Rates Module

The Maker Protocol's Rate Accumulation Mechanism


A fundamental feature of the MCD system is to accumulate stability fees on Vault debt balances, as well as interest on Dai Savings Rate (DSR) deposits.

The mechanism used to perform these accumulation functions is subject to an important constraint: accumulation must be a constant-time operation with respect to the number of Vaults and the number of DSR deposits. Otherwise, accumulation events would be very gas-inefficient (and might even exceed block gas limits).

For both stability fees and the DSR, the solution is similar: store and update a global "cumulative rate" value (per-collateral for stability fees), which can then be multiplied by a normalized debt or deposit amount to give the total debt or deposit amount when needed.

This can be described more concretely with mathematical notation:

  • Discretize time in 1-second intervals, starting from t_0;

  • Let the (per-second) stability fee at time t have value F_i (this generally takes the form 1+x, where x is small)

  • Let the initial value of the cumulative rate be denoted by R_0

  • Let a Vault be created at time t_0 with debt D_0 drawn immediately; the normalized debt A (which the system stores on a per-Vault basis) is calculated as D_0/R_0

Then the cumulative rate R at time T is given by:

R(t)R0i=t0+1tFi=R0Ft0+1Ft0+2Ft1FtR(t) \equiv R_0 \prod_{i=t_0 + 1}^{t} F_i = R_0 \cdot F_{t_0 + 1} \cdot F_{t_0 + 2} \cdots F_{t-1} \cdot F_t

And the total debt of the Vault at time t would be:

D(t)AR(t)=D0t=1TFiD(t) \equiv A \cdot R(t) = D_0 \prod_{t=1}^{T} F_i

In the actual system, R is not necessarily updated with every block, and thus actual R values within the system may not have the exact value that they should in theory. The difference in practice, however, should be minor, given a sufficiently large and active ecosystem.

Detailed explanations of the two accumulation mechanisms may be found below.

Stability Fee Accumulation


Stability fee accumulation in MCD is largely an interplay between two contracts: the Vat (the system's central accounting ledger) and the Jug (a specialized module for updating the cumulative rate), with the Vow involved only as the address to which the accumulated fees are credited.

The Vat stores, for each collateral type, an Ilk struct that contains the cumulative rate (rate) and the total normalized debt associated with that collateral type (Art). The Jug stores the per-second rate for each collateral type as a combination of a base value that applies to all collateral types, and a duty value per collateral. The per-second rate for a given collateral type is the sum of its particular duty and the global base.

Calling Jug.drip(bytes32 ilk) computes an update to the ilk's rate based on duty, base, and the time since drip was last called for the given ilk (rho). Then the Jug invokes Vat.fold(bytes32 ilk, address vow, int rate_change) which:

  • adds rate_change to rate for the specified ilk

  • increases the Vow's surplus by Art*rate_change

  • increases the system's total debt (i.e. issued Dai) by Art*rate_change.

Each individual Vault (represented by an Urn struct in the Vat) stores a "normalized debt" parameter called art. Any time it is needed by the code, the Vault's total debt, including stability fees, can be calculated as art*rate (where rate corresponds to that of the appropriate collateral type). Thus an update to Ilk.rate via Jug.drip(bytes32 ilk) effectively updates the debt for all Vaults collateralized with ilk tokens.

Example With Visualizations

Suppose at time 0, a Vault is opened and 20 Dai is drawn from it. Assume that rate is 1; this implies that the stored art in the Vault's Urn is also 20. Let the base and duty be set such that after 12 years, art*rate = 30 (this corresponds to an annual stability of roughly 3.4366%). Equivalently, rate = 1.5 after 12 years. Assuming that base + duty does not change, the growth of the effective debt can be graphed as follows:

Now suppose that at 12 years, an additional 10 Dai is drawn. The debt vs time graph would change to look like:

What art would be stored in the Vat to reflect this change? (hint: not 30!) Recall that art is defined from the requirement that art * rate = Vault debt. Since the Vault's debt is known to be 40 and rate is known to be 1.5, we can solve for art: 40/1.5 ~ 26.67.

The art can be thought of as "debt at time 0", or "the amount of Dai that if drawn at time zero would result in the present total debt". The graph below demonstrates this visually; the length of the green bar extending upwards from t = 0 is the post-draw art value.

Some consequences of the mechanism that are good to keep in mind:

  • There is no stored history of draws or wipes of Vault debt

  • There is no stored history of stability fee changes, only the cumulative effective rate

  • The rate value for each collateral perpetually increases (unless the fee becomes negative at some point)

Who calls drip?

The system relies on market participants to call drip rather than, say, automatically calling it upon Vault manipulations. The following entities are motivated to call drip:

  • Keepers seeking to liquidate Vaults (since the accumulation of stability fees can push a Vault's collateralization ratio into unsafe territory, allowing Keepers to liquidate it and profit in the resulting collateral auction)

  • Vault owners wishing to draw Dai (if they don't call drip prior to drawing from their Vault, they will be charged fees on the drawn Dai going back to the last time drip was called—unless no one calls drip before they repay their Vault, see below)

  • MKR holders (they have a vested interest in seeing the system work well, and the collection of surplus in particular is critical to the ebb and flow of MKR in existence)

Despite the variety of incentivized actors, calls to drip are likely to be intermittent due to gas costs and tragedy of the commons until a certain scale can be achieved. Thus the value of the rate parameter for a given collateral type may display the following time behavior:

Debt drawn and wiped between rate updates (i.e. between drip calls) would have no stability fees assessed on it. Also, depending on the timing of updates to the stability fee, there may be small discrepancies between the actual value of rate and its ideal value (the value if drip were called in every block). To demonstrate this, consider the following:

  • at t = 0, assume the following values:

rate=1 ; total fee=f\text{rate} = 1 \text{ ; total fee} = f

in a block with t = 28, drip is called—now:

rate=f28\text{rate} = f^{28}

in a block with t = 56, the fee is updated to a new, different value:

totalfeeg\text{totalfee} \xrightarrow{} g

in a block with t = 70, drip is called again; the actual value of rate that obtains is:

rate=f28g42\text{rate} = f^{28} g^{42}

however, the "ideal" rate (if drip were called at the start of every block) would be:

rateideal=f56g14\text{rate}_{ideal} = f^{56}g^{14}

Depending on whether f > g or g > f, the net value of fees accrued will be either too small or too large. It is assumed that drip calls will be frequent enough such inaccuracies will be minor, at least after an initial growth period. Governance can mitigate this behavior by calling drip immediately prior to fee changes. The code in fact enforces that drip must be called prior to a duty update, but does not enforce a similar restriction for base (due to the inefficiency of iterating over all collateral types).

Dai Savings Rate Accumulation


DSR accumulation is very similar to stability fee accumulation. It is implemented via the Pot, which interacts with the Vat (and again the Vow's address is used for accounting for the Dai created). The Pot tracks normalized deposits on a per-user basis (pie[usr]) and maintains a cumulative interest rate parameter (chi). A drip function analogous to that of Jug is called intermittently by economic actors to trigger savings accumulation.

The per-second (or "instantaneous") savings rate is stored in the dsr parameter (analogous to base+duty in the stability fee case). The chi parameter as a function of time is thus (in the ideal case of drip being called every block) given by:

chi(t)chi0i=t0+1tdsri\text{chi}(t) \equiv \text{chi}0 \prod{i=t_0 + 1}^{t} \text{dsr}_i

where chi_0 is simply chi(t_0).

Suppose a user joins N Dai into the Pot at time t_0. Then, their internal savings Dai balance is set to:

pie[usr]=N/chi0\text{pie[usr]} = N / \text{chi}_0

The total Dai the user can withdraw from the Pot at time t is:

pie[usr]chi(t)=Ni=t0+1tdsri\text{pie[usr]} \cdot \text{chi}(t) = N \prod_{i=t_0 + 1}^{t} \text{dsr}_i

Thus we see that updates to chi effectively increase all Pot balances at once, without having to iterate over all of them.

After updating chi, Pot.drip then calls Vat.suck with arguments such that the additional Dai created from this savings accumulation is credited to the Pot contract while the Vow's sin (unbacked debt) is increased by the same amount (the global debt and unbacked debt tallies are increased as well). To accomplish this efficiently, the Pot keeps track of a the total sum of all individual pie[usr] values in a variable called Pie.

Notable Properties

The following points are useful to keep in mind when reasoning about savings accumulation (all have analogs in the fee accumulation mechanism):

  • if drip is called only infrequently, the instantaneously value of chi may differ from the ideal

  • the code requires that drip be called prior to dsr changes, which eliminates deviations of chi from its ideal value due to such changes not coinciding with drip calls

  • chi is a monotonically increasing value unless the effective savings rate becomes negative (dsr < ONE)

  • There is no stored record of depositing or withdrawing Dai from the Pot

  • There is no stored record of changes to the dsr

Who calls drip?

The following economic actors are incentivized (or forced) to call Pot.drip:

  • any user withdrawing Dai from the Pot (otherwise they lose money!)

  • any user putting Dai into the Pot—this is not economically rational, but is instead forced by smart contract logic that requires drip to be called in the same block as new Dai is added to the Pot (otherwise, an economic exploit that drains system surplus is possible)

  • any actor with a motive to increase the system debt, for example a Keeper hoping to trigger flop (debt) auctions

A Note On Setting Rates

Let's see how to set a rate value in practice. Suppose it is desired to set the DSR to 0.5% annually. Assume the real rate will track the ideal rate. Then, we need a per-second rate value r such that (denoting the number of seconds in a year by N):

rN=1.005r^N = 1.005

An arbitrary precision calculator can be used to take the N-th root of the right-hand side (with N = 31536000 = 3652460*60), to obtain:

r=1.000000000158153903837946258002097...r = 1.000000000158153903837946258002097...

The dsr parameter in the Pot implementation is interpreted as a ray, i.e. a 27 decimal digit fixed-point number. Thus we multiply by 10^27 and drop anything after the decimal point:

dsr=1000000000158153903837946258\text{dsr} = 1000000000158153903837946258

The dsr could then be set to 0.5% annually by calling:

Pot.file("dsr", 1000000000158153903837946258)

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