[Report] The events of May 12th 2022 and the ProtocolDAO resulting actions

This is a Report to document and make all of our actions transparent regarding what happened on May 12h 2022 during volatile market conditions. We, the ProtocolDAO, saw some tail risk appearing and saw a need to evaluate the situation and take some action to protect the mUSD basket.

The protocol and all mUSD collateral assets are functioning as normal. This was done because the ProtocolDAO wanted to be as protective and conservative as possible.

Preamble

With the depeg of UST and the resulting market volatility, much of the crypto market was shaken up resulting in USDT and sUSD briefly losing peg as well. We received some queries about some basket assets from concerned members of the general public. The ProtocolDAO was monitoring the basket composition of mUSD on Mainnet and Polygon as well as the Curve pools and prices on exchanges for the underlying assets.

Decisions made

With some risks appearing on our radar, the ProtocolDAO decided to organise an impromptu meeting and discuss risk mitigation tactics. USDT started to become heavily weighted in our basket on Ethereum Mainnet and Polygon. We continuously monitored the price and saw a recovery back to the peg after a while. Following that the weight of sUSD increased and reached up to 60% of the basket. We were in close contact with the Synthetix team to discuss the risks of a depegging of sUSD. As the Team confirmed to us, the risk was very slim and the peg quickly returned to the target price. With that, several protocol changes were enacted to ensure that risk to the basket was minimised:

  • the maxWeight of mUSD on Ethereum Mainnet was voted by the ProtocolDAO to be lowered to 55% at first and
  • as soon as the basket weight normalized further again maxWeight was lowered to 50%.

This was done in an ad-hoc manner, to protect the basket. mUSD was still functioning as intended and the PrototocolDAO wanted to be as protective and conservative as possible.

Since then, the market normalized further, prices stabilized and the basket weights are much healthier right now. This market volatility also resulted in an above-average swap volume which benefits SAVE users.

Conclusion

The basket functioned as intended and we simply voted to lower the basket maxWeight for our basket assets. This is exactly why our mAssets contract has the additional functionality built-in for protection, to set a maxWeight and a minWeight.

We feel the basket Assets are tried and tested and reveal in these difficult times that these were the right assets to choose for the mUSD basket:

  • USDC and USDT are redeemable 1:1 to US Dollars from Circle or Tether who periodically publish independent audit reports that show that they are fully backed by cash or cash equivalents — unlike banks that typically have fractional reserves of their actual deposits.
  • DAI and sUSD are overcollateralized stables - collateral is locked up for each DAI and sUSD in existence that would get automatically liquidated if the collateralization ratio falls below a certain threshold.

We continue to monitor the assets and we will keep every decision open and transparent, but we feel that now the market has calmed enough for us to be looking forward and continue building V2.

Open Questions

This is a good opportunity to discuss some open questions:

  1. Was the response adequate?
  2. Was it correct for the ProtocolDAO to proactively act in such a manner to reduce risk?
  3. Is a response plan necessary to prepare and communicate upfront for events like this?
  4. Should the changes to the configuration be reversed?
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Hey @dimsome, thanks for summarising it so well. I would love to hear more from the community on this topic.

@mZeroNine good topic for the next governance call.

For sure Herr Rugolini! It’s already on the agenda as it marks a precedent and teaching for future emergencies and related decision-making processes :sunglasses:

Regarding the open questions, and as an overall kickoff to the discussion, here are some of my thoughts:

1.) I think given the circumstance of a nuclear meltdown in crypto, the response seems adequate. Personally, I would have preferred to see some sort of an emergency Snapshot vote take place that lasts for 6 hours or so and catches the overall concensus of Meta Governors within a very short timespan, but overall I think it was handled well, given we never had such an incident before.

2.) This was briefly mentioned in the above paragraph, but I feel the ProtocolDAO did have the best interest at heart when enacting this change, and I feel was warranted, seeing that a major stablecoin depegged by almost 5% prior to this decision being made. Again, I would’ve personally liked to see some open discussion in the #governance channel, or here on the forum, but I’m sure it might have not been the first thing on the mind of signers and core contributors at the time.

3.) Definitely feeling that we should create an emergency protocol for incidents like this moving forward, taking the lessons learned from this precendent.

In particular, we should take care of discretion regarding certain parameter changes of the protocol. I also think we should sanctify and create a checklist of steps to follow in case of emergency, so we can all align and are all in consensus of procedures like these moving forward to be able to verify these steps and points were all followed correctly during the crisis and were in accordance with the (then sanctified) governance vote.

A simple discretionary vote and subsequent enactment of such a vote taking place for not only key ProtocolDAO members or Core Contributors, but also certain parties from other portions of the mStable ecosystem to insert their key and give their ok before a change like this can be enacted would surely go a long way of decentralizing the entire emergency procedure as a whole.

This would also be a sound reflection of the overall consensus of the ecosystem outside of the ProtocolDAO in a representative governance system we’re currently subscribed to.

Other than that, I feel that the Governance Call will yield the remaining answers to the above, and looking forward to discussing this with you all very soon!

Thanks to all participants for protecting the users and governors of mStable alike, and onwards we march! :innocent:

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Detailed and well-written sir. Thank you for this @dimsome

Happy to see the team reacting fast and efficiently during this major stress test for stablecoins. If I agree that such actions were taken on the spot (without a public governance process), I believe there were the utter necessity because without them mUSD could have potentially been overexposed to a fragile part of the basket

Maybe for the future

  • A list of actions could be whitelisted (basket weight, add/remove stable, etc) to be performed by the Protocol DAO during global meltdowns (Market losing 15-25%)
  • An exceptional Snapshot could be live (6hours maybe?) with a lower majority threshold

Hi @dimsome , thanks for sharing all these details and showing how the team can be proactive on turbulent times.

  • Was the response adequate?
    Given the circumstances , Yes I think so .
  • Was it correct for the ProtocolDAO to proactively act in such a manner to reduce risk?
    Reducing risk gave to many of us peace of mind.
  • Is a response plan necessary to prepare and communicate upfront for events like this?
    A framework well defined including the community should be created to act very quick in such events but also taking into consideration what the community has voted previously
  • Should the changes to the configuration be reversed?
    Lets not rush and present the pros and cons of each configuration, so we all can decide.
  1. Yes, DAOs mimic Corporations in structure and this needs an executive board to make quick decision in the best interest of the DAO.

  2. Yes, for the same reasons.

  3. No, not until a decision is made.

Or, an alternative could be an open documented chat group that is documented and archived. Only core team could have speaking permissions in these short term threads.

  1. No, as we’ve already seen that might be more risk than the protocol can tolerate in a black swan event.

Apologies for the slow response on this one.

My take is similar to others’: I think it’s important to have a framework in place to allow quick decision making in the best interest of the protocol in exceptional circumstances. However, the the discretionary powers of the ProtocolDAO could be more explicitly outlined to avoid any uncertainty around whether an action is acceptable in the future.