Proposal to Begin Issuance of new DBR Tokens

Forum post: https://forum.inverse.finance/t/proposal-to-begin-issuance-of-new-dbr-tokens/227

Summary

This proposal aims to begin the issuance of DBR tokens via streaming to INV depositors in FiRM.

Background

On December 16th, 2022, Inverse Finance DAO launched FiRM, the fixed-rate interest market for borrowing DOLA. On the same day the DAO also launched the DBR, an ERC20 token that represents your right to borrow DOLA on FiRM. 1 DBR is required to borrow 1 DOLA for 1 year, meaning 0.00274 DBR is burnt from a borrowers balance per day per DOLA they’ve borrowed on FiRM. For example, a user who has borrowed 1,000 DOLA will have 2.74 DBR burnt daily (the “burn” happens continuously in the DBR smart contracts memory, rather than once a day!).

A total supply of 4,646,000 DBR was minted at launch and distributed in the following way:

Airdrop - 1,096,000 DBR (566,000 of which still remains unclaimed)

On-chain liquidity - 1,550,000

Future OTC Swap allowance - 2,000,000

No DBR OTC swaps have been carried out since this proposal, however, an additional 420,000 DBR has been put towards on-chain liquidity. The initial swap rate of DBR was 1 DBR to 0.040 DOLA, and due to the constrained supply and usage of FiRM, this has risen to a current swap rate of 1 DBR to 0.050 DOLA as of April 5th 2023, a 25% increase.

Motivation

In order for DOLA borrowing to ramp up on FiRM, the issuance of new DBR into supply is necessary to meet the demand to borrow DOLA. A higher market swap rate for DBR results in a costlier DOLA borrowing transaction. This causes increased friction in the acquisition of new DOLA borrowers and impacts product adoption.

Having new DBR entering circulation will allow the market to readjust more efficiently to an equilibrium that maximizes borrowing of DOLA on FiRM. This will make FiRM more appealing for new and existing users and support the growth and success of Inverse Finance.

Proposed changes

This proposal, if passed, will formalize the DAO’s decision to use streaming to INV depositors on FiRM as the method of new DBR issuance. DBR will become claimable to INV stakers on FiRM, increasing every block proportionally to the number of INV a user has staked relative to the total amount of INV staked. For example, if a wallet owns 1.5% of all INV staked, then it will receive 1.5% of new DBR issuance via streaming.

INV stakers who are streamed DBR are likely to do the following:

• Use the DBR to fund new or existing DOLA borrow positions on FiRM
• Swap the DBR tokens on the market for another crypto token, such as DOLA
• Hold the DBR, waiting to do one of the following above

This is expected to contribute to a more efficient DBR market.

• When the swap rate of DBR is high (when considering DOLA borrowing costs), INV stakers are likely to swap their streamed DBR for other crypto tokens, reducing the market swap rate.
• When the DBR market swap rate is low (when considering DOLA borrowing costs), INV stakers are more likely to use the DBR to borrow DOLA (or hold for the future), meaning the new DBR hitting the market will be constrained, likely leading to an increase in DBR swap rate as new borrowers open positions on FiRM.

INV Escrow Market

A FiRM market for the INV token will need to be launched in order for DBR streaming to begin. At launch, borrowing will be disabled, meaning INV cannot be used as collateral to open new loan positions. Once a suitable price feed has been developed a DAO vote may add in this additional functionality.

The INV Escrow market will function as follows:

• INV deposits will be automatically staked to the xINV market on Frontier, meaning the depositor receives INV staking rewards as usual
• Depositors will retain control over the governance voting power of their INV and the ability to delegate the power as they wish via an on-chain transaction
• Only the depositor will be able to claim any DBR rewards accrued to them

DBR Distributor

The DBR distributor controls the distribution of DBR to INV depositors on FiRM. It operates with the following rules:

• A minimum and maximum reward rate is set and controlled by governance
• The current reward rate is controlled by the operator, which is a role given by governance. The operator can only set a reward rate that is within the min and max parameters set by governance
• The reward rate is the rate of new DBR being issued per second, globally. For example, a reward rate of 1.0 is equivalent to 1 DBR per second, 60 DBR per minute, 3600 DBR per hour, 86,400 DBR per day or 31,536,000 DBR issued per year. The issuance is split among all INV currently deposited on FiRM
• When a user claims DBR, the exact amount is minted to their wallet, adding to the circulating supply of DBR

DBR rewardRate

It is important for governance to appropriately set the min and max DBR reward rate to allow for safe, efficient management by the operator. Governance can also set the current DBR reward rate via adjusting the min and max allowed rate to the same value. This proposal aims to set the operator to the Fed Chair multisig, a 2 of 7 multisig with representation from Risk, Treasury, Product, Growth and Analytics working groups formed in May 2022.

The initial parameters will be set on launch:

• minRewardRate = 0
• maxRewardRate = 0.3171 (10m DBR per year rate)
• Starting rewardRate = 0.1268 (4m DBR per year)

Management of the DBR rewardRate can be simplified by looking at the current amount of DOLA lent out on FiRM and determining whether this quantity should either be maintained, increased or decreased.

• If the current policy is to maintain the amount of DOLA lent out on FiRM, the yearly DBR reward rate should be set roughly to the amount of DOLA lent out. This means that the circulating supply of DBR will be kept at roughly level, with DBR being burnt from supply at roughly the same rate new DBR is issued. For example, if 5m DOLA is lent out on FiRM and this level wants to be maintained, a DBR reward rate of 0.1585 should be set (5m DBR issued per year).
• If the current policy is to expand the amount of DOLA lent out on FiRM from its current level, the yearly DBR reward rate should be set to the target for DOLA. For example, if 5m DOLA is lent out on FiRM currently, but the target is 8m, then the DBR reward rate should be set to 0.2537 (8m DBR issued per year). This will result in more DBR issued than burnt, leading to an expanding supply that should allow for the expansion of DOLA borrowing for the reasons outlined above. In instances where the goal is to expand DOLA borrowing at a rapid rate, the DBR reward rate should be set higher than the DOLA target, and reduced when nearing that target.
• If the current policy is to reduce/contract the amount of DOLA lent out on FiRM, then the DBR reward rate should be set to less than the current quantity of DOLA lent out. The best level is to set the DBR reward rate to the new target for DOLA lent out on FiRM, or lower to increase the speed of the supply contraction.

It should be noted that DOLA borrowing can ramp up a lot faster than it can ramp back down due to the design of FiRM.

On-Chain Actions

• Make DBR distributor a DBR minter
• Set the rewardRate = 0.1268 (4m DBR per year)
• Set the minRewardRate to 0
• Set the maxRewardRate to 0.3171 (10m DBR per year)
• Add the Market to the DBR contract
• Add frontier INV feed to oracle
• Pause borrows on new Market