and the basket made more robust with scale (contingent on data availability and governance on shade).

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